<PAGE>   1
                       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 (FEE REQUIRED)

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997

                                FILE NO. 0-14968

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

<TABLE>
<S>                                                 <C>       
                  OKLAHOMA                                     73-1230348
(State or other jurisdiction of incorporation or    (I.R.S. Employer Identification No.)
               organization)

            3240 W. BRITTON ROAD
           OKLAHOMA CITY, OKLAHOMA                               73120
   (Address of principal executive offices)                    (Zip code)
</TABLE>

                                 (405) 755-3607
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

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

                    COMMON STOCK, PAR VALUE, $.002 PER SHARE

         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, and (2) has been subject to such filing
requirements for the past 90 days. YES  X   NO
                                       ---     ---

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

         The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of March 25, 1998 was $15,448,609. The
Company has assumed that its directors and officers are the only affiliates, for
purposes of this calculation.
Number of shares outstanding as of March 25, 1998 - 3,914,669 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Following is a list of annual reports, proxy statements, and Rule
424(b) or (c) prospectuses which are incorporated by reference into the Form
10-K and the Part of the Form 10-K into which the document is incorporated - The
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders is
incorporated by reference in Part III, Items 10, 11, 12 and 13.

<PAGE>   2

                                 EATERIES, INC.
                                    FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

PART 1                                                                                                       PAGE
<S>         <C>                                                                                              <C>
Item 1.     Business.......................................................................................    1

Item 2.     Properties.....................................................................................    7

Item 3.     Legal Proceedings..............................................................................    8

Item 4.     Submission of Matters to a Vote of Security  Holders...........................................    8

PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters..........................    8

Item 6.     Selected Financial Data........................................................................    8

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations..........................................................................   10

Item 8.     Financial Statements and Supplementary Data....................................................   16

Item 9.     Changes in and Disagreements With Accountants on Accounting and
            Financial Disclosure...........................................................................   16

PART III

Item 10.    Directors and Executive Officers of the Registrant.............................................   16

Item 11.    Executive Compensation.........................................................................   16

Item 12.    Security Ownership of Certain Beneficial Owners and Management.................................   16

Item 13.    Certain Relationships and Related Transactions.................................................   16

PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................   16

INDEX TO EXHIBITS..........................................................................................   17

SIGNATURES.................................................................................................   18

INDEX TO FINANCIAL STATEMENTS..............................................................................   19
</TABLE>


                                       i
<PAGE>   3

ITEM 1.           BUSINESS

IN GENERAL

         Eateries, Inc. (the "Company") and its subsidiaries own, operate and
franchise restaurants under the names: Garfield's Restaurant & Pub
("Garfield's"), Pepperoni Grill, Garcia's Mexican Restaurants ("Garcia's"), Casa
Lupita and Carlos Murphy's. As of December 28, 1997, the Company-owned 62 (43
Garfield's, 10 Garcia's, five Casa Lupita's, two Carlos Murphy's and two
Pepperoni Grills) and franchised 10 (eight Garfield's and two Garcia's)
restaurants in 27 states.

         The Company opened its first restaurant, a Garfield's, in 1984 in
Oklahoma City, Oklahoma. In 1986, the Company completed an initial public
offering of its common stock. Prior to 1997, Garfield's was the Company's
primary growth concept. Garfield's is a family-oriented concept, providing an
upscale alternative to traditional fast-food. Garfield's are designed to appeal
to a divergent customer base that grew up on fast-food, but now prefers a more
sophisticated menu, the availability of alcoholic beverages, a comfortable
ambiance, speed, value and convenience. The concept features a varied selection
of moderately-priced, high quality food and beverage items with table service
dining.

         In January 1995, the Company acquired substantially all the assets of
the "Pepperoni Grill" restaurant located in Oklahoma City, Oklahoma, along with
all rights to the use of the trademarks associated with the concept. Pepperoni
Grill features a variety of Italian entrees with special emphasis on brick-oven
baked pizza.

         In November 1997, the Company, through its wholly-owned subsidiary,
Fiesta Restaurants, Inc., acquired 17 Mexican restaurants under the names:
Garcia's (10), Casa Lupita (5) and Carlos Murphy's (2), along with the
trademarks associated with these concepts. In February 1998, the Company sold
three of the Casa Lupita locations to Chevy's, Inc. In connection with this
transaction, the Company entered into an agreement to sell another Casa Lupita
location to Chevy's conditioned upon, among other things, the transfer to
Chevy's of the liquor license related to such restaurant. The decision to sell
these restaurants was the result of a plan to consolidate operations and focus
on the expansion of Garcia's. The Company plans to convert the remaining Casa
Lupita and the two Carlos Murphy's to the Garcia's concept in 1998.

         In 1997, the Company constructed and opened three (3) Garfield's in
major regional malls in addition to the acquisition noted above. The Company's
future expansion of its existing concepts will be primarily focused on
Garfield's and Garcia's. The Company expects to add up to five additional
Garfield's and Garcia's restaurants in 1998. The primary expansion emphasis will
be on Company-owned rather than franchised restaurants. However, management will
visit with qualified, interested parties as potential franchisees. The Company
also plans to pursue other acquisitions to further enhance shareholder value.

         The Company's principal offices are located at 3240 West Britton Road,
Oklahoma City, Oklahoma 73120. Its telephone number is (405) 755-3607.

GARFIELD'S RESTAURANT & PUB

MENU

         Each Garfield's restaurant offers a diverse menu of freshly prepared
traditional and innovative entrees, including steak, seafood, chicken,
hamburgers, Mexican, Italian, and sandwiches along with a variety of appetizers,
salads and desserts. Menu offerings are revised by the Company semi-annually to
improve sales. The Company's senior management actively participates in the
search for new menu items. Garfield's restaurants also offer a separate
lower-priced children's menu.

         In an effort to further define the strengths of various mall-based
Garfield's, management began testing six urban stores as "Garfield's Cafe's"
during 1997. These units are located in major urban markets and lack the ability
to be marketed due to exorbitant advertising costs. This lack of visibility
negatively impacts sales and profitability. Thus, "Garfield's Cafe's" have
repositioned menus that offer greater value, lower costs, a simpler and thus,
faster mix of menu selections. Food costs for items in "Cafe" stores are lower
than traditional Garfield's. "Cafe" stores also feature specials designed to
drive sales and profits. Results of the "Cafe" stores have been encouraging. The
Company will continue utilizing this concept in all six locations. As of
December 28, 1997, no additional Garfield's have been converted to the "Cafe"
concept..

RESTAURANT LAYOUT

         Garfield's restaurants are constructed in regional malls in accordance
with uniform design specifications and are generally similar in appearance and
interior decor. Restaurants are furnished and styled in a colorful motif,
highlighting the travels of the Company's namesake, "Casey Garfield", including
exhibits, photographs, souvenirs and other travel-related furnishings. Tables
are covered with paper and customers are encouraged to doodle with crayons
provided at each table.


                                       1
<PAGE>   4

         The size and shape of Garfield's restaurants vary depending largely
upon the location but typically average 4,500 to 5,500 square feet, and seat
approximately 200 guests. The Company's prototype Garfield's to be constructed
in 1998 will approximate 4,700 square feet.

HOURS OF OPERATION

         Depending on location, most restaurants are open from 11:00 a.m. until
11:00 p.m. on weekdays and Sunday, and later on Friday and Saturday.

UNIT ECONOMICS

         Historically, the cost of opening a new Garfield's restaurant has
varied widely due to the different restaurant configuration and sizes, regional
construction cost levels, and certain other factors. The Company currently
leases the restaurant premises in major regional malls and builds-out the leased
space to meet the Garfield's concept specifications of style and decor. Total
construction costs for a typical Garfield's opened in 1997 were approximately
$886,000, of which approximately $433,000 was funded through landlord finish-out
allowances, bringing the Company's net investment to approximately $453,000 per
unit. Management believes its unit economics are among the best in the industry.

SITE SELECTION

         All Garfield's restaurants are located in regional shopping malls,
primarily in the eastern half of the United States. The Company considers the
location of a restaurant to be critical to its long-term success and has devoted
significant effort to the investigation and evaluation of potential mall sites.
The site selection process focuses on historical sales per foot by mall tenants
and proximity to entertainment centers within and near the mall as well as
accessibility to major traffic arteries. The Company also reviews potential
competition in the area and utilizes an Equifax site selection model to "rate"
each potential location based upon a multitude of different criteria. Senior
management inspects and approves each mall restaurant site. The Company expects
to locate future Garfield's in regional malls. It takes approximately 18 weeks
to complete construction and open a Garfield's.

RESTAURANT LOCATIONS

         The following table sets forth the locations of the existing Garfield's
restaurants as of December 28, 1997.

<TABLE>
<CAPTION>
                      COMPANY-OWNED RESTAURANTS                              FRANCHISED RESTAURANTS
                                                    NO. OF                                                 NO. OF
           STATE                                     UNITS       STATE                                     UNITS
           -----                                   ---------     -----                                    -------
<S>                                                <C>           <C>                                      <C>
           Alabama...............................      1         Colorado...............................     1
           Arkansas..............................      1         Iowa...................................     2
           Florida...............................      3         Oklahoma...............................     5
           Georgia...............................      1                                                  -------
           Illinois..............................      4              Total.............................     8
           Indiana...............................      4                                                  =======
           Kentucky..............................      1     
           Louisiana.............................      2     
           Michigan..............................      2     
           Mississippi...........................      4     
           Missouri..............................      4     
           New York..............................      2     
           North Carolina........................      1     
           Ohio..................................      2     
           Oklahoma..............................      3     
           South Carolina........................      1     
           Tennessee.............................      1     
           Texas.................................      2     
           West Virginia.........................      2     
           Wisconsin.............................      2     
                                                   ========= 
                Total............................     43     
                                                   ========= 
</TABLE>

PEPPERONI GRILL RESTAURANTS

         The original Pepperoni Grill restaurant, located in Oklahoma City,
Oklahoma, was purchased by the Company in January, 1995. Its menu features a
variety of Italian entrees with special emphasis on brick-oven baked pizza. The
warm European bistro 


                                       2
<PAGE>   5

atmosphere is accented with an exhibition kitchen, light woods and booths
covered in tapestry. All menu items are prepared on the premises with the entire
entree presentation being performed within view of the guest, making the kitchen
part of the restaurant's atmosphere. An in-store bakery makes all the breads and
daily desserts. Pepperoni Grill's signature bakery item is a Tuscan parmesan
black pepper bread that is served with all entrees along with the traditional
olive oil and balsamic vinegar. Over 60 different wine selections are offered
along with 25 wines available by the glass.

         The Company purchased the Pepperoni Grill restaurant primarily because
of its many similarities to the existing Garfield's concept and its popular
"Italian" based menu. The Pepperoni Grill restaurant concept is similar to
Garfield's as it is a full service dinner house, located in a mall and is
approximately the same size with many operational functions which parallel a
Garfield's.

         The Company opened a second Pepperoni Grill restaurant in a regional
mall located in Terre Haute, Indiana in November, 1995, next to an existing
Garfield's. After evaluating the benefits of this strategy and the future growth
potential of the Pepperoni Grill restaurant concept, management decided to open
a free-standing Pepperoni Grill in Edmond, Oklahoma, to capitalize on its strong
reputation in the Oklahoma City market. As part of this decision, management
decided to convert the Terre Haute location into a test location for a Casa Ole'
franchise and transferred assets with approximately $275,000 in net book value
to the Edmond location. The Casa Ole test location was closed in November 1997.
At this time, management does not expect any further development of Casa Ole'.

FIESTA RESTAURANTS

         In November 1997, the Company, through its wholly-owned subsidiary,
Fiesta Restaurants, Inc. ("Fiesta"), acquired from Famous Restaurants, Inc. and
its subsidiaries ("Famous"), substantially all of the assets comprising 17
Mexican restaurants and the corporate headquarters of Famous (the "Famous
Acquisition"). The acquired restaurants operate under the names: Garcia's (10),
Casa Lupita (five) and Carlos Murphy's (two). The purchase price for the assets
was approximately $10,652,000, of which $8,631,415 was paid in cash at closing
and the balance represented estimated liabilities of Famous assumed by the
Company and transaction costs. The cash portion of the purchase price was
financed through a five-year term loan with a bank. This term loan bears
interest at the three-month London Interbank Offered Rates ("LIBOR") plus 1.25%
(6.94% as of December 28, 1997) and is secured by all of the Company's real
estate (all of which was obtained through the Famous Acquisition). The term loan
requires principal to be repaid based upon a seven-year amortization schedule,
with all remaining unpaid principal due on the fifth anniversary of the loan.

MENU

         Each Garcia's restaurant offers a traditional menu of high quality
Mexican food. Alcoholic beverages are also offered in each location. Menus are
generally standardized, although there are slight variations to accommodate
regional taste preferences.

RESTAURANT LAYOUT

         Garcia's restaurants have a distinctive southwestern design and decor.
The existing restaurants generally measure 8,000 to 10,000 square feet and seat
approximately 200 to 250 guests in the main dining area with an additional 75 to
125 seats in the bar area.

RESTAURANT LOCATIONS

         The following table sets forth the locations of the existing Fiesta
restaurants as of December 28, 1997.

<TABLE>
<CAPTION>
                      COMPANY-OWNED RESTAURANTS                              FRANCHISED RESTAURANTS
                                                    NO. OF                                                 NO. OF
           STATE                                     UNITS       STATE                                     UNITS
           -----                                   ---------     -----                                    -------
<S>                                                <C>           <C>                                      <C>
           Arizona...............................      6         Iowa...................................     1
           California............................      2         Tennessee..............................     1
           Colorado..............................      2                                                  -------
           Florida...............................      1              Total.............................     2
           Idaho.................................      1                                                  =======
           Illinois..............................      1    
           Michigan..............................      1    
           New Jersey............................      1    
           Ohio..................................      1    
           Utah..................................      1    
                                                   =========
                Total............................     17    
                                                   =========
</TABLE>

                                       3
<PAGE>   6

SALE OF RESTAURANTS

         In February 1998, the Company sold substantially all of the assets,
including real estate, comprising three of the Casa Lupita restaurants to
Chevy's, Inc. ("Chevy's") for a cash price of approximately $5,300,000. The
proceeds from this sale were used to pay-down debt primarily related to the
Famous Acquisition. In connection with this transaction, the Company entered
into an agreement to sell substantially all of the assets related to one
additional Casa Lupita to Chevy's for a price of $1,000,000. Closing of this
transaction is conditioned upon, among other things, the transfer to Chevy's of
the liquor license related to such restaurant. Management currently expects
closing of this transaction to occur during the second quarter of 1998.

         The decision to sell the four Casa Lupita locations was the result of a
plan to consolidate Fiesta's operations and focus on the expansion of Garcia's.
The Company plans to convert the remaining Casa Lupita and the two Carlos
Murphy's to the Garcia's concept in 1998. Initial expansion plans are for Fiesta
to open several new Garcia's in its core operating area in and around Phoenix,
Arizona. In March 1998, the Company opened a new Garcia's food court facility in
Bank One Ball Park, home of the Arizona Diamondbacks (a Major League Baseball
team), in Phoenix, Arizona. This premier entertainment location will be open
throughout the Major League Baseball season as well as for all special events
and concerts held at the Ball Park.

RESTAURANT OPERATIONS

MANAGEMENT AND EMPLOYEES

         Responsibility for the Company's restaurant operations is organized
geographically with restaurant general managers reporting to area directors of
operations who, in turn, report to the respective divisional vice president of
operations for Garfield's, Fiesta and Pepperoni Grill. A typical restaurant has
a general manager, two to four assistant managers and average 57 employees,
approximately 75% of whom are part-time.

         Area directors of operations as well as restaurant general managers and
associate managers are eligible for cash and stock bonuses, travel incentives,
professional training and attendance at industry conferences. Receipt of these
incentives is based on reaching restaurant performance objectives. The Company's
hourly employees are eligible for performance-based awards for superior service
to the Company and its guests. Employee awards can include travel incentives,
gift certificates, plaques and Company memorabilia. Most employees other than
restaurant management and corporate management are compensated on an hourly
basis.

QUALITY CONTROL

         The Company has uniform operating standards and specifications relating
to the quality, preparation and selection of menu items, maintenance and
cleanliness of the premises, and employee conduct. Managers are responsible for
assuring compliance with Company operating procedures. Executive and supervisory
personnel routinely visit each restaurant to evaluate adherence to quality
standards and employee performance.

