<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                 
                              FORM 10-Q/A-1     
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
     FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1998 OR
 
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
     FOR THE TRANSITION PERIOD FROM         TO
 
                       COMMISSION FILE NUMBER: 33-14051
 
                               ----------------
 
                           FAMILY RESTAURANTS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

          DELAWARE                                       33-0197361
 (STATE OR OTHER JURISDICTION                          (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
 
      18831 VON KARMAN AVENUE, IRVINE, CALIFORNIA          92612
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)          (ZIP CODE)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 757-7900
 
                               ----------------
 
  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 whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
 
  Number of shares of outstanding common stock as of May 8, 1998 is 988,285.
 
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<PAGE>
 
                         PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                            FAMILY RESTAURANTS, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     ($ IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                        MARCH 29,  DECEMBER 28,
                                                          1998         1997
                                                       ----------- ------------
                                                       (UNAUDITED)
<S>                                                    <C>         <C>
                        ASSETS
                        ------
Current assets:
  Cash and cash equivalents...........................  $  33,861   $  32,518
  Receivables.........................................      4,145       3,944
  Inventories.........................................      4,308       4,569
  Other current assets................................      3,551       4,086
                                                        ---------   ---------
    Total current assets..............................     45,865      45,117
Property and equipment, net...........................    181,262     183,601
Reorganization value in excess of amount allocable to
 identifiable assets, net.............................     36,179      36,529
Other assets..........................................     24,260      24,521
                                                        ---------   ---------
                                                        $ 287,566   $ 289,768
                                                        =========   =========
        LIABILITIES AND STOCKHOLDERS' DEFICIT
        -------------------------------------
Current liabilities:
  Current portion of long-term debt, including
   capitalized lease obligations......................  $   2,609   $   2,694
  Accounts payable....................................     15,633      13,959
  Self-insurance reserves.............................     30,560      32,515
  Other accrued liabilities...........................     52,323      58,573
  Income taxes payable................................      3,789       3,788
                                                        ---------   ---------
    Total current liabilities.........................    104,914     111,529
Other long-term liabilities...........................      4,460       4,478
Long-term debt, including capitalized lease
 obligations, less current portion....................    212,596     199,955
Stockholders' deficit:
  Common stock--authorized 1,500,000 shares, par value
   $.01 per share, 997,277 shares issued..............         10          10
  Additional paid-in capital..........................    157,317     157,317
  Accumulated deficit.................................   (190,348)   (182,138)
  Less treasury stock, at cost (8,992 shares).........     (1,383)     (1,383)
                                                        ---------   ---------
    Total stockholders' deficit.......................    (34,404)    (26,194)
                                                        ---------   ---------
                                                        $ 287,566   $ 289,768
                                                        =========   =========
</TABLE>
 
     See accompanying notes to condensed consolidated financial statements
 
                                      Q-2
<PAGE>
 
                            FAMILY RESTAURANTS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                ($ IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                            FOR THE QUARTERS
                                                                  ENDED
                                                            ------------------
                                                             MARCH     MARCH
                                                            29, 1998  30, 1997
                                                            --------  --------
<S>                                                         <C>       <C>
Sales...................................................... $113,306  $114,978
                                                            --------  --------
Product costs..............................................   30,763    30,365
Payroll and related costs..................................   40,206    40,867
Occupancy and other operating expenses.....................   30,848    32,750
Depreciation and amortization..............................    5,339     5,570
General and administrative expenses........................    7,118     7,478
Opening costs..............................................      620         0
Loss on disposition of properties, net.....................      668     1,467
                                                            --------  --------
  Total costs and expenses.................................  115,562   118,497
                                                            --------  --------
Operating loss.............................................   (2,256)   (3,519)
Interest expense, net......................................    5,827     4,406
                                                            --------  --------
Loss before income tax provision...........................   (8,083)   (7,925)
Income tax provision.......................................      127       176
                                                            --------  --------
Net loss................................................... $ (8,210) $ (8,101)
                                                            ========  ========
</TABLE>
 
 
     See accompanying notes to condensed consolidated financial statements
 
                                      Q-3
<PAGE>
 
                            FAMILY RESTAURANTS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                ($ IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                           FOR THE QUARTERS
                                                                 ENDED
                                                          --------------------
                                                          MARCH 29,  MARCH 30,
                                                            1998       1997
                                                          ---------  ---------
<S>                                                       <C>        <C>
Increase in Cash and Cash Equivalents
Cash flows from operating activities:
  Cash received from customers, franchisees and
   licensees............................................. $ 113,690  