TRAINING

         The Company places a great deal of emphasis on the proper training of
its hourly employees and general and associate managers. In 1995, the Company
hired a full-time training director to oversee all areas of employee education.
The outline for the training program is based on the individual expertise of the
trainee and typically lasts about two weeks for hourly employees and up to eight
weeks for managers. Managers must be certified in a number of skills in
restaurant management, including technical proficiency and job functions,
management techniques and profit and loss responsibilities. These skills are
taught primarily in the restaurant along with classroom training and assigned
projects. Manager training is performed in several geographically dispersed
restaurants. Standard manuals regarding training and operations, products and
equipment, and local marketing programs are provided by the Company.

PURCHASING

         During 1994, the Company hired a purchasing director to oversee the
relations and negotiations with manufacturers and regional distributors for most
food and beverage products and to ensure uniform quality, competitive costs and
adequate supplies of proprietary products. The Company and its franchisees
purchase substantially all food and beverage products from several national and
regional suppliers. The Company has not experienced any significant delays in
receiving food and beverage inventories or restaurant supplies.

ADVERTISING AND MARKETING

         The Company uses television, newspaper, radio and outdoor advertising
to promote its restaurants. In markets where the Company shares a trade area
with a franchisee, advertising cooperatives are utilized to maximize the
Company's restaurant's visibility. 


                                       4
<PAGE>   7

Franchisees of Garfield's units are generally required to expend up to 4% of
sales on restaurant related marketing efforts. In addition, all Company and
franchise restaurants contribute 1/2% of their sales to a marketing fund used to
produce advertising, menu development and point-of-sale material to promote
increased sales. The Company engages in a variety of local market promotional
activities such as contributing goods, time and money to charitable, civic and
educational programs, in order to increase public awareness of the Company's
restaurants.

RESTAURANT REPORTING

         Financial controls are implemented through the use of computerized cash
registers and management information systems. Sales reports and food, beverage
and labor cost data are prepared and reviewed weekly for operational control.
During 1997, the Company implemented new systems to streamline the flow of
sales, payroll and accounts payable information.

EXPANSION STRATEGY

         The Company intends to open Garfield's restaurants in regional malls
principally throughout the eastern half of the United States. This expansion
strategy is designed to capitalize on the growing trend to include and expand
dining and entertainment facilities in regional malls. Management believes this
mall-based expansion strategy for Garfield's reduces the risks associated with
locating restaurants in new markets because of the availability of historical
trends regarding mall sales and customer traffic. Further, restaurant
construction within a mall typically requires a substantially lower investment
than construction of a free-standing restaurant.

         Management believes there are sufficient additional mall locations for
its restaurant concepts, particularly as existing malls are expanded and
remodeled with a view toward becoming entertainment and dining centers. The
Company maintains relationships with several leading mall operators who provide
the Company with an ongoing supply of potential mall locations for evaluation.
This will not, however, preclude it from searching for other expansion
opportunities such as free-standing sites.

         The Company intends to open Garcia's in free-standing sites primarily
in its core operating area in and around Phoenix, Arizona. This strategy
capitalizes on the strong reputation of the Garcia's concept in the Phoenix
area.

         The Company has retained a Director of Real Estate to represent it in
site negotiations. This individual is compensated on a success fee basis. The
Company expects to focus its expansion primarily on the opening of Company-owned
Garfield's and Garcia's restaurants. Additional franchising is possible but
likely to be a minor part of expansion.

         Subsequent to December 28, 1997, the Company has opened one new
Garfield's in Jasper, Alabama, and is currently developing one new Garfield's in
Asheville, North Carolina. In March 1998, the Company opened a new Garcia's food
court facility in the Bank One Ball Park in Phoenix, Arizona. Also, in March
1998, a new franchised Garfield's was opened in Vincennes, Indiana. The Company
expects to open up to five Company-owned Garfield's and Garcia's restaurants in
1998 and up to ten Company-owned Garfield's and Garcia's restaurants in 1999.
The Company also plans to convert the existing Casa Lupita's and Carlos Murphy's
to the Garcia's concept during 1998.

         In addition, management is actively seeking possible merger or
acquisition candidates that it believes will add value to the Company.

FRANCHISE OPERATIONS

GENERAL TERMS

         As of December 28, 1997, eight franchised Garfield's were operating
pursuant to agreements granted by the Company. In March 1998, a new franchised
Garfield's opened in Vincennes, Indiana, bringing the total count of franchised
Garfield's to nine. The typical Garfield's franchise agreement provides for (i)
the payment of an initial franchise fee of up to $35,000 and a monthly
continuing royalty fee expressed as a percentage (typically 3% or 4%) of gross
sales with a minimum fee of $2,000 to $2,500 per month; (ii) the payment of 1/2%
of gross sales to the Garfield's Creative Marketing Fund; (iii) quality control
and operational standards; (iv) development obligations for the opening of new
restaurants under the franchise; and (v) the creation and use of advertising.
The franchise term usually ranges from five to 10 years with five-year renewals.
The grant of a franchise does not ensure that a restaurant will be opened. Under
the Company's typical franchise agreement, the failure to open restaurants can
cause a termination of the franchise. Although the Company largely relies upon
standardized agreements for its franchises, it will continue to adjust its
agreements as circumstances warrant.

         As of December 28, 1997, there were two franchised Garcia's
restaurants. These franchise agreements provide for the monthly payment of
continuing royalties of 1.5% to 2.0% of gross sales.


                                       5
<PAGE>   8

FUTURE FRANCHISE DEVELOPMENT

         The Company has elected to emphasize Company restaurant development but
is studying the possibility of becoming more aggressive in its franchise
development. The Company entered into one new franchise agreement in 1997 for a
new Garfield's which opened in March 1998. The Company has not entered into any
additional franchise agreements as of the date of this report.

COMPANY MANAGED FRANCHISES

         The Company currently manages three of its franchised Garfield's
restaurants in Oklahoma City pursuant to a management agreement with the
franchisee who remains the owner of the restaurants. The Company receives fixed
management and accounting fees in addition to its royalties and other charges
under the franchise agreement.

FRANCHISE REVENUE DATA

         The following table sets forth fees and royalties earned by the Company
from franchisees for the years indicated.

<TABLE>
<CAPTION>
                                1997               1996              1995
                                ----               ----              ----
<S>                          <C>                <C>               <C>      
Initial franchise fees       $     --           $     --          $  50,000
Continuing royalties          268,000            265,000            258,000
</TABLE>

COMPLIANCE WITH FRANCHISE STANDARDS

         All franchisees are required to operate their Garfield's restaurants in
compliance with the Company's methods, standards and specifications regarding
such matters as menu items, ingredients, materials, supplies, services,
fixtures, furnishings, decor and signs, although the franchisee has the
discretion to determine the menu prices to be charged. However, as a practical
matter, all franchisees utilize the Company's standardized Garfield's menu. In
addition, all franchisees are required to purchase all food, ingredients,
supplies and materials from suppliers approved by the Company. The Company
enforces the standards required of franchisees. Such enforcement may result in
the closure or non-renewal of certain franchise units, but any such closings or
non-renewals are not expected to have a material adverse effect upon the
Company's results of operations or financial position.

COMPETITION

         The restaurant industry is intensely competitive with respect to price,
service, location, food type and quality. There are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for
substantially longer periods than the Company and may be better established in
the market area than the Company's restaurants. The restaurant business is often
affected by changes in consumer taste, national, regional or local economic
conditions, demographic trends, traffic patterns and type, number and location
of competing restaurants. In addition, factors such as inflation, increased
food, labor and benefit costs, and the lack of experienced management and hourly
employees may adversely affect the restaurant industry in general and the
Company's restaurants in particular.

SERVICE MARKS

         "GARFIELD'S", "CASEY GARFIELD'S", "PEPPERONI GRILL", "GARCIA'S", "CASA
LUPITA" and "CARLOS MURPHY'S" are Company service marks registered with the
United States Patent and Trademark Office. The Company pursues any infringement
of its marks within the United States and considers its marks to be crucial to
the success of its operations.

EMPLOYEES

         As of March 1, 1998, the Company employed 3,567 individuals, of whom
278 were management or administrative personnel (including 219 who were
restaurant managers or trainees) and 3,289 were employed in non-management
restaurant positions. As of this date, the Company employed 262 persons on a
salaried basis and 3,305 persons on an hourly basis. Each restaurant employs an
average of 57 people.

         Most employees, other than restaurant management and corporate
management personnel, are paid on an hourly basis. The Company believes that it
provides working conditions and wages that compare favorably with those of its
competition. As the Company expands, it will need to hire additional management
and its continued success will depend in large part on its ability to attract
and retain good management employees. The Company's employees are not covered by
a collective bargaining agreement.


                                       6
<PAGE>   9

SEASONALITY

         With 44 of the 62 Company-owned restaurants located in regional malls
as of December 28, 1997, the resulting higher pedestrian traffic during the
Thanksgiving to New Year holiday season has caused the Company to experience a
substantial increase in food and beverage sales and profits in the Company's
fourth fiscal quarter. However, as a result of the 1997 acquisition of 17
free-standing Mexican restaurants from Famous, the Company's management believes
that its revenues and profits on a quarterly basis will be less affected by
seasonality in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of Seasonality."

GOVERNMENT REGULATIONS

         The Company's restaurants are subject to licensing and regulation by
alcoholic beverage control, health, sanitation, safety and fire agencies in each
state and/or municipality in which restaurants are located. The Company has not
experienced material difficulties in these areas, however, regulatory
difficulties or failures in obtaining the required licenses or approvals could
delay or prevent the opening of a new restaurant and affect profitability.

         Approximately 14% of the Company's food and beverage revenues in 1997
were attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities, for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, such licenses or permits
must be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the daily
operations of the Company's restaurants, including minimum age of patron and
employees, hours of operation, advertising, wholesale purchasing, inventory
control and handling, storage and dispensing of alcoholic beverages.

         In certain states the Company may be subject to "dram-shop" statutes,
which generally provide a person injured by an intoxicated patron the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.

         The Company's restaurant operations are also subject to federal
and state laws governing such matters as minimum wages, working conditions,
overtime and tip credits. Significant numbers of the Company's food service and
preparation personnel are paid at rates equal to or based upon the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase the Company's labor costs. The enactment of future legislation
increasing employee benefits, such as mandated health insurance, could also
significantly adversely affect the industry and the Company, as could future
increases in workers' compensation rates.

         The Company is subject to Federal Trade Commission ("FTC") regulation
and state laws that regulate the offer and sale of franchises. The Company may
also become subject to state laws that regulate substantive aspects of the
franchisor-franchisee relationship. The FTC requires the Company to furnish
prospective franchisees a franchise offering circular containing prescribed
information. A number of states in which the Company might consider franchising
also regulate the offer and sale of franchises and require registration of the
franchise offering with state authorities. The Company believes that it is in
material compliance with such laws.

         The Americans With Disabilities Act ("ADA") prohibits discrimination in
employment and public accommodations on the basis of disability. While the
Company believes it is in substantial compliance with the ADA regulations, the
Company could be required to expend funds to modify its restaurants to provide
service to, or make reasonable accommodations for the employment of disabled
persons.

ITEM 2. PROPERTIES

         All but one of the Company's facilities are occupied under leases. The
majority of the Company's restaurant leases provide for the payment of base
rents plus real estate taxes, insurance and other expenses and for the payment
of a percentage of the Company's sales in excess of certain sales levels. These
leases typically provide for escalating rentals in future years and have initial
terms expiring as follows:

<TABLE>
<CAPTION>
                                                                      NO. OF
          YEAR LEASE TERM EXPIRES                                  FACILITIES *
          -----------------------                                  ------------
<S>                                                                <C>
          1998-1999......................................                3
          2000-2001......................................               10
          2002-2003......................................                9
          2004-2005......................................               19
          2006-2007......................................               10
          2008 and beyond................................               13
</TABLE>


                                       7
<PAGE>   10

         * Includes two leases which have been executed for locations that were
under-development and had not opened as of December 28, 1997, and three leases
for locations which were sold subsequent to December 28, 1997.

         The Company's executive offices, located in approximately 7,400 square
feet of office space in Oklahoma City, Oklahoma, are occupied under a lease
which expires in June, 1999.

ITEM 3. LEGAL PROCEEDINGS

         The Company is not presently engaged in any legal proceedings the
outcome of which is expected to have a material adverse effect upon its business
or financial condition. However, in the ordinary course of its business, the
Company is named in various lawsuits related to the operation of its
restaurants, most of which relate to on-the-job injury claims by its employees
and are typically handled by the Company's insurance carriers.

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

         No matter was submitted to a vote of the Company's security holders
during its fourth fiscal quarter of 1997.

                                     PART II

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

         The Company's common stock has been quoted on the NASDAQ National
Market System under the symbol "EATS" since May 1994. Prior to that date, the
Company's common stock was quoted on the NASDAQ Small-Cap Market. The following
table sets forth, for the quarterly periods indicated, the high and low closing
bid prices for the common stock, as reported by the NASDAQ Markets.

<TABLE>
<CAPTION>
                                                       Low        High
                                                       ---        ----
<S>                                                   <C>         <C>  
1996
First Quarter..................................       $2.19       $3.50
Second Quarter.................................        3.25        5.75
Third Quarter..................................        2.75        4.88
Fourth Quarter.................................        3.00        4.75

1997
First Quarter..................................       $2.94       $4.31
Second Quarter.................................        2.50        3.19
Third Quarter..................................        2.56        4.38
Fourth Quarter.................................        3.69        5.00

1998
First Quarter (to March 25)....................       $3.44       $5.50
</TABLE>

         Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.

         On March 25, 1998, the Company's stock transfer agent reported that the
Company's common stock was held by 247 holders of record. However, management
believes there are approximately 1,000 beneficial owners of the Company's common
stock.

         The Company has paid no cash dividends on its common stock. The Board
of Directors intends to retain earnings of the Company to support operations and
to finance expansion and does not intend to pay cash dividends on the common
stock for the foreseeable future. The payment of cash dividends in the future
will depend upon such factors as earnings levels, capital requirements, the
Company's financial condition and other factors deemed relevant by the Board of
Directors.

ITEM 6. SELECTED FINANCIAL DATA

         The following table sets forth selected financial data of the Company.
The selected financial data in the table are derived from the consolidated
financial statements of the Company. The following data should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.


                                       8
<PAGE>   11

<TABLE>
<CAPTION>
                                                                 (In thousands except per share amounts)
                                                                               Fiscal Year
                                                         -------------------------------------------------------
                                                           1997        1996        1995        1994       1993
                                                         --------    --------    --------    --------   --------
<S>                                                      <C>         <C>         <C>         <C>        <C>     
INCOME STATEMENT DATA:
Revenues:
    Food and beverage sales ..........................   $ 62,851    $ 55,733    $ 45,811    $ 38,869   $ 26,401
    Franchise fees and royalties .....................        268         265         307         267        488
    Other income .....................................        423         418         482         423        369
                                                         --------    --------    --------    --------   --------
                                                           63,542      56,416      46,600      39,559     27,258
                                                         --------    --------    --------    --------   --------
Costs and Expenses:
    Costs of sales ...................................     17,840      17,070      13,968      12,052      8,231
    Operating expenses ...............................     36,795      32,219      26,387      22,359     14,891
    Pre-opening costs ................................        279         726         830         568        591
    General and administrative expenses ..............      4,049       3,666       3,067       2,467      2,101
    Provision for restaurant closures
      and other disposals ............................         --          --         897          --         --
    Provision for impairment of long-lived assets ....         85          --          --          --         --
    Depreciation and amortization ....................      2,216       1,886       1,337         927        601
    Interest expense .................................        310         194          41          48         50
                                                         --------    --------    --------    --------   --------
                                                           61,574      55,761      46,527      38,421     26,465
                                                         --------    --------    --------    --------   --------
Income before provision (benefit) for
   income taxes and cumulative effect of
   change in accounting for income taxes .............      1,968         655          73       1,138        793
Provision (benefit) for income taxes .................        569          74        (113)        316        293
                                                         --------    --------    --------    --------   --------
 Income before cumulative effect of change
   in accounting for income taxes ....................      1,399         581         186         822        500
Cumulative effect of change in accounting
   for income taxes ..................................         --          --          --          --        202
                                                         --------    --------    --------    --------   --------
Net income ...........................................   $  1,399    $    581    $    186    $    822   $    702
                                                         ========    ========    ========    ========   ========
Net income per common share (1):
    Income before cumulative effect
      of change in accounting for income taxes .......   $   0.36    $   0.15    $   0.05    $   0.23   $   0.24
    Cumulative effect of change in
      accounting for income taxes ....................         --          --          --          --       0.09
                                                         --------    --------    --------    --------   --------
    Net income per common share ......................   $   0.36    $   0.15    $   0.05    $   0.23   $   0.33
                                                         ========    ========    ========    ========   ========
Net income per common share
    assuming dilution (1):
    Income before cumulative effect
      of change in accounting for income taxes .......   $   0.35    $   0.15    $   0.05    $   0.21   $   0.18
    Cumulative effect of change in
      accounting for income taxes ....................         --          --          --          --       0.08
                                                         --------    --------    --------    --------   --------
    Net income per common share
      assuming dilution ..............................   $   0.35    $   0.15    $   0.05    $   0.21   $   0.26
                                                         ========    ========    ========    ========   ========

Weighted average common shares .......................      3,869       3,836       3,723       3,646      2,124
                                                         ========    ========    ========    ========   ========
Weighted average common shares
    assuming dilution ................................      3,988       4,002       3,834       3,832      2,732
                                                         ========    ========    ========    ========   ========

BALANCE SHEET DATA (AT END OF PERIOD):
    Working capital (deficit) ........................   $ (4,844)   $ (3,456)   $ (1,677)        922   $  2,021
    Total assets .....................................     29,775      18,709      16,596      12,933     11,363
    Long-term obligations (2) ........................      7,637       1,471       1,249          75         42
    Stockholders' equity .............................     10,993       9,650       8,912       8,625      7,690

OTHER DATA:
    Earnings before interest, depreciation
      and taxes (EBITDA) .............................   $  4,493    $  2,736    $  1,451    $  2,113   $  1,444
    System-wide sales ................................     71,133      64,036      53,802      45,891     39,025
</TABLE>

(1)  In March 1997, the Financial Accounting Standards Board ("FASB") issued
     SFAS 128, "Earnings Per Share," which requires the calculation of basic and
     diluted earnings per share (EPS). Basic EPS includes no dilution and is
     computed by dividing income available to common stockholders by the
     weighted-average number of common shares outstanding for the period.
     Diluted EPS is computed by dividing net income available to common
     stockholders by the sum of the weighted-average number of common shares
     outstanding for the period plus common stock equivalents. The Company
     adopted the provisions of SFAS 128 in the fourth quarter of 1997, and, as
     required, has restated all prior period EPS amounts to conform to the new
     accounting standard.

(2)  Includes capital leases and long-term debt obligations, net of current
     portions. (See Note 5 of Notes to Consolidated Financial Statements.)


                                       9
<PAGE>   12

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

         From time to time, the Company may publish forward-looking statements
relating to certain matters including anticipated financial performance,
business prospects, the future opening of Company-owned and franchised
restaurants, anticipated capital expenditures, and other matters. All statements
other than statements of historical fact contained in this Form 10-K or in any
other report of the Company are forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of that safe
harbor, the Company notes that a variety of factors, individually or in the
aggregate, could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements including, without limitation, the
following: consumer spending trends and habits; competition in the casual dining
restaurant segment; weather conditions in the Company's operating regions; laws
and government regulations; general business and economic conditions;
availability of capital; success of operating initiatives and marketing and
promotional efforts; and changes in accounting policies. In addition, the
Company disclaims any intent or obligation to update those forward-looking
statements.

INTRODUCTION

         As of December 28, 1997, the Company owned and operated 62 (43
Garfield's, 10 Garcia's, five Casa Lupitas, two Carlos Murphy's and two
Pepperoni Grills) and franchised 10 (eight Garfield's and two Garcia's)
restaurants. Subsequent to December 28, 1997, the Company opened one new
Garfield's and sold three Casa Lupitas. Additionally, one new franchised
Garfield's was opened subsequent to December 28, 1997. The Company currently has
one Garfield's and one Garcia's in development. As of the date of this report,
the entire system includes 60 (44 Garfield's, 10 Garcia's, two Casa Lupitas, two
Carlos Murphy's, and two Pepperoni Grills) Company-owned restaurants and 11
(nine Garfield's and two Garcia's) franchise restaurants.

PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA

         The following table sets forth, for the periods indicated, (i) the
percentages that certain items of income and expense bear to total revenues,
unless otherwise indicated, and (ii) selected operating data:

<TABLE>
<CAPTION>
                                                                       Fiscal Year
                                                           -----------------------------------
                                                              1997         1996         1995
                                                           ---------    ---------    ---------
<S>                                                        <C>          <C>          <C>  
INCOME STATEMENT DATA:
Revenues:
    Food and beverage sales ............................        98.9%        98.8%        98.3%
    Franchise fees and royalties .......................         0.4          0.5          0.7
    Other income .......................................         0.7          0.7          1.0
                                                           ---------    ---------    ---------
                                                               100.0        100.0        100.0
                                                           ---------    ---------    ---------
Costs and Expenses:
    Costs of sales (1) .................................        28.4         30.6         30.5
    Operating expenses (1) .............................        58.5         57.8         57.6
    Pre-opening costs (1) ..............................         0.4          1.3          1.8
    General and administrative expenses ................         6.4          6.5          6.6
    Provision for restaurant closures
      and other disposals ..............................          --           --          1.9
    Provision  for  impairment  of long-lived assets ...         0.1           --           --
    Depreciation and amortization (1) ..................         3.5          3.4          2.9
    Interest expense ...................................         0.5          0.3          0.1
                                                           ---------    ---------    ---------

Income before provision (benefit) for income taxes .....         3.1          1.1          0.2
Provision (benefit) for income taxes ...................         0.9          0.1         (0.2)
                                                           ---------    ---------    ---------
Net income .............................................         2.2%         1.0%         0.4%
                                                           =========    =========    =========

SELECTED OPERATING DATA:
(Dollars in thousands) System-wide sales:
   Company restaurants .................................   $  62,851    $  55,733    $  45,811
   Franchise restaurants ...............................       8,282        8,303        7,991
                                                           ---------    ---------    ---------
      Total ............................................   $  71,133    $  64,036    $  53,802
                                                           =========    =========    =========
Number of restaurants (at end of period):
   Company restaurants .................................          62           45           41
   Franchise restaurants ...............................          10            8            8
                                                           ---------    ---------    ---------
      Total ............................................          72           53           49
                                                           =========    =========    =========
</TABLE>

(1) As a percentage of food and beverage sales.


                                       10
<PAGE>   13
IMPACT OF SEASONALITY

         The concentration of restaurants in regional malls, where customer
traffic increases substantially during the Thanksgiving to New Year holiday
season, has resulted in the Company experiencing a substantial increase in
restaurant sales and profits during the fourth quarter of each year. However,
as a result of the acquisition of 17 free-standing Mexican restaurants from
Famous, the Company's management believes that its revenues and profits on a
quarterly basis will be less affected by seasonality in the future. The
following table presents the Company's revenues, net income (loss) and certain
other financial and operational data for each fiscal quarter of 1997, 1996 and
1995.

<TABLE>
<CAPTION>


                                                                                     FISCAL QUARTERS
                                                          ----------------------------------------------------------------------
                                                              1ST           2ND            3RD            4TH          ANNUAL
                                                          -----------   -----------    -----------    -----------   ------------
                                                                           (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                                       <C>           <C>            <C>            <C>           <C>        
1997:

          Revenues ....................................   $    14,203   $    13,709    $    14,735    $    20,895   $    63,542
          Net income ..................................           229            24            225            921         1,399
          Net income per common share .................          0.06          0.01           0.06           0.24          0.36
          Net income per common share
               assuming dilution ......................          0.06          0.01           0.06           0.22          0.35
          Weighted average common shares ..............         3,863         3,898          3,858          3,857         3,869
           Weighted average common
                shares assuming dilution ..............         4,006         3,945          3,958          4,044         3,988
          Pre-opening costs ...........................   $        18   $       156    $        92    $        13   $       279
          Number of Company units at
              end of period (1) .......................            43            45             46             62            62
          Company restaurant operating months .........           131           131            135            162           559
          Sales per Company restaurant
              operating month .........................   $       107   $       103    $       108    $       128   $       113

1996:
          Revenues ....................................   $    12,772   $    13,426    $    13,999    $    16,219   $    56,416
          Net income (loss) ...........................            37          (166)           109            601           581
          Net income (loss) per common share ..........          0.01         (0.04)          0.03           0.16          0.15
          Net income per common share
              assuming dilution .......................          0.01         (0.04)          0.03           0.15          0.15
          Weighted average common shares ..............         3,808         3,843          3,845          3,849         3,836
          Weighted average common
              shares assuming dilution ................         3,894         3,843          4,004          4,007         4,002
          Pre-opening costs ...........................   $       120   $       154    $       230    $       222   $       726
          Number of Company units at
              end of period ...........................            42            43             44             45            45
          Company restaurant operating months .........           124           127            128            134           513
          Sales per Company restaurant
              operating month .........................   $       102   $       104    $       108    $       119   $       109

1995:
          Revenues ....................................   $    10,475   $    10,682    $    11,449    $    13,994   $    46,600
          Net income (loss) (2) .......................            25           (45)          (642)           848           186
          Net income (loss) per common
               share (2) ..............................          0.01         (0.01)         (0.17)          0.23          0.05
          Net income (loss) per common
               share assuming dilution (2) ............          0.01         (0.01)         (0.17)          0.22          0.05
          Weighted average common
               shares .................................         3,695         3,727          3,733          3,737         3,723
          Weighted average common
               shares assuming dilution ...............         3,829         3,727          3,733          3,842         3,834
          Pre-opening costs ...........................   $       143   $       198    $       223    $       266   $       830
          Number of Company units at
              end of period ...........................            37            38             38             41            41
          Company restaurant operating months .........           107           114            113            119           453
          Sales per Company restaurant
              operating month .........................   $        96   $        92    $       100    $       116   $       101

</TABLE>


(1) During the fourth quarter of 1997, the Company acquired 17 Mexican
    restaurants under the names: Garcia's (10), Casa Lupita (5) and Carlos
    Murphy's (2).
(2) During the third quarter of 1995, the Company recorded a pre-tax charge of
    $897,000 to establish a provision for restaurant closures and other
    disposals. The effect of this provision on the reported net income (loss)
    and per share data for the third quarter and the fiscal year was $(639,000)
    or $(0.17) per share.



                                      11
<PAGE>   14
FISCAL YEARS 1997, 1996, AND 1995

REVENUES

         Revenues for the year ended December 28, 1997, increased 13% over the
revenues reported for the year ended December 29, 1996. Revenues in 1996
increased 21% over 1995 levels. Revenues for the year ended December 31, 1995,
increased 18% over the same period in 1994. The 1997, 1996 and 1995 increases
were primarily due to increases in food and beverage sales.

         The number of restaurants operating at the end of each year, the
number of operating months during that year and average sales per operating
month were as follows:

<TABLE>
<CAPTION>
                                                              1997         1996         1995
                                                            --------     --------     --------

<S>                                                         <C>          <C>          <C>
Number of Company restaurants at year end .............           62           45           41
Number of Company restaurant operating months .........          559          513          453
Average sales per Company restaurant operating
    month .............................................     $112,500     $108,600     $101,100
</TABLE>

      A summary of sales and costs of sales expressed as a percentage of sales
are listed below for the fiscal years:

<TABLE>
<CAPTION>

                                                   1997        1996        1995
                                                  ------      ------      ------
SALES:

<S>                                               <C>         <C>         <C>  
   Food .....................................       85.6%       85.1%       83.5%
   Beverage .................................       14.4%       14.9%       16.5%
                                                  ------      ------      ------
      Total .................................      100.0%      100.0%      100.0%
                                                  ======      ======      ======

COSTS OF SALES:
   Food .....................................       28.7%       30.7%       30.6%
   Beverage .................................       26.7%       30.5%       30.2%
                                                  ------      ------      ------
      Total .................................       28.4%       30.6%       30.5%
                                                  ======      ======      ======
</TABLE>

      Average monthly sales per unit were $112,500 during 1997 compared to
$108,600 during 1996. The 1997 per unit monthly sales increased by $3,900 or
3.6% from 1996 levels. This increase is primarily due to the introduction of a
new Garfield's menu design, a successful television advertising campaign during
the fourth quarter, the success of continued radio and newspaper advertising,
the implementation of a mall employee rewards program in selected locations,
and the addition of 17 higher volume restaurants through the Famous Acquisition
in the fourth quarter of 1997. The Company's management expects that average
monthly sales per unit will increase in future periods due to the addition of
the 17 new Mexican restaurants through the Famous Acquisition and the future
openings of Garcia's.

      Average monthly sales per unit were $108,600 during 1996 compared to
$101,100 during 1995. The 1996 per unit monthly sales increased by $7,500 or
7.4% from 1995 levels. The increase was primarily due to a stronger, more
experienced senior-level management team in place at the beginning of 1996, the
successful introduction of quarterly regional newspaper advertising programs
which were used in the majority of the Company's restaurant markets in 1996,
successful tests of radio and direct mail advertising campaigns in selected
markets and two menu roll-outs (in July and October 1996), both of which
included selective modest price increases (in-line with competitor pricing on
comparable menu selections) and introduced several new product selections that
were featured in the aforementioned newspaper, radio and direct mail
advertising campaigns.

         Continuing royalties were $268,000 in 1997, $265,000 in 1996 and
$258,000 in 1995. Continuing royalties were comparable as the same number of
franchise restaurants (eight) were in operation during the three year period.
During the second quarter of 1995, one franchise restaurant closed and a new
one opened. Initial franchise fees recognized in 1995 were $50,000. No initial
franchise fees were recorded in 1997 or 1996.

COSTS AND EXPENSES

      The following is a comparison of costs of sales and labor costs
(excluding payroll taxes and fringe benefits) as a percentage of food and
beverage sales at Company-owned restaurants:

<TABLE>
<CAPTION>

                                                         1997        1996        1995
                                                       ------      ------      ------

<S>                                                      <C>         <C>         <C>  
Costs of sales ...................................       28.4%       30.6%       30.5%
Labor costs ......................................       27.3%       27.6%       28.0%
                                                       ------      ------      ------
     Total .......................................       55.7%       58.2%       58.5%
                                                       ======      ======      ======

</TABLE>


                                      12
<PAGE>   15

      Costs of sales as a percentage of food and beverage sales decreased in
1997 (28.4%) from 1996 (30.6%). This decrease is primarily due to the Company's
continued menu development, increased vendor rebates, and improved store-level
food and beverage cost controls. Costs of sales as a percentage of food and
beverage sales increased slightly in 1996 (30.6%) as compared to 1995 (30.5%)
primarily due to higher meat and dairy product costs, partially offset by lower
produce costs and improvements in the Company's purchasing techniques.

      The Company's labor costs as a percentage of food and beverage sales
decreased in 1997 to 27.3% from 27.6% in 1996. Labor costs as a percentage of
food and beverage sales decreased in 1996 from 28.0% in 1995. The 1997 decrease
is primarily due to continued improvement of store-level monitoring of labor
needs, continued refinement of restaurant operations resulting in reduced
kitchen labor costs and a reduction in the average number of managers per store
from 1996. The decrease in 1996 from 1995 is primarily due to the improvements
of store-level monitoring of labor needs.

      Operating expenses (which include labor costs) as a percentage of food
and beverage sales were 58.5% in 1997, 57.8% in 1996, and 57.6% in 1995. The
increase in operating expenses as a percentage of food and beverage sales in
1997 as compared to 1996 was due primarily to higher promotional and
advertising expenses and occupancy costs (primarily rent and utilities)
partially offset by lower labor costs (as previously explained). The modest
increase in operating expenses as a percentage of food and beverage sales in
1996 versus 1995 was attributable to higher advertising and promotional
expenses partially offset by lower restaurant occupancy and labor costs.

PRE-OPENING COSTS

      Unlike a majority of its publicly-held competitors which capitalize and
amortize pre-opening costs over a period of up to 24 months, the Company
expenses such costs as incurred.

      During each of the three years ended December 28, 1997, December 29,
1996, and December 31, 1995, the Company incurred and recognized as expense the
following amounts for restaurant pre-opening costs relative to the
corresponding number of restaurants opened:
<TABLE>
<CAPTION>


                                                              1997          1996          1995
                                                            --------      --------      --------

<S>                                                         <C>           <C>           <C>     
Total pre-opening costs ...............................     $279,000      $726,000      $830,000
Restaurants opened ....................................            3             8             9
Average pre-opening costs per restaurant opened .......     $ 93,000      $ 90,700      $ 92,200
Total pre-opening costs as a percentage of food
    and beverage sales ................................          0.4%          1.3%          1.8%
</TABLE>

      Under the Company's policy of expensing pre-opening costs as incurred,
income from operations, on an annual and quarterly basis, could be adversely
affected during periods of restaurant development.

GENERAL AND ADMINISTRATIVE EXPENSES

      General and administrative expenses decreased as a percentage of total
revenues to 6.4% in 1997 from 6.5% in 1996. In 1996, general and administrative
expenses decreased from 6.6% in 1995. The higher absolute levels of general and
administrative expenses from 1995 to 1997 are related primarily to additional
personnel costs and related costs of operating the Company's expanding
restaurant group. General and administrative expenses as a percentage of total
revenues decreased modestly in 1997 as compared to 1996 and in 1996 as compared
to 1995, as a result of the Company's revenues increasing at a higher rate than
its increase in general and administrative expenses. The Company anticipates
that its costs of supervision and administration of Company and franchise
stores will increase at a slower rate than revenue increases during the next
few years.

PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS

      During 1995, the Company approved and began the implementation of a plan
to close four under-performing restaurants. During 1996, the Company identified
two additional locations for closure. As of December 28, 1997, the Company had
disposed of all restaurants planned for closure in 1995 and 1996. These
restaurants (the 1995 and 1996 identified closures) collectively accounted for
$79,000, $1,784,000 and $3,498,000 of revenues and $(18,000), $(68,000) and
$(223,000) of operating losses for fiscal years 1997, 1996 and 1995,
respectively. Management expects the effect of closing these under-performing
restaurants to result in improved margins and increased profitability for the
Company in future periods.

      As a result of the plan to close under-performing restaurants, the
Company recorded a pre-tax charge of $897,000 in the third quarter of 1995. The
provision related to lease termination costs, litigation settlement costs,
write-down of property, equipment and leasehold improvements, and other exits
costs. As of December 28, 1997, the Company has a remaining reserve of
approximately $51,000 for settlement of any remaining liabilities associated
with the closures.


                                      13
<PAGE>   16



PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS

      In 1996, the Company adopted the provisions of SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Pursuant to SFAS 121, the Company's restaurants are reviewed on an
individual restaurant basis for indicators of impairment, whenever events or
circumstances indicate that the carrying value of its restaurants may not be
recoverable. The Company's primary test for an indicator of potential
impairment is operating losses. In order to determine whether an impairment has
occurred, the Company estimates the future net cash flows expected to be
generated from the use of its restaurants and the eventual disposition, as of
the date of determination, and compares such estimated future cash flows to the
respective carrying amounts. Those restaurants which have carrying amounts in
excess of estimated future cash flows are deemed impaired. The carrying value
of these restaurants is adjusted to an estimated fair value by discounting the
estimated future cash flows attributable to such restaurants using a discount
rate equivalent to the rate of return the Company expects to achieve from its
investment in newly-constructed restaurants. The excess is charged to expense
and cannot be reinstated.

      Considerable management judgment and certain significant assumptions are
necessary to estimate future cash flows. Significant judgments and assumptions
used by the Company in evaluating its assets for impairment include, but may
not be limited to: estimations of future sales levels, cost of sales, direct
and indirect costs of operating the assets, the length of time the assets will
be utilized and the Company's ability to utilize equipment, fixtures and other
moveable long-lived assets in other existing or future locations. In addition,
such estimates and assumptions include anticipated operating results related to
certain profit improvement programs implemented by the Company during 1996 and
1997, as well as the continuation of certain rent reductions, deferrals, and
other negotiated concessions from certain landlords. Actual results could vary
significantly from management's estimates and assumptions and such variance
could result in a change in the estimated recoverability of the Company's
long-lived assets. Accordingly, the results of the changes in those estimates
could have a material impact on the Company's future results of operations and
financial position.

      During 1997, the Company recorded an $85,000 provision for impairment of
long-lived assets related to three locations. Additionally, as of December 28,
1997, the Company had identified a total of six locations with indicators of
impairment.

      Prior to adopting SFAS 121, the Company accounted for the impairment of
long-lived assets by evaluating the recoverability of assets of restaurant
locations for which management had identified and began a plan to close the
location. The Company continues to use the guidance of FASB Emerging Issues
Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" for guidance in
recognizing costs related to closing restaurants.

      In the normal course of business, management performs a regular review of
the strength of its operating assets. It is management's plan to continue to
make such decisions to close under-performing restaurants and/or dispose of
other assets it considers in the best long-term interest of the Company's
shareholders.

DEPRECIATION AND AMORTIZATION EXPENSE

      Depreciation and amortization expense increased in 1997 to $2,216,000
(3.5% of restaurant sales) compared to $1,886,000 (3.4% of restaurant sales) in
1996 and $1,337,000 (2.9% of restaurant sales) in 1995. The increase in expense
in 1997 as compared to 1996 is primarily attributable to the increase in net
assets subject to depreciation and amortization in 1997 versus 1996 as the
result of opening and acquisition of additional restaurants. The expense
increase in 1996 versus 1995 relates principally to the increase in net assets
subject to depreciation and amortization because of opening additional
restaurants, the purchase of the Pepperoni Grill restaurant in January 1995,
and the remodeling of existing restaurants.

INTEREST EXPENSE

      Interest expense during each of the three years in the period ended
December 28, 1997, was $310,000 in 1997, $194,000 in 1996, and $41,000 in 1995.
Additionally, the Company has capitalized approximately $39,000, $62,000 and
$72,000 of interest costs during 1997, 1996 and 1995, respectively. The
increase in interest expense in 1997 as compared to 1996 is attributable to an
increase in the 1997 average borrowing balances and a higher average interest
rate under the Company's revolving credit agreements and the increase in the
Company's long-term debt as a result of the Famous Acquisition. The increase in
interest expense in 1996 versus 1995 is attributable to an increase in the
average borrowing balance under the Company's revolving credit agreement in
1996 versus 1995.

INCOME TAXES

      The Company records income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." The
provision (benefit) for income taxes was $569,000, $74,000 and $(131,000),
respectively, for 1997, 1996 and 1995.

      At December 28, 1997, the Company has recorded a benefit for its deferred
tax assets of approximately $2,869,000. Management believes that approximately
$2,019,000 of the assets will be recognized through the reversal of existing
taxable 


                                      14
<PAGE>   17
temporary differences with the remainder to be recognized through realization
of future income. It is management's opinion, based on the historical trend of
normal and recurring operating results, present store development and
forecasted operating results, that it is more likely than not that the Company
will realize the approximately $2,300,000 in the future net income in the next
two years necessary to recognize the deferred tax assets not otherwise offset
by reversing taxable temporary differences; net operating loss carryforwards do
not begin to expire until 2003 and general business tax credits until 2009.
While management of the Company is not presently aware of any adverse matters,
it is possible that the Company's ability to realize the deferred income tax
assets could be impaired if there are significant future exercises of
non-qualified stock options or if the Company were to experience declines in
sales and/or profit margins as a result of loss of market share, increased
competition or other adverse general economic conditions. Management intends to
evaluate the realizability of the net deferred tax asset at least quarterly by
assessing the need for a valuation allowance.

NET INCOME PER SHARE AMOUNTS

      In March 1997, The Financial Accounting Standards Board ("FASB") issued
SFAS 128, "Earnings Per Share," which requires the calculation of basic and
diluted earnings per share (EPS). Basic EPS includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. The
weighted-average common shares outstanding for the basic EPS calculation were
3,868,950, 3,836,228 and 3,722,788 in 1997, 1996, and 1995, respectively.
Diluted EPS is computed by dividing net income available to common stockholders
by the sum of the weighted-average number of common shares outstanding for the
period plus dilutive common stock equivalents. The sum of the weighted-average
common shares and common share equivalents for the diluted EPS calculation were
3,988,016, 4,002,359 and 3,833,956 in 1997, 1996, and 1995, respectively. The
Company adopted the provisions of SFAS 128 in the fourth quarter of 1997, and,
as required, has restated all prior period EPS amounts to conform to the new
accounting standard.

IMPACT OF INFLATION

      The impact of inflation on the cost of food and beverage products, labor
and real estate can affect the Company's operations. Over the past few years,
inflation has had a lesser impact on the Company's operations due to the lower
rates of inflation in the nation's economy and the economic conditions in the
Company's market area.

      Management believes the Company has historically been able to pass on
increased costs through certain selected menu price increases and increased
productivity and purchasing efficiencies, but there can be no assurance that
the Company will be able to do so in the future. Management anticipates that
the average cost of restaurant real estate leases and construction costs could
increase in the future which could affect the Company's ability to expand.

LIQUIDITY AND CAPITAL RESOURCES

      At December 28, 1997, the Company's working capital ratio increased to
0.53 to 1 compared to 0.50 to 1 at December 29, 1996. As is customary in the
restaurant industry, the Company has consistently operated with negative
working capital and has not historically required large amounts of working
capital. Historically, the Company has leased the vast majority of its
restaurant locations. For fiscal years 1997, 1996 and 1995, the Company's
expenditures for capital improvements were $3,886,000, $7,307,000, and
$7,789,000, respectively, which were funded out of cash flows from operating
activities of $4,977,000, $2,438,000, and $3,318,000, respectively, landlord
finish-out allowances of $1,742,000, $3,022,000, and $2,492,000, respectively,
and borrowings under the Company's credit agreements. In addition, the Company
expended approximately $529,000 in January 1995 for the acquisition of the
Pepperoni Grill restaurant and trade name and approximately $8,939,000 for the
Famous Acquisition in November 1997. The Famous Acquisition was financed
primarily through a term loan with a bank (described below).

      During 1998, the Company expects to construct and open an aggregate total
of five new Garfield's (in regional malls) and Garcia's (in free-standing
sites). The Company believes the cash generated from its operations and
borrowing availability under its credit facility (described below), will be
sufficient to satisfy the Company's net capital expenditures and working
capital requirements through 1998.

         In August 1995, the Company entered into an agreement with a bank for
a revolving line of credit for $3,000,000. In July 1996, the Company's
$3,000,000 revolving line of credit was increased to $5,000,000 and the term
was extended by one year to August, 1999. In November 1997, the Company entered
into a new loan agreement with a bank. This loan agreement provides for a
$6,000,000 revolving line of credit and a term loan in the principal amount not
to exceed the lesser of $9,500,000, or the actual acquisition cost of the
assets purchased from Famous Restaurants, Inc. under the Asset Purchase
Agreement dated November 14, 1997. As of December 28, 1997, the Company had
borrowed $8,631,415 under the term loan feature. There were no outstanding
borrowings under the revolving line of credit as of December 28, 1997.
Outstanding borrowings under both the revolving line of credit and term loan
bear interest at three-month LIBOR plus 1.25% (6.94% as of December 28, 1997).
The interest rate is adjusted quarterly. There is no non-use fee related to
either facility. The revolving line of credit has a five-year term with final
maturity in November 2002. Under the term loan, outstanding principal and
interest are payable quarterly in the amount necessary to fully amortize the
outstanding principal balance over a seven-year period, with a final maturity
in November 2002. Borrowings under this loan agreement are secured by all of
the Company's real estate. This loan agreement contains, among other things,
certain financial 

                                      15
<PAGE>   18
covenants and restrictions. As of December 28, 1997, the Company was in
compliance with these financial covenants and restrictions. The revolving
credit facility included in this loan agreement provides the Company adequate
borrowing capacity to continue its expansion plans for Garfield's and Garcia's
for the next two years.

      In November 1997, the Company entered into an interest rate swap
agreement with a bank to hedge its risk exposure to potential increases in
LIBOR. This agreement has a term of five years and an initial notional amount
of $9,500,000. The notional amount declines quarterly over the life of the
agreement on a seven-year amortization schedule assuming a fixed interest rate
of 7.68%. Under the terms of the interest rate swap agreement, the Company pays
interest quarterly on the notional amount at a fixed rate of 7.68%, and
receives interest quarterly on the notional amount at a floating rate of
three-month LIBOR plus 1.25%.

      In April 1997, the Company's Board of Directors authorized the repurchase 
of up to 200,000 shares of the Company's common stock. In July, 1997, an
additional 200,000 shares were authorized for repurchase. As of December 28,
1997, 55,100 shares had been repurchased under this plan for a total purchase
price of approximately $160,000. No additional shares have been repurchased
subsequent to December 28, 1997.

Other

      The use by many existing computer systems of a two-digit year date format
rather than four digits--the Year 2000 issue--impacts the company's business
systems and facilities.  The company is working with key suppliers, vendors and
customers to ensure Year 2000 compliance.  Although the ultimate outcome of the
Year 2000 project cannot be guaranteed, management believes the cost of
addressing the Year 2000 issue is not material to the consolidated results of
operations or financial condition of the company.

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements of the Company are included in a separate
section of this report.

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

      None.

                                    PART III

      In accordance with General Instruction G(3), a presentation of
information required in response to Items 10, 11, 12, and 13 appear in the
Company's Proxy Statement to be filed pursuant to Regulation 14A within 120
days of the year end covered hereby, and shall be incorporated herein by
reference when filed.


                                    PART IV

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

(a) The following documents are filed as part of the report:

     1.  Consolidated Financial Statements:

         Management's Responsibility for Financial Reporting
         Reports of Independent Auditors
         Consolidated Balance Sheets as of December 28, 1997 and December 29, 
           1996
         Consolidated Statements of Income for each of the three years in the
           periods ended December 28, 1997, December 29, 1996 and December 31, 
           1995
         Consolidated Statements of Stockholders' Equity for each of the
           three years in the periods ended December 28, 1997, December 29, 1996
           and December 31, 1995
         Consolidated Statements of Cash Flows for each of the three years in
           the periods ended December 28, 1997, December 29, 1996 and December 
           31, 1995 
         Notes to Consolidated Financial Statements

     2.  Consolidated Financial Statement Schedules:

         All schedules for which provision is made in the applicable accounting
         regulation of the Securities and Exchange Commission are not required
         under the related instructions or are inapplicable, and therefore have
         been omitted.

     3.  Exhibits.

         The following exhibits are filed with this Form 10-K and are
         identified by the numbers indicated:

         EXHIBIT
         NUMBER     DESCRIPTION OF DOCUMENT

          3.1       Amended and Restated Articles of Incorporation.(1)
          3.2       Amendment to the Amended and Restated Articles of 
                    Incorporation.(2)
          3.3       Bylaws as amended.(1)
          4.1       Specimen Stock Certificate.(3)


                                      16
<PAGE>   19

         EXHIBIT
         NUMBER     DESCRIPTION OF DOCUMENT

          4.2       Form of Representative's Warrant.(3)
          10.1      Employment Agreement between the Company and Vincent F.
                    Orza, Jr., dated October 1, 1995.(10)  
          10.2      Employment Agreement between the Company and James M. Burke,
                    dated October 1, 1995.(10) 
          10.4      Lease Agreement dated May 1, 1987 (as amended June 30, 1990,
                    October 1, 1992 and October 1, 1993) between the Company and
                    Colonial Center, LTD for the lease of the Company's 
                    corporate office facilities in Oklahoma City, Oklahoma. (3)
          10.8      Franchise Agreement and Amendment dated August 31, 1993
                    between the Company and Wolsey Dublin Company for the
                    Garfield's franchise in Sioux City, Iowa and non-exclusive 
                    development rights to two additional locations in seven
                    cities in four states over the next two years. (3)
          10.9      Amended and Restated Franchise Agreement and Modification of
                    Amended and Restated Franchise Agreement dated December 31, 
                    1992 between the Company and O.E., Inc. for the three 
                    Garfield's franchise locations in the Oklahoma City, 
                    Oklahoma metropolitan area. (3)
          10.10     Form of Franchise Agreement (revised March 1, 1993).(7)
          10.11     Management Agreement dated December 31, 1992 between the
                    Company and O.E., Inc. for the supervision and accounting 
                    services provided by the Company for three Garfield's 
                    franchise locations in the Oklahoma City metropolitan area.
                    (3)
          10.12     Collateral Assignment Agreement dated January 20, 1991, 
                    between the Company and Vincent F. Orza, Jr. (5)
          10.13     Collateral Assignment Agreement dated January 20, 1991, 
                    between the Company and James M. Burke. (5)
          10.15     Stock Plan for Significant Employees of the Company, 
                    dated December 1, 1986. (6)
          10.16     1987 Director Stock Incentive Plan. (6)
          10.17     Eateries, Inc. Omnibus Equity Compensation Plan. (6)
          10.18     Underwriting Agreement between the Company, Pauli & Company 
                    Incorporated, RAS Securities Corp. and certain shareholders 
                    of the Company dated November 15, 1993. (3)
          10.22     Asset Sale Agreement dated January 9, 1995 between the
                    Company and Pepperoni Grill, Inc. and Specialty Restaurants,
                    involving the purchase of assets of Pepperoni Grill 
                    restaurant by the Company. (9) 
          10.23     Employment Agreement between the Company and Corey Gable, 
                    dated January 1, 1997. (10) 
          10.24     Employment Agreement between the Company and Peter L. 
                    Holloway, dated January 1, 1995. (9) 
          10.25     Employee Stock Purchase Plan dated June 15, 1994 (8). 
          10.26     Amended and restated Eateries, Inc. Omnibus Equity 
                    Compensation Plan dated as of June 15, 1994. (9) 
          10.27     Option Agreement between the Company and Vincent F. Orza, 
                    Jr., dated January 4, 1996 (10) 
          10.28     Option Agreement between the Company and James M. Burke, 
                    dated January 4, 1996 (10)
          10.29     Option Agreement between the Company and Corey Gable, dated 
                    April 5, 1996 (10)
          10.32     Asset Purchase Agreement dated November 14, 1997, by and
                    between the Company, through its wholly-owned subsidiary, 
                    Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and 
                    its subsidiaries. (11) 
          10.33     Agreement for Purchase and Sale of Assets and Licenses dated
                    February 26, 1998, among the Company and Chevy's, Inc. (12) 
          10.34     Agreement for purchase and Sale of Assets dated February 26,
                    1998, between the Company and Chevy's, Inc. (12)
          10.35     Loan Agreement dated as of November 18, 1997, by and between
                    NationsBank, N.A. and the Company.
          10.36     Stock Put Agreement dated April 2, 1997, by and among 
                    Vincent F. Orza, Jr. and the Company.
          10.37     Stock Put Agreement dated April 2, 1997, by and among James 
                    M. Burke and the Company.
           23.1     Consent of Arthur Andersen LLP.
           23.2     Consent of Ernst & Young LLP.
           27.1     Financial Data Schedule.

            (1)     Filed as exhibit to Registrant's Registration Statement on 
                    Form S-18 (File No. 33-6818-FW).
            (2)     Filed as exhibit to Registrant's Quarterly Report on Form 
                    10-Q for the six months ended June 30, 1988 (File No.
                    0-14968) and incorporated herein by reference.
            (3)     Filed as exhibit to Registrant's Registration Statement on 
                    Form S-2 (File No. 33-69896).
            (4)     Filed as exhibit to Registrant's Annual Report on Form 10-K 
                    for the fiscal year ended December 31, 1992 (File No.
                    0-14968) and incorporated herein by reference.
            (5)     Filed as exhibit to Registrant's Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1990 (File No.
                    0-14968) and incorporated herein by reference.
            (6)     Filed as exhibit to Registrant's Registration Statement on
                    form S-8 (File No. 33-41279).
            (7)     Filed as exhibit to Registrant's Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1993 (File No.
                    0-14968) and incorporated herein by reference.
            (8)     Filed as Appendix A to the Company's Notice of Annual 
                    Meeting of Shareholders dated April 29, 1994 and 
                    incorporated herein by reference.
            (9)     Filed as exhibit to Registrant's Annual Report on Form 10-K 
                    for the fiscal year ended December 31, 1994 (File No.
                    0-14968) and incorporated herein by reference.
            (10)    Filed as exhibit to Registrant's Annual Report on Form 10-K
                    for the fiscal year ended December 29, 1996 (File No.
                    0-14968) and incorporated herein by reference.
            (11)    Filed as exhibit to Registrant's Current Report on Form 8-K 
                    dated December 8, 1997 (File No. 0-14968) and incorporated 
                    herein by reference.
            (12)    Filed as exhibit to Registrant's Current Report on Form 8-K 
                    dated March 16, 1998 (File No. 0-14968) and incorporated 
                    herein by reference.

(b)  A Form 8-K was filed on December 8, 1997, with the Securities and Exchange
     Commission regarding the Registrant's acquisition of certain assets from
     Famous Restaurants, Inc. and its subsidiaries.


                                      17
<PAGE>   20



                                   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.

                                      REGISTRANT:
                                      EATERIES, INC.

Date: April 10, 1998                  By:  /s/ Vincent F. Orza, Jr.
      --------------                       ------------------------
                                           Vincent F. Orza, Jr.
                                           President
                                           Chief Executive Officer

Date: April 10, 1998                  By: /s/Corey Cable
      --------------                      -------------------------
                                          Corey Gable
                                          Vice President/Treasurer
                                          Chief Financial and Accounting Officer

      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: April 10, 1998                  By: /s/Vincent F. Orza, Jr.
      --------------                      -------------------------
                                          Vincent F. Orza, Jr.
                                          Chairman of the Board,
                                          President and Director

Date: April 10, 1998                  By: /s/James M. Burke
      --------------                      -------------------------
                                          James M. Burke
                                          Vice President of Operations,
                                          Assistant Secretary and Director

Date: April 10, 1998                  By: /s/Edward D. Orza
      --------------                      -------------------------
                                          Edward D. Orza,
                                          Director

Date: April 10, 1998                  By: /s/Patricia L. Orza
     ---------------                      -------------------------
                                          Patricia L. Orza,
                                          Secretary and Director

Date: April 10, 1998                  By: /s/Thomas F. Golden
     ---------------                      -------------------------
                                          Thomas F. Golden,
                                          Director

Date: April 10, 1998                  By: /s/Philip Friedman
     ---------------                      -------------------------
                                          Philip Friedman,
                                          Director

Date: April 10, 1998                  By: /s/Larry Kordisch
     ---------------                      -------------------------
                                          Larry Kordisch,
                                          Director


                                      18
<PAGE>   21




                        EATERIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                                                             PAGE
                                                                                                             ----

<S>                                                                                                           <C>
Management's Responsibility for Financial Reporting.......................................................    F-1

Reports of Independent Auditors............................................................................   F-2

Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996..................................   F-4

Consolidated Statements of Income for each of the three years in the period ended
      December 28, 1997....................................................................................   F-5

Consolidated Statements of Stockholders' Equity for each of the three years in
      the period ended December 28, 1997...................................................................   F-6

Consolidated Statements of Cash Flows for each of the three years in the period ended
      December 28, 1997....................................................................................   F-7

Notes to Consolidated Financial Statements.................................................................   F-8


</TABLE>



                                      19
<PAGE>   22




              MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

         The management of Eateries, Inc. has the responsibility for preparing
the accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
estimates and judgment where necessary. Management believes that all
representations made to our external auditors during their examination of the
financial statements were valid and appropriate.

         To meet its responsibility, management has established and maintains a
comprehensive system of internal control that provides reasonable assurance as
to the integrity and reliability of the consolidated financial statements, that
assets are safeguarded, and that transactions are properly executed and
reported. This system can provide only reasonable, not absolute, assurance that
errors and irregularities can be prevented or detected. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control is subject to close scrutiny by management and is revised as
considered necessary.

         The Board of Directors of Eateries, Inc. have engaged Arthur Andersen
LLP, independent auditors, to conduct an audit of and express an opinion as to
the fairness of the presentation of the 1997 consolidated financial statements.
Their report is included on the following page.



/s/Vincent F. Orza, Jr.
-----------------------------
Vincent F. Orza, Jr.
President and Chairman
Chief Executive Officer



/s/Corey Gable
----------------------------
Corey Gable
Vice President/Treasurer
Chief Financial and Accounting Officer



April 10, 1998



                                      F-1


<PAGE>   23


                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
Eateries, Inc.
Oklahoma City, Oklahoma



      We have audited the accompanying consolidated balance sheet of Eateries,
Inc. and subsidiaries as of December 29, 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Eateries, Inc. and subsidiaries at December 29, 1996, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 29, 1996, in conformity with generally accepted accounting
principles.



                                             ERNST & YOUNG LLP


Oklahoma City, Oklahoma
March 26, 1997,
except for the last paragraph of Note 5, as to which the date is
April 9, 1997








                                      F-2
<PAGE>   24


                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
Eateries, Inc.
Oklahoma City, Oklahoma



      We have audited the accompanying consolidated balance sheet of Eateries,
Inc. and subsidiaries as of December 28, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for year then ended.
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 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 provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Eateries, Inc. and subsidiaries at December 28, 1997, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.



                                             ARTHUR ANDERSEN LLP


Oklahoma City, Oklahoma
March  5, 1998,




                                      F-3
<PAGE>   25




                         EATERIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                        December 28,      December 29,
                                                                            1997              1996
                                                                        ------------      ------------
<S>                                                                     <C>               <C>         
ASSETS
Current assets:
     Cash and cash equivalents .......................................  $  1,331,363      $    695,481
     Receivables:
            Franchisees ..............................................        35,693            53,685
            Insurance refunds ........................................       488,594           164,219
            Landlord finish-out allowances ...........................       106,250           188,866
            Other ....................................................       490,828           394,776
     Deferred income taxes (Note 8) ..................................       452,000           387,000
     Inventories .....................................................     2,296,282         1,400,262
     Other current assets ............................................       357,903           209,929
                                                                        ------------      ------------
                Total current assets .................................     5,558,913         3,494,218
Property and equipment, at cost (Notes 4 and 5):
     Land and buildings ..............................................     5,234,000           125,167
     Furniture and equipment .........................................    11,076,626         9,322,453
     Leasehold improvements ..........................................    26,026,890        23,453,916
     Assets under capital leases .....................................       123,420           123,420
                                                                        ------------      ------------
                                                                          42,460,936        33,024,956
     Less: Landlord finish-out allowances ............................    14,880,564        13,896,522
                                                                        ------------      ------------
                                                                          27,580,372        19,128,434
     Less: Accumulated depreciation and amortization .................     7,201,463         5,444,896
                                                                        ------------      ------------
             Net property & equipment ................................    20,378,909        13,683,538
Deferred income taxes (Note 8) .......................................       398,000           975,000
Goodwill, net ........................................................     2,479,045           193,589
Other assets .........................................................       959,817           362,356
                                                                        ------------      ------------
                                                                        $ 29,774,684      $ 18,708,701
                                                                        ============      ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
     Accounts payable ................................................  $  4,850,211      $  4,359,571
     Accrued liabilities:
             Compensation ............................................     2,191,775         1,388,058
             Taxes, other than income ................................       815,039           456,681
             Other (Note 6) ..........................................     1,480,055           572,022
             Restaurant closure costs (Note 7) .......................        51,281           145,575
     Current portion of long-term obligations (Note 5) ...............     1,014,715            28,308
                                                                        ------------      ------------
                      Total current liabilities ......................    10,403,076         6,950,215
Deferred credit ......................................................       658,638           575,517
Other liabilities ....................................................        82,500            62,500
Long-term obligations, net of current portion (Note 5) ...............     7,637,415         1,470,715
Commitments (Note 4)

Stockholders' equity (Note 10):
     Preferred stock, $.002 par value, none outstanding ..............            --                --
     Common stock, $.002 par value, 4,221,785 and 4,143,391 shares
            outstanding at December 28, 1997 and December 29, 1996,
            respectively .............................................         8,444             8,287
     Additional paid-in capital ......................................     9,486,594         9,340,519
     Retained earnings ...............................................     3,065,300         1,666,092
                                                                        ------------      ------------
                                                                          12,560,338        11,014,898
     Treasury stock, at cost, 347,115 and 282,761 shares at
             December 28, 1997 and December 29, 1996, respectively ...    (1,567,283)       (1,365,144)
                                                                        ------------      ------------
                      Total stockholders' equity .....................    10,993,055         9,649,754
                                                                        ------------      ------------
                                                                        $ 29,774,684      $ 18,708,701
                                                                        ============      ============
</TABLE>

See accompanying notes.




                                      F-4
<PAGE>   26


                         EATERIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                       December 28,     December 29,     December 31,
                                                           1997             1996             1995
                                                       ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>         
Revenues:
      Food and beverage sales .......................  $ 62,850,893     $ 55,732,807     $ 45,810,664
      Franchise fees and royalties ..................       267,785          264,954          307,653
      Other .........................................       422,842          418,476          482,123
                                                       ------------     ------------     ------------
           Total revenues ...........................    63,541,520       56,416,237       46,600,440

Costs of sales ......................................    17,840,104       17,070,384       13,967,757
                                                       ------------     ------------     ------------
                                                         45,701,416       39,345,853       32,632,683

Operating expenses (Note 6) .........................    36,795,093       32,218,754       26,387,127
Pre-opening costs (Note 2) ..........................       279,000          726,000          830,000
General and administrative expenses .................     4,048,964        3,665,207        3,067,610
Provision for restaurant closures
      and other disposals  (Note 7) .................            --               --          897,000
Provision for impairment of
      long-lived assets (Note 8) ....................        85,000               --               --
Depreciation and amortization .......................     2,215,640        1,886,323        1,336,919
Interest expense ....................................       309,511          194,070           41,186
                                                       ------------     ------------     ------------
                                                         43,733,208       38,690,354       32,559,842
                                                       ------------     ------------     ------------

Income before provision (benefit) for income taxes ..     1,968,208          655,499           72,841

Provision (benefit) for income taxes (Note 9) .......       569,000           74,000         (113,000)
                                                       ------------     ------------     ------------

Net income ..........................................  $  1,399,208     $    581,499     $    185,841
                                                       ============     ============     ============


Net income per common share (Note 11) ...............  $       0.36     $       0.15     $       0.05
                                                       ============     ============     ============

Net income per common share
      assuming dilution (Note 11) ...................  $       0.35     $       0.15     $       0.05
                                                       ============     ============     ============
</TABLE>

See accompanying notes.




                                      F-5
<PAGE>   27





                         EATERIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                         COMMON STOCK                                                     
                                         ----------------------------------------------
                                                   SHARES                                          TREASURY STOCK         
                                         -----------------------------                      ----------------------------- 
                                          AUTHORIZED         ISSUED           AMOUNT          SHARES            AMOUNT    
                                         ------------     ------------     ------------     ------------     ------------
<S>                                      <C>              <C>              <C>              <C>              <C>
Balance, December 31, 1994 .........       20,000,000        3,952,890     $      7,906          272,122     $ (1,328,867)

Issuance of common stock:
     Exercise of stock options .....               --           53,833              107               --               -- 
     Employee stock purchase plan ..               --           12,411               25               --               -- 
Tax benefit from the exercise of
     non-qualified stock options
     (Note 8) ......................               --               --               --               --               -- 
Treasury stock acquired (Note 9) ...               --               --               --            1,917           (5,751)
Net income .........................               --               --               --               --               -- 
                                         ------------     ------------     ------------     ------------     ------------
Balance, December 31, 1995 .........       20,000,000        4,019,134            8,038          274,039       (1,334,618)

Issuance of common stock:
     Exercise of stock options .....               --           97,163              194               --               -- 
     Employee bonuses ..............               --            2,750                6               --               -- 
     Employee stock purchase plan ..               --           24,044               48               --               -- 
     Sale of common stock ..........               --              300                1               --               -- 
Tax benefit from the exercise of
     non-qualified stock options
     (Note 8) ......................               --               --               --               --               -- 
Treasury stock acquired (Note 9) ...               --               --               --            8,722          (30,526)
Net income .........................               --               --               --               --               -- 
                                         ------------     ------------     ------------     ------------     ------------
Balance, December 29, 1996 .........       20,000,000        4,143,391            8,287          282,761       (1,365,144)

Issuance of common stock:
     Exercise of stock options .....               --           59,332              119               --               -- 
     Employee bonuses ..............               --            2,500                5               --               -- 
     Employee stock purchase plan ..               --           16,462               33               --               -- 
     Sale of common stock ..........               --              100               --               --               -- 
Tax benefit from the exercise of
     non-qualified stock options
     (Note 8) ......................               --               --               --               --               --
Treasury stock acquired (Note 9) ...               --               --               --           64,354         (202,139)
Net income .........................               --               --               --               --               -- 
                                         ------------     ------------     ------------     ------------     ------------
Balance, December 28, 1997 .........       20,000,000        4,221,785     $      8,444          347,115     $ (1,567,283)
                                         ============     ============     ============     ============     ============
<CAPTION>
                                           ADDITIONAL
                                            PAID-IN         RETAINED                  
                                            CAPITAL         EARNINGS           TOTAL 
                                         ------------     ------------     ------------
<S>                                      <C>              <C>              <C>         
Balance, December 31, 1994 .........     $  9,047,594     $    898,752     $  8,625,385

Issuance of common stock:
     Exercise of stock options .....           33,476               --           33,583
     Employee stock purchase plan ..           26,350               --           26,375
Tax benefit from the exercise of
     non-qualified stock options
     (Note 8) ......................           47,000               --           47,000
Treasury stock acquired (Note 9) ...               --               --           (5,751)
Net income .........................               --          185,841          185,841
                                         ------------     ------------     ------------
Balance, December 31, 1995 .........        9,154,420        1,084,593        8,912,433

Issuance of common stock:
     Exercise of stock options .....           60,533               --           60,727
     Employee bonuses ..............           10,941               --           10,947
     Employee stock purchase plan ..           57,432               --           57,480
     Sale of common stock ..........            1,193               --            1,194
Tax benefit from the exercise of
     non-qualified stock options
     (Note 8) ......................           56,000               --           56,000
Treasury stock acquired (Note 9) ...               --               --          (30,526)
Net income .........................               --          581,499          581,499
                                         ------------     ------------     ------------
Balance, December 29, 1996 .........        9,340,519        1,666,092        9,649,754

Issuance of common stock:
     Exercise of stock options .....           51,214               --           51,333
     Employee bonuses ..............            8,595               --            8,600
     Employee stock purchase plan ..           48,941               --           48,974
     Sale of common stock ..........              325               --              325
Tax benefit from the exercise of
     non-qualified stock options
     (Note 8) ......................           37,000               --           37,000
Treasury stock acquired (Note 9) ...               --               --         (202,139)
Net income .........................               --        1,399,208        1,399,208
                                         ------------     ------------     ------------

Balance, December 28, 1997 .........     $  9,486,594     $  3,065,300     $ 10,993,055
                                         ============     ============     ============
</TABLE>


See accompanying notes.




                                      F-6
<PAGE>   28


                         EATERIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                             ------------------------------------------------
                                                             December 28,      December 29,      December 31,
                                                                 1997              1996              1995
                                                             ------------      ------------      ------------
<S>                                                          <C>               <C>               <C>         
Cash flows from operating activities:
      Net income ..........................................  $  1,399,208      $    581,499      $    185,841
      Adjustments to reconcile net income to
         net cash provided by operating activities:
           Depreciation and amortization ..................     2,215,640         1,886,323         1,336,919
           Gain on asset disposals ........................        (6,165)          (42,544)         (133,144)
           Common stock bonuses ...........................         8,600            10,947                --
           Provision (benefit) for deferred income taxes ..       549,000            74,000          (113,000)
           (Increase) decrease in operating assets:
                Receivables ...............................      (393,730)           (7,869)         (209,745)
                Inventories ...............................        46,320           (31,589)         (268,464)
                Prepaid expenses and deposits .............        10,041           (30,909)          (45,213)
           Increase (decrease) in operating liabilities:
                Accounts payable ..........................       202,198           154,383         1,285,362
                Accrued liabilities .......................       842,299          (329,300)        1,171,977
                Deferred credit ...........................       103,121           222,035            (4,659)
                Other liabilities .........................            --           (49,400)          111,900
                                                             ------------      ------------      ------------
           Total adjustments ..............................     3,577,324         1,856,077         3,131,933
                                                             ------------      ------------      ------------
           Net cash provided by operating activities ......     4,976,532         2,437,576         3,317,774
                                                             ------------      ------------      ------------

Cash flows from investing activities:
      Capital expenditures ................................    (3,886,481)       (7,306,987)       (7,788,654)
      Landlord finish-out allowances ......................     1,741,658         3,021,883         2,491,931
      Net cash payments for restaurant acquisitions .......    (8,991,173)               --          (529,083)
      Proceeds from the sale of property and equipment ....        15,063            53,001           426,214
      Sales of marketable securities ......................            --                --           514,737
      Payments received for notes receivable ..............        11,620                --                --
      Decrease (increase) in other assets .................       (72,784)          (50,457)          (24,143)
                                                             ------------      ------------      ------------
           Net cash used in investing activities ..........   (11,182,097)       (4,282,560)       (4,908,998)
                                                             ------------      ------------      ------------

Cash flows from financing activities:
      Sales of common stock ...............................        49,299            58,674            26,375
      Payments on notes payable to vendor .................            --           (13,139)         (434,362)
      Payments on long-term obligations ...................       (28,308)          (25,305)          (70,619)
      Net borrowings under revolving credit agreement .....    (1,450,000)          250,000         1,200,000
      Borrowings under note payable .......................     8,631,415                --                --
      Proceeds from issuance of stock on exercise of ......        26,333            60,727            27,833
         stock options
      Payment of withholding tax liabilities related
         to acquisition of treasury stock .................       (17,224)          (30,526)               --
      Repurchase of treasury stock ........................      (159,915)               --                --
      Increase (decrease) in bank overdrafts included in
         accounts payable .................................      (210,153)        1,238,080                --
                                                             ------------      ------------      ------------
           Net cash provided by financing
               activities .................................     6,841,447         1,538,511           749,227
                                                             ------------      ------------      ------------

Net decrease in cash and cash equivalents .................       635,882          (306,473)         (841,997)
Cash and cash equivalents at beginning period .............       695,481         1,001,954         1,843,951
                                                             ============      ============      ============
Cash and cash equivalents at end of period ................  $  1,331,363      $    695,481      $  1,001,954
                                                             ============      ============      ============
</TABLE>

See accompanying notes.




                                      F-7
<PAGE>   29



                         EATERIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   ORGANIZATION

      Eateries, Inc. (the "Company") was incorporated under the laws of the
State of Oklahoma on June 1, 1984. The Company is engaged in the creation,
design, management and operations of restaurants through Company-owned and
franchise restaurants. The Company's restaurants are located primarily in
regional malls in the Southwest, Midwest and Southeast regions of the United
States. The Company's restaurants operate under the name "Garfield's Restaurant
& Pub" ("Garfield's"), "Pepperoni Grill" and "Casa Ole" (as a franchisee). An
analysis of Company-owned and franchised restaurants for the three years in the
period ended December 28, 1997, is as follows:

<TABLE>
<CAPTION>
                                             Company        Franchised         Total
                                              Units           Units            Units
                                            ---------       ----------      -----------  
    <S>                                     <C>             <C>             <C>
    At December 31, 1994                           34                8               42
       Units opened                                 9                1               10
       Units closed                                (3)              (1)              (4)
       Unit acquired                                1               --                1
                                            ---------       ----------      -----------  
    At December 31, 1995                           41                8               49
       Units opened                                 8               --                8
       Units closed                                (3)              --               (3)
       Unit sold                                   (1)              --               (1)
                                            ---------       ----------      -----------  
    At December 29, 1996                           45                8               53
       Units opened                                 3               --                3
       Units closed                                (3)              --               (3)
       Units acquired                              17                2               19
                                            ---------       ----------      -----------  
    At December 28, 1997                           62               10               72
                                            =========       ==========      ===========  
</TABLE>

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include the accounts of Eateries,
Inc. and its wholly-owned subsidiaries, Fiesta Restaurants, Inc., Pepperoni
Grill, Inc. and Garfield's Management, Inc. All significant intercompany
transactions and balances have been eliminated.

FISCAL YEAR

      In 1996, the Company changed its fiscal year to a 52/53 week year ending
on the last Sunday in December.

CASH AND CASH EQUIVALENTS

      Cash and cash equivalents include certain highly liquid debt instruments
with a maturity of three months or less when purchased.

INVENTORIES

      Inventories are stated at the lower of cost (first-in, first-out) or
market and consist primarily of food, beverages and smallwares.

LANDLORD FINISH-OUT ALLOWANCES

      Amounts received or receivable from landlords for reimbursement of
improvements to leased facilities are recorded as a reduction of the costs
incurred by the Company for property and equipment.

DEPRECIATION AND AMORTIZATION

      Property and equipment (which includes assets under capital leases) and
landlord finish-out allowances are stated at cost (or amounts received with
respect to landlord finish-out allowances) and are depreciated and amortized
over the lesser of the estimated useful lives of the assets or the remaining
term of the leases using the straight-line method. Estimated useful lives are as
follows:




                                      F-8
<PAGE>   30

<TABLE>
<S>                                     <C>        
Buildings.......................        15-30 Years
Furniture and equipment.........         5-15 Years
Leasehold improvements..........         3-15 Years
Landlord finish-out allowances..         8-15 Years
</TABLE>

ADVERTISING COSTS

      Costs incurred in connection with advertising and marketing of the
Company's restaurants are expensed as incurred. Such costs amounted to
$1,376,000 in 1997, $797,000 in 1996 and $647,000 in 1995.

PRE-OPENING COSTS

      The costs related to the opening of restaurant locations are expensed when
incurred.

INCOME TAXES

      The Company is subject to Federal, State and local income taxes. The
Company records income taxes in accordance with Statement of Financial
Accounting Standards No. ("SFAS") 109 "Accounting for Income Taxes." Under SFAS
109, deferred income taxes are provided on the tax effect of presently existing
temporary differences, net of existing net operating loss and tax credit
carryforwards. The tax effect is measured using the enacted marginal tax rates
and laws that will be in effect when the differences and carryforwards are
expected to be reversed or utilized. Temporary differences consist principally
of depreciation caused by using different lives for financial and tax reporting,
the expensing of smallwares when incurred for tax purposes while such costs are
capitalized for financial purposes and the expensing of costs related to
restaurant closures and other disposals for financial purposes prior to being
deducted for tax purposes.

DEFERRED CREDIT

      Certain of the Company's long-term noncancellable operating leases for
restaurant and corporate facilities include scheduled base rental increases over
the term of the lease. The total amount of the base rental payments is charged
to expense on the straight-line method over the term of the lease. The Company
has recorded a deferred credit to reflect the net excess of rental expense over
cash payments since inception of the leases.

FRANCHISE ACTIVITIES

      The Company franchises the Garfield's Restaurant & Pub concept to
restaurant operators and, at December 28, 1997 and December 29, 1996, eight
restaurant units were operating under franchise agreements. During 1997, the
Company signed an agreement for a new franchise location. This location was
opened in March, 1998, increasing the total number of franchised Garfield's to
nine. The initial franchise fee paid to the Company is recognized as income when
substantially all services have been performed by the franchisor to each
franchised location, which is typically when the related restaurant is opened.
The franchisor provides initial services to the franchisee in the selection of a
site, approval of architectural plans, assistance in the selection of equipment
for the restaurant, distribution of operations manuals and training of
franchisee's personnel prior to the opening of the restaurant. The Company
recognized $50,000 of initial franchise fees for franchised restaurants during
1995 (none were recognized in 1996 or 1997).

      Continuing royalties are recognized as revenue based on the terms of each
franchise agreement, generally as a percentage of sales of the franchised
restaurants. During 1997, 1996 and 1995, the Company recognized $268,000,
$265,000, and $258,000, respectively, of fees from continuing royalties.

      Franchisees are required to remit an amount equal to 1/2% of their sales
to the Garfield's Creative Marketing Fund. The franchisees' payments, which were
$41,000, $41,000, and $39,000 during 1997, 1996 and 1995, respectively, are
combined with the franchisor's expenditures to purchase services for creative
advertising and design, market research and other items to maintain and further
enhance the Garfield's concept.

      Franchisee receivables at December 28, 1997 and, December 29, 1996 are
comprised primarily of uncollected continuing royalties, which are generally
unsecured; however, the Company has not experienced significant credit losses in
prior years and is not aware of any significant uncollectible amounts at
December 28, 1997.

CAPITALIZATION OF INTEREST

      Interest attributed to funds used to finance restaurant construction
projects is capitalized as an additional cost of the related assets.
Capitalization of interest ceases when the related projects are substantially
complete. The Company has capitalized 





                                      F-9
<PAGE>   31

approximately $39,000, $62,000 and $72,000 of interest costs during 1997, 1996
and 1995, respectively. These costs are included in leasehold improvements in
the accompanying balance sheets.

STOCK-BASED COMPENSATION

      In 1996, the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS 123, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for its
employee stock options because the alternative fair value accounting provided
for under SFAS 123, requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.


NET INCOME PER COMMON SHARE

      In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 128, "Earnings Per Share," which requires the calculation of basic and
diluted earnings per share (EPS). Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS is computed by
dividing net income available to common stockholders by the sum of the
weighted-average number of common shares outstanding for the period plus common
stock equivalents. The Company adopted the provisions of SFAS 128 in the fourth
quarter of 1997, and, as required, has restated all prior period EPS amounts to
conform to the new accounting standard.

USE OF ESTIMATES

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

STATEMENTS OF CASH FLOWS

      Interest of $277,000, $228,000 and $94,000 was paid for each of the three
years 1997, 1996 and 1995, respectively.

      For the three years 1997, 1996 and 1995, the Company had the following
non-cash investing and financing activities.

<TABLE>
<CAPTION>
                                                                                          Fiscal Year
                                                                ----------------------------------------------
                                                                    1997             1996             1995
                                                                ------------     ------------     ------------
<S>                                                             <C>              <C>              <C>         
Increase (decrease) in current receivables
     for landlord finish-out allowances ......................  $    (82,616)    $   (559,422)    $    493,288
Increase (decrease) in non-current receivables for
     landlord finish-out allowances ..........................            --         (429,000)         429,000
Sales of property and equipment in exchange
     for notes receivable ....................................       160,000           95,000               --
Borrowings for capital expenditures under
     notes payable to vendor .................................            --               --          116,567
Acquisition of treasury stock upon exercise of
     stock options (Note 9) ..................................        25,000               --            5,751
Increase in additional paid-in capital as a result
     of tax benefits from the exercise of
     non-qualified stock options .............................        37,000           56,000           47,000
Asset write-offs related to restaurant
     closures and other disposals ............................        13,334           71,932               --
Assumption of liabilities related to restaurant acquisition ..     1,618,773               --               --
</TABLE>

FAIR VALUES OF FINANCIAL INSTRUMENTS

      The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments for purposes of complying
with SFAS 107, "Disclosures About Fair Values of Financial Instruments":

      Cash and cash equivalents, accounts receivable, deposits, accounts payable
and accrued liabilities - The carrying amounts reported in the consolidated
balance sheets approximate fair values because of the short maturity of these
instruments.





                                      F-10
<PAGE>   32

      Long-term obligations - The revolving credit agreement, which represents
the material portion of long-term obligations in the accompanying consolidated
balance sheets, bears interest at a variable rate, which is adjusted monthly.
Therefore, the carrying values for these borrowings approximate their fair
values.

OTHER
      
      During 1997 and early 1998, the Financial Accounting Standards Board
issued several pronouncements related to financial statement disclosure that
will affect the Company's 1998 financial statement presentation. Following is a
discussion of the new standards.

      Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," established standards for the reporting and display of
comprehensive income and its components as a part of the basic financial
statements. The Company does not believe that comprehensive income will differ
materially from net income. The disclosures will be required for the 1998
year-end financial statements, and abbreviated information will be required for
the first quarter.

      SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for determining segments and reporting
information about a company's business segments, products and services, 
geographic areas and major customers in annual financial statements. Also
required is selected information about operating segments in interim financial
reports issued to shareholders. The Company does not anticipate the adoption of
this new accounting standard will create additional business segment reporting
requirements.

      SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement,
effective for year-end 1998 financial statements, revises disclosures about
pensions and other postretirement benefit plans. It does not change the
measurement or recognition of costs associated with those plans.

      In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Amounts capitalized
or expensed by the Company for internal-use software projects are not expected
to differ materially as a result of the SOP, since the prescribed accounting
treatment is fairly consistent with the Company's current accounting policy.
The SOP, the effect of which is to be recognized prospectively, is effective
for 1999 financial statements.

(3)   RESTAURANT ACQUISITIONS

      In January 1995, the Company acquired substantially all of the assets of
the "Pepperoni Grill' restaurant located in Oklahoma City, Oklahoma, along with
rights to use trademarks associated with the restaurant, for a cash purchase
price (including transaction expenses) of $529,000. Additionally, the Company
assumed real estate and equipment leases for the restaurant. The acquisition has
been accounted for under the purchase method. As a result, the Company recorded
inventory, equipment and leasehold improvements totaling $199,000, trademarks of
$125,000 and goodwill of approximately $205,000. The Company is amortizing the
cost of the trademarks and goodwill over 20 years using the straight-line method
and assesses the recoverability of such assets based upon the expected future
cash flows from operations of the Pepperoni Grill concept.

      In November 1997, the Company, through its wholly-owned subsidiary, Fiesta
Restaurants, Inc., acquired from Famous Restaurants, Inc. and its subsidiaries
("Famous"), substantially all of the assets comprising 17 Mexican restaurants,
and the corporate headquarters of Famous (the "Famous Acquisition"). The
acquired restaurants operate under the names: Garcia's (10), Casa Lupita (five)
and Carlos Murphy's (two). The purchase price for the assets was approximately
$10,652,000 of which $8,631,415 was paid in cash at closing and the balance
represented estimated liabilities of Famous assumed by the Company and
transaction costs. The acquisition has been accounted for under the purchase
method.

      The following unaudited pro forma combined information for the years ended
December 28, 1997 and December 29, 1996, give effect to the Famous Acquisition
as if it had been consummated as of December 30, 1996 and January 1, 1996,
respectively:

<TABLE>
<CAPTION>
                                     1997               1996
                                --------------     --------------
<S>                             <C>                <C>           
Total revenues                  $   92,211,956     $   88,583,645
Net income                           1,549,630            678,932
Net income per common share               0.40               0.18
Net income per common share
    assuming dilution                     0.39               0.17
</TABLE>

      The unaudited pro forma combined information is based upon the historical
financial statements of the Company and Famous Restaurants, Inc., giving effect
to the transaction under the purchase method of accounting and adjustments for:
(1) amortization and depreciation of the property and equipment acquired, (2)
amortization of goodwill recorded in connection with the acquisition, (3)
interest expense related to the acquisition debt, and (4) the tax effects of the
adjustments and pro forma results of the acquisition.

      The unaudited pro forma combined information has been prepared based on
estimates and assumptions deemed by the Company to be appropriate and do not
purport to be indicative of the results of operations which would actually have
been obtained if the Famous Acquisition had occurred as presented in such
information or which may be obtained in the future. The Company has developed
and will apply its existing cost reduction practices beyond those assumed in
these unaudited pro forma results to further reduce cost of sales, operating
expenses and general and administrative expenses. The results of these cost
saving practices are prospective in nature and although there are savings
inherent in these techniques, such projected savings have not been incorporated
into the pro forma combined information.

(4)   REAL ESTATE LEASES

      The Company leases the majority of its restaurant facilities and its
corporate office under operating leases with initial terms expiring at various
dates through the year 2009. Certain leases contain renewal options ranging from
five to ten years. Most, but not all, leases require the Company to be
responsible for the payment of taxes, insurance and/or maintenance and include
percentage rent and fixed rent escalation clauses. In the normal course of
business, the Company may grant a landlord lien on certain personal property
upon an event of default by the Company. At December 28, 1997, the remaining
minimum rental commitments under long-term noncancellable leases, excluding
amounts related to taxes, insurance, maintenance and percentage rent, are as
follows:

<TABLE>
<S>                                                   <C>        
1998.........................................         $ 5,269,000
1999.........................................           5,233,000
2000.........................................           5,158,000
2001.........................................           4,884,000
2002.........................................           4,323,000
Thereafter...................................          14,711,000
                                                      -----------
Total minimum rental commitments.............         $39,578,000
                                                      ===========
</TABLE>




                                      F-11

<PAGE>   33
      Total minimum rental commitments include $1,649,000 related to two
locations scheduled for opening in 1998 and $705,000 related to three locations
which were sold subsequent to December 28, 1997.

      The components of rent expense for noncancellable operating leases are
summarized as follows:

<TABLE>
<CAPTION>
                                                  Fiscal Year
                                   ----------------------------------------
                                      1997           1996           1995
                                   ----------     ----------     ----------
<S>                                <C>            <C>            <C>       
Minimum rents ................     $3,549,000     $2,912,000     $2,611,000
Percentage rents .............        203,000        211,000        131,000
                                   ----------     ----------     ----------
                                   $3,752,000     $3,123,000     $2,742,000
                                   ==========     ==========     ==========
</TABLE>

(5) LONG-TERM OBLIGATIONS

      Long-term obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                          December 28,     December 29,
                                                                                              1997             1996
                                                                                          -----------      -----------
<S>                                                                                       <C>              <C>        
Revolving line of credit with a bank, interest at the London Interbank Offered
  Rates ("LIBOR") plus 2.75%
  (8.35% at December 28, 1997) ......................................................     $        --      $ 1,450,000
Term loan with a bank, interest at LIBOR plus 1.25%
     (6.94% at December 28, 1997) ...................................................       8,631,415               --
Obligations under capital leases ....................................................          20,715           49,023
                                                                                          -----------      -----------
                                                                                            8,652,130        1,499,023
Less current portion ................................................................      (1,014,715)         (28,308)
                                                                                          -----------      -----------
                                                                                          $ 7,637,415      $ 1,470,715
                                                                                          ===========      ===========
</TABLE>

      At December 28, 1997 the future minimum lease payments for equipment under
capital leases are $21,600 for 1998 and none for 1999 (amount representing
interest is $885).

      Maturities of long-term obligations at December 28, 1997 are:

<TABLE>
<CAPTION>
<S>                                      <C>       
               1998                      $1,014,715
               1999                       1,064,000
               2000                       1,140,000
               2001                       1,221,000
               2002                       4,212,415
                                         ----------
                                         $8,652,130
                                         ==========
</TABLE>

      In November 1997, the Company entered into a new loan agreement with a
bank. This loan agreement provides for a $6,000,000 revolving line of credit and
a term loan in the principal amount not to exceed the lesser of $9,500,000, or
the actual acquisition cost of the assets purchased from Famous Restaurants,
Inc. under the Asset Purchase Agreement dated November 14, 1997. As of December
28, 1997, the Company had borrowed $8,631,415 under the term loan feature. There
were no outstanding borrowings under the revolving line of credit as of December
28, 1997. Outstanding borrowings under both the revolving line of credit and
term loan bear interest at three-month LIBOR plus 1.25% (6.94% as of December
28, 1997). The interest rate is adjusted quarterly. There is no non-use fee
related to either facility. The revolving line of credit has a five-year term
with final maturity in November 2002. Under the term loan, outstanding principal
and interest are payable quarterly in the amount necessary to fully amortize the
outstanding principal balance over a seven-year period, with a final maturity in
November 2002. Borrowings under this loan agreement are secured by all of the
Company's real estate. This loan agreement contains, among other things, certain
financial covenants and restrictions. As of December 28, 1997, the Company was
in compliance with these financial covenants and restrictions.

      In November 1997, the Company entered into an interest rate swap agreement
with a bank to hedge its risk exposure to potential increases in LIBOR. This
agreement has a term of five years and an initial notional amount of $9,500,000.
The notional amount declines quarterly over the life of the agreement on a
seven-year amortization schedule assuming a fixed interest rate of 7.68%. Under
the terms of the interest rate swap agreement, the Company pays interest
quarterly on the notional amount at a fixed rate of 7.68%, and receives interest
quarterly on the notional amount at a floating rate of three-month LIBOR plus
1.25%.

      In August 1995, the Company entered into a three-year unsecured revolving
credit agreement with a bank (which replaced a $500,000 line of credit with
another bank). This agreement was a three-year unsecured revolving facility
allowing the Company to borrow at the national prime interest rate or the LIBOR
plus 2.75% (the interest rate was reset monthly). The Company was also



                                      F-12
<PAGE>   34

required to pay a non-use fee of 1/2of 1% per annum on the daily average of the
unborrowed amount of the revolving loan facility. In July, 1996, the loan
agreement was amended to allow the Company to borrow up to $5,000,000 through
August 31, 1999. During the year ended December 29, 1996, the Company had not
met a financial covenant and certain restriction provisions under this loan
agreement. In April 1997, these violations were waived by the bank. This
agreement was terminated in November 1997 and replaced by the loan agreement
described above.

(6) RELATED PARTY TRANSACTIONS

      An affiliate of the Company is providing marketing and advertising
services. Total costs incurred for such services (primarily radio, television
and print media) were approximately $554,000 in 1997, $168,000 in 1996 and
$424,000 in 1995. A director of the Company is a partner in a law firm that
provides legal services to the Company. During 1997, 1996 and 1995, the Company
incurred approximately $132,000, $148,000 and $127,000, respectively, in legal
services with the firm.

      During 1997 and 1996, the Company also acquired common stock from certain
officers and directors (see Note 9).

(7) PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS

      During 1995, the Company approved and began the implementation of a plan
to close four under-performing restaurants. During 1996, the Company identified
two additional locations for closure. As of December 28, 1997, the Company had
disposed of all restaurants planned for closure in 1995 and 1996. These
restaurants (the 1995 and 1996 identified closures) collectively accounted for
$79,000, $1,784,000 and $3,498,000 of revenues and $(18,000), $(68,000) and
$(223,000) of operating losses for fiscal years 1997, 1996 and 1995,
respectively. Management expects the effect of closing these under-performing
restaurants to result in improved margins and increased profitability for the
Company in future periods.

      As a result of the plan to close under-performing restaurants, the Company
recorded a pre-tax charge of $897,000 in the third quarter of 1995. The
provision related to lease termination costs, litigation settlement costs,
write-down of property, equipment and leasehold improvements, and other exits
costs. As of December 28, 1997, the Company has a remaining reserve of
approximately $51,000 for settlement of its remaining liabilities associated
with the closures.

(8) PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS

      In 1996, the Company adopted the provisions of SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed
Of." Pursuant to SFAS 121, the Company's restaurants are reviewed on an
individual restaurant basis for indicators of impairment, whenever events or
circumstance indicate that the carrying value of its restaurants may not be
recoverable. The Company's primary test for an indicator of potential impairment
is operating losses. In order to determine whether an impairment has occurred,
the Company estimates the future net cash flows expected to be generated from
the use of its restaurants and the eventual disposition, as of the date of
determination, and compares such estimated future cash flows to the respective
carrying amounts. Those restaurants which have carrying amounts in excess of
estimated future cash flows are deemed impaired. The carrying value of these
restaurants is adjusted to an estimated fair value by discounting the estimated
future cash flows attributable to such restaurants using a discount rate
equivalent to the rate of return the Company expects to achieve from its
investment in newly-constructed restaurants. The excess is charged to expense
and cannot be reinstated.

      Considerable management judgment and certain significant assumptions are
necessary to estimate future cash flows. Significant judgments and assumptions
used by the Company in evaluating its assets for impairment include, but may not
be limited to: estimations of future sales levels, cost of sales, direct and
indirect costs of operating the assets, the length of time the assets will be
utilized and the Company's ability to utilize equipment, fixtures and other
moveable long-lived assets in other existing or future locations. In addition,
such estimates and assumptions include anticipated operating results related to
certain profit improvement programs implemented by the Company during 1996 and
1997 as well as the continuation of certain rent reductions, deferrals, and
other negotiated concessions from certain landlords. Actual results could vary
significantly from management's estimates and assumptions and such variance
could result in a change in the estimated recoverability of the Company's
long-lived assets. Accordingly, the results of the changes in those estimates
could have a material impact on the Company's future results of operations and
financial position.




                                      F-13
<PAGE>   35

      During 1997, the Company recorded an $85,000 provision for impairment of
long-lived assets related to three locations. Additionally, as of December 28,
1997, the Company had identified a total of six locations with indicators of
impairment.

      Prior to adopting SFAS 121, the Company accounted for the impairment of
long-lived assets by evaluating the recoverability of assets of restaurant
locations for which management had identified and began a plan to close the
location. The Company continues to use the guidance of FASB Emerging Issues Task
Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" for guidance in
recognizing costs related to closing restaurants.

(9) INCOME TAXES

      The provision (benefit) for income taxes consists of the following (see
Note 2):

<TABLE>
<CAPTION>
                                                     1997          1996           1995
                                                  ---------     ---------      ---------
<S>                                               <C>           <C>            <C>      
Current:
  Federal                                         $      --     $      --      $      --
  State                                              20,000            --             --
                                                  ---------     ---------      ---------
                                                     20,000            --             --
                                                  ---------     ---------      ---------

Deferred:
  Federal                                           450,000        44,000       (110,000)
  State                                              99,000        30,000         (3,000)
                                                  ---------     ---------      ---------
                                                    549,000        74,000       (113,000)
                                                  ---------     ---------      ---------
Provision (benefit) for income taxes              $ 569,000     $  74,000      $(113,000)
                                                  =========     =========      =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 December 28,  December 29,
                                                                    1997           1996
                                                                 ----------     ----------
<S>                                                              <C>            <C>       
Deferred tax assets:
  Net operating loss carryforwards .........................     $1,646,000     $2,169,000
  General business tax credits .............................        972,000        687,000
  Restaurant Closures and other disposals ..................         20,000         54,000
  Deferred rent credit .....................................         61,000         68,000
  Other ....................................................        170,000         65,000
                                                                 ----------     ----------
    Total deferred tax assets ..............................      2,869,000      3,043,000
  Valuation allowance for deferred tax assets ..............             --             --
                                                                 ----------     ----------
    Total deferred tax assets, net of allowance ............      2,869,000      3,043,000

Deferred tax liabilities:
  Smallwares expensed for tax purposes .....................        578,000        338,000
  Tax depreciation in excess of financial depreciation .....      1,411,000      1,325,000
  Other ....................................................         30,000         18,000
                                                                 ----------     ----------
    Total deferred tax liabilities .........................      2,019,000      1,681,000
                                                                 ----------     ----------
  Net deferred tax assets ..................................     $  850,000     $1,362,000
                                                                 ==========     ==========
</TABLE>

      At December 28, 1997, the Company has recorded a benefit for its deferred
tax assets of $2,869,000. Management believes that $2,019,000 of these assets
will be recognized through the reversal of existing taxable temporary
differences with the remainder to be recognized through realization of future
income. It is management's opinion based on the historical trend of normal and
recurring operating results, present store development, and forecasted operating
results that it is more likely than not that the Company will realize the
approximately $2,300,000 in future net income in the next three years necessary
to realize the deferred tax assets not otherwise offset by reversing taxable
temporary differences. Net operating loss carryforwards do not begin to expire
until 2003 and general business tax credits until 2009. While management is not
presently aware of any adverse matters, it is possible that the Company's
ability to realize the deferred income tax assets could be impaired if there are
significant future exercises of non-qualified stock options or the Company were
to experience declines in sales and/or profit margins as a result of loss of
market share, increased competition or other adverse general economic
conditions.




                                      F-14
<PAGE>   36

A reconciliation of theoretical income taxes follows:

<TABLE>
<CAPTION>
                                                                Fiscal Year
                                                 ---------------------------------------
                                                    1997           1996           1995
                                                 ---------      ---------      ---------
<S>                                              <C>            <C>            <C>      
Expected tax provision at 34%                    $ 669,000      $ 223,000      $  24,800
Permanent differences                               (1,000)        12,100          8,500
State tax provisions, net of federal benefit        79,000         19,700          2,200
Tax effect of general business tax credits        (178,000)      (180,800)      (149,000)
Other, net                                              --             --            500
                                                 ---------      ---------      ---------
Income tax provision (benefit)                   $ 569,000      $  74,000      $(113,000)
                                                 =========      =========      =========
</TABLE>

      The Company estimates that at December 28, 1997, the tax net operating
loss carryforward was approximately $4,300,000 (which principally relates to the
tax benefit from the exercise of non-qualified stock options, the benefit of
which was recognized through paid-in capital) which is available for utilization
in various years through 2011.

(10) STOCKHOLDERS' EQUITY

      The Company has authorized 10,000,000 shares of $.002 par value preferred
stock. None of the preferred stock has been issued. The rights, preferences and
dividend policy have not been established and are at the discretion of the
Company's Board of Directors.

      The Company has authorized 20,000,000 shares of common stock at a par
value of $.002 per share. In conjunction with an offering of common stock in
1993, the Company issued to the underwriters warrants to purchase 67,500 common
shares of the Company. Such warrants are exercisable beginning on November 22,
1994, at an initial exercise price of $5.89 per share. The exercise price
escalates each anniversary date with a final exercise price of $6.56 per share
on the fourth anniversary of the issuance of the warrants. The warrants expire
on November 22, 1998. The exercise price and the number of shares of common
stock for which the warrants are exercisable are subject to adjustment upon the
occurrence of certain dilutive events.

      In May 1989, the Company's shareholders approved the Eateries, Inc.
Omnibus Equity Compensation Plan ("the Plan") (which was amended in June 1994 by
approval of the shareholders). The Plan consolidated the Company's equity based
award programs which are described as follows:

DIRECTOR OPTION PLAN

      Non-qualified stock options granted and outstanding include 343,661
director options. Under the Plan, each director receives options to purchase
50,000 shares of common stock upon initial election to the Board of Directors.
These options vest over a five-year period at 20% per year and expire five years
from the date vested (last expiring in 2007). As a result of an amendment to the
Plan in 1994, any director who has served as a director of the Company for five
years, upon election for any additional terms, shall be granted an option to
purchase 10,000 shares of common stock for each additional year elected. These
options fully vest after one year of additional service by the director and
expire five years from the date vested (last expiring in 2003).

MANAGEMENT OPTIONS

      Non-qualified stock options granted and outstanding include 517,500
management options, which are vested over three to five-year periods and expire
five years from the date vested (last expiring in 2006).
A summary of stock option activity under the Plan is as follows:


                                      F-15
<PAGE>   37

<TABLE>
<CAPTION>
                                                                                                                Weighted
                                                                   Number               Exercise Price           Average
                                                                  of Shares                Per Share          Exercise Price
                                                                 -----------   ---------------------------- ------------------
<S>                                                               <C>          <C>                 <C>        <C>     
Outstanding at December 31, 1994 (of which approximately
  269,000 options are exercisable at weighted average
  prices of $.78) ..........................................      450,489      $     .50    --     $    6.00  $   2.15
Granted ....................................................      120,000           2.875   --          3.875     3.20
Options exercised:
  Director .................................................      (23,333)           .625   --          1.00       .79
  Management ...............................................      (30,500)           .50                           .50
Forfeited ..................................................      (65,000)          3.375   --          5.50      5.01
                                                                ---------
Outstanding at December 31, 1995 (of which approximately
  283,000 options are exercisable at weighted average
  prices of $1.65) .........................................      451,656            .625   --          6.00      2.20
Granted ....................................................      495,000           2.625   --          4.375     2.91
Options exercised:
  Director .................................................      (97,163)           .625                          .63
Forfeited ..................................................      (20,000)          3.375                         3.38
                                                                ---------
Outstanding at December 29, 1996 (of which approximately
  362,000 options are exercisable at weighted average
  prices of $2.51) .........................................      829,493            .625   --          6.00      2.77
Granted ....................................................      110,000           2.563   --          3.00      2.76
Options exercised:
  Director .................................................      (53,332)           .625                          .63
    Management .............................................       (6,000)          3.00                          3.00
Forfeited ..................................................      (19,000)          3.00                          3.00
                                                                ---------      -----------------------------  --------
Outstanding at December 28, 1997 (of which approximately
  441,000 options are exercisable at weighted average
  prices of $3.02) .........................................      861,161      $     .625   --     $    6.00  $   2.90
                                                                =========      =============================  ========
</TABLE>

      As of December 28, 1997, the Plan provides for issuance of options up to
2,554,989 shares and has 586,452 shares of common stock reserved for future
grant under the Plan.

RESTRICTED MANAGEMENT OPTIONS

      As of December 28, 1997 and December 29, 1996, there were 20,000
restricted stock options (not granted under the Plan) which had an original
vesting date of 1999 and expire five years from the date vested (last expiring
in 2004). These options included an acceleration feature which allowed for all
or a portion of the options to vest in 1996, based on certain performance
criteria. Based on these performance criteria, 10,000 of these options vested in
1996. The remaining 10,000 options will vest in 1999. A summary of restricted
stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                                                                    Weighted
                                                                  Number                Exercise Price              Average
                                                                 of Shares                Per Share             Exercise Price
                                                                -----------    ------------------------------  -----------------
<S>                                                                <C>         <C>                             <C>     
Outstanding at December 31, 1994 ...........................           --             --                             --
Granted ....................................................      120,000      $    3.00     --     $    3.125 $   3.02
                                                                ---------
Outstanding at December 31, 1995 (none are exercisable) ....      120,000           3.00     --          3.125     3.02
Forfeited ..................................................     (100,000)          3.00                           3.00
                                                                ---------      ------------------------------- --------
Outstanding at December 28, 1997 and December 29,
   1996 (of which 10,000 options are exercisable at a
   price of $3.13 per option share) ........................       20,000      $    3.125                      $   3.13
                                                                =========      ==============================  ========
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

      In June 1994, the Company's shareholders approved the Employee Stock
Purchase Plan under the Company's Omnibus Equity Compensation Plan. The Stock
Purchase Plan enables substantially all employees to subscribe to shares of
common stock on an annual offering date at a purchase price of 85% of the fair
market value of the shares on the offering date or, if lower, 85% of the fair
market value of the shares on the exercise date, which is one year from the
annual offering date. A maximum of 200,000 shares are



                                      F-16
<PAGE>   38

authorized for subscription over the ten year term of the plan (30,000 shares
reserved for issuance at December 28, 1997, for the offering period ending on
December 1, 1998). During 1997, 1996 and 1995, 16,462, 24,044 and 12,411 shares,
respectively, were issued under the Plan.

STOCK BONUS PLAN

      The Plan provides for up to 200,000 shares of stock to be awarded to
non-executive employees at the Compensation Committee's discretion over
specified future periods of employment. A total of 20,961 shares have been
issued under the Plan leaving 179,039 shares available for issuance.

TREASURY STOCK TRANSACTIONS

      As provided for in each stock option agreement, option holders can satisfy
amounts due for the exercise price and applicable required withholding taxes on
the exercise by delivery to the Company shares of common stock having a fair
market value equal to such amounts due to the Company. During 1997, 1996 and
1995, the Company acquired 9,254, 8,722 and 1,917 common shares, respectively,
in lieu of cash for such amounts due to the Company related to the exercise of
stock options. (Also see Note 8 regarding the tax benefits from the exercise of
stock options.)

PRO FORMA INFORMATION FOR STOCK OPTIONS

      Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994, under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1997, 1996 and 1995, respectively: risk-free interest rates of 6.53%, 5.71% and
6.34%; a dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of .38, .28 and .28 and a weighted-average
expected life of the options of 7.6 years. The weighted average grant date fair
value of options issued in 1997, 1996 and 1995 was $1.32, $1.08 and $1.21,
respectively.

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and stock purchase plan
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and stock purchase plan.

      For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
                                                          1997            1996            1995
                                                    -------------     -----------     -----------
<S>                                                 <C>               <C>             <C>        
Pro forma net income ..........................     $   1,247,622     $   419,269     $   149,714
Pro forma net income per common share .........              0.32            0.11            0.04
Pro forma net income per common share
   assuming dilution ..........................              0.31            0.10            0.04
</TABLE>

      Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2000.

STOCK PUT AGREEMENTS

      In April, 1997, the Company entered into stock put agreements with two of
its executive officers (who also serve on the Company's Board of Directors).
Under the agreements, in the event of the officer's death while an employee of
the Company, their respective estate or other legal representative has the right
(but not the obligation) to compel the Company to purchase all or part of
the common stock owned by or under stock option agreements with the deceased
officer or the members of their immediate families (i.e. spouse or children) or
controlled by any of them through trusts, partnership corporations or other
entities on the date of their death. The per share purchase price payable by the
Company for common stock purchased under the agreements is the greater of the
highest closing stock price during the 60 days preceding the officer's death or
two times the net book value per share as of the last day of the calendar month
immediately preceding the officer's death. In any event, the total purchase
price cannot exceed the proceeds payable to the Company from the key man life
insurance policy maintained on the life of the respective officer.


                                      F-17
<PAGE>   39

(11) EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                 1997           1996           1995
                                             ----------     ----------     ----------
<S>                                          <C>            <C>            <C>       
Numerator:
     Net income                              $1,399,208     $  581,499     $  185,841
                                             ==========     ==========     ==========

Denominator:
     Denominator for basic
      earnings per share-
      weighted-average shares
      outstanding                             3,868,950      3,836,228      3,722,788

Dilutive effect of nonqualified
     stock options                              119,066        166,131        111,168
                                             ----------     ----------     ----------

Denominator for diluted
    earnings per share                        3,988,016      4,002,359      3,833,956
                                             ==========     ==========     ==========

Basic earnings per share                     $     0.36     $     0.15     $     0.05
                                             ==========     ==========     ==========

Diluted earnings per share                   $     0.35     $     0.15     $     0.05
                                             ==========     ==========     ==========
</TABLE>

      As of December 28, 1997, there were outstanding options and warrants to
purchase 177,500 shares of common stock at prices ranging from $4.38 per share
to $6.56 per share, which were not included in the computation of diluted
earnings per share because their effect would have been anti-dilutive.

(12) SUBSEQUENT EVENT 

     In February 1998, the Company sold substantially all of the assets,
including real estate, comprising three of the Casa Lupita restaurants to
Chevy's Inc. ("Chevy's") for a cash price of approximately $5,300,000. The
proceeds from this sale were used to pay-down debt primarily related to the
Famous Acquisition. In connection with this transaction, the Company entered
into an agreement to sell substantially all of the assets related to one
additional Casa Lupita to Chevy's for a price of $1,000,000. Closing of this
transaction is conditioned upon, among other things, the transfer to Chevy's of
the liquor license related to such restaurant. Management currently expects
closing of this transaction to occur during the second quarter of 1998.

(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 

      (In thousands except per share data)

<TABLE>
<CAPTION>
                                              FIRST        SECOND         THIRD       FOURTH
                                             QUARTER       QUARTER       QUARTER      QUARTER        ANNUAL
                                            ---------    ----------    -----------  -----------   -----------
<S>                                          <C>          <C>           <C>           <C>          <C>     
1997:
            Total revenues                   $ 14,203     $ 13,709      $ 14,735      $ 20,895     $ 63,542
            Gross profit                       10,121        9,913        10,624        15,043       45,701
            Net income                            229           24           225           921        1,399
            Net income per common share          0.06         0.01          0.06          0.24         0.36
            Net income per common share
                assuming dilution                0.06         0.01          0.06          0.22         0.35

1996:
            Total revenues                   $ 12,772     $ 13,426      $ 13,999      $ 16,219     $ 56,416
            Gross profit                        8,931        9,350         9,773        11,292       39,346
            Net income (loss)                      37         (166)          109           601          581
            Net income (loss) per common         0.01        (0.04)         0.03          0.16         0.15
                share
            Net income (loss) per common
                share assuming dilution          0.01        (0.04)         0.03          0.15         0.15

1995:
            Total revenues                   $ 10,475     $ 10,682      $ 11,449      $ 13,994     $ 46,600
            Gross profit                        7,261        7,399         8,096         9,877       32,633
            Net income (loss)                      25          (45)         (642)          848          186
            Net income (loss) per common
                share                            0.01        (0.01)        (0.17)         0.23         0.05
            Net income (loss) per common
                share assuming dilution          0.01        (0.01)        (0.17)         0.22         0.05
</TABLE>






                                      F-18
<PAGE>   40
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>


         EXHIBIT
         NUMBER     DESCRIPTION OF DOCUMENT
         -------    -----------------------
         <S>        <C>
          3.1       Amended and Restated Articles of Incorporation.(1)
          3.2       Amendment to the Amended and Restated Articles of 
                    Incorporation.(2)
          3.3       Bylaws as amended.(1)
          4.1       Specimen Stock Certificate.(3)
          4.2       Form of Representative's Warrant.(3)
          10.1      Employment Agreement between the Company and Vincent F.
                    Orza, Jr., dated October 1, 1995.(10)  
          10.2      Employment Agreement between the Company and James M. Burke,
                    dated October 1, 1995.(10) 
          10.4      Lease Agreement dated May 1, 1987 (as amended June 30, 1990,
                    October 1, 1992 and October 1, 1993) between the Company and
                    Colonial Center, LTD for the lease of the Company's 
                    corporate office facilities in Oklahoma City, Oklahoma. (3)
          10.8      Franchise Agreement and Amendment dated August 31, 1993
                    between the Company and Wolsey Dublin Company for the
                    Garfield's franchise in Sioux City, Iowa and non-exclusive 
                    development rights to two additional locations in seven
                    cities in four states over the next two years. (3)
          10.9      Amended and Restated Franchise Agreement and Modification of
                    Amended and Restated Franchise Agreement dated December 31, 
                    1992 between the Company and O.E., Inc. for the three 
                    Garfield's franchise locations in the Oklahoma City, 
                    Oklahoma metropolitan area. (3)
          10.10     Form of Franchise Agreement (revised March 1, 1993).(7)
          10.11     Management Agreement dated December 31, 1992 between the
                    Company and O.E., Inc. for the supervision and accounting 
                    services provided by the Company for three Garfield's 
                    franchise locations in the Oklahoma City metropolitan area.
                    (3)
          10.12     Collateral Assignment Agreement dated January 20, 1991, 
                    between the Company and Vincent F. Orza, Jr. (5)
          10.13     Collateral Assignment Agreement dated January 20, 1991, 
                    between the Company and James M. Burke. (5)
          10.15     Stock Plan for Significant Employees of the Company, 
                    dated December 1, 1986. (6)
          10.16     1987 Director Stock Incentive Plan. (6)
          10.17     Eateries, Inc. Omnibus Equity Compensation Plan. (6)
          10.18     Underwriting Agreement between the Company, Pauli & Company 
                    Incorporated, RAS Securities Corp. and certain shareholders 
                    of the Company dated November 15, 1993. (3)
          10.22     Asset Sale Agreement dated January 9, 1995 between the
                    Company and Pepperoni Grill, Inc. and Specialty Restaurants,
                    involving the purchase of assets of Pepperoni Grill 
                    restaurant by the Company. (9) 
          10.23     Employment Agreement between the Company and Corey Gable, 
                    dated January 1, 1997. (10) 
          10.24     Employment Agreement between the Company and Peter L. 
                    Holloway, dated January 1, 1995. (9) 
          10.25     Employee Stock Purchase Plan dated June 15, 1994 (8). 
          10.26     Amended and restated Eateries, Inc. Omnibus Equity 
                    Compensation Plan dated as of June 15, 1994. (9) 
          10.27     Option Agreement between the Company and Vincent F. Orza, 
                    Jr., dated January 4, 1996 (10) 
          10.28     Option Agreement between the Company and James M. Burke, 
                    dated January 4, 1996 (10)
          10.29     Option Agreement between the Company and Corey Gable, dated 
                    April 5, 1996 (10)
          10.32     Asset Purchase Agreement dated November 14, 1997, by and
                    between the Company, through its wholly-owned subsidiary, 
                    Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and 
                    its subsidiaries. (11) 
          10.33     Agreement for Purchase and Sale of Assets and Licenses dated
                    February 26, 1998, among the Company and Chevy's, Inc. (12) 
          10.34     Agreement for purchase and Sale of Assets dated February 26,
                    1998, between the Company and Chevy's, Inc. (12)
          10.35     Loan Agreement dated as of November 18, 1997, by and between
                    NationsBank, N.A. and the Company.
          10.36     Stock Put Agreement dated April 2, 1997, by and among 
                    Vincent F. Orza, Jr. and the Company.
          10.37     Stock Put Agreement dated April 2, 1997, by and among James 
                    M. Burke and the Company.
           23.1     Consent of Arthur Andersen LLP.
           23.2     Consent of Ernst & Young LLP.
           27.1     Financial Data Schedule.

            (1)     Filed as exhibit to Registrant's Registration Statement on 
                    Form S-18 (File No. 33-6818-FW).
            (2)     Filed as exhibit to Registrant's Quarterly Report on Form 
                    10-Q for the six months ended June 30, 1988 (File No.
                    0-14968) and incorporated herein by reference.
            (3)     Filed as exhibit to Registrant's Registration Statement on 
                    Form S-2 (File No. 33-69896).
            (4)     Filed as exhibit to Registrant's Annual Report on Form 10-K 
                    for the fiscal year ended December 31, 1992 (File No.
                    0-14968) and incorporated herein by reference.
            (5)     Filed as exhibit to Registrant's Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1990 (File No.
                    0-14968) and incorporated herein by reference.
            (6)     Filed as exhibit to Registrant's Registration Statement on
                    form S-8 (File No. 33-41279).
            (7)     Filed as exhibit to Registrant's Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1993 (File No.
                    0-14968) and incorporated herein by reference.
            (8)     Filed as Appendix A to the Company's Notice of Annual 
                    Meeting of Shareholders dated April 29, 1994 and 
                    incorporated herein by reference.
            (9)     Filed as exhibit to Registrant's Annual Report on Form 10-K 
                    for the fiscal year ended December 31, 1994 (File No.
                    0-14968) and incorporated herein by reference.
            (10)    Filed as exhibit to Registrant's Annual Report on Form 10-K
                    for the fiscal year ended December 29, 1996 (File No.
                    0-14968) and incorporated herein by reference.
            (11)    Filed as exhibit to Registrant's Current Report on Form 8-K 
                    dated December 8, 1997 (File No. 0-14968) and incorporated 
                    herein by reference.
            (12)    Filed as exhibit to Registrant's Current Report on Form 8-K 
                    dated March 16, 1998 (File No. 0-14968) and incorporated 
                    herein by reference.


</TABLE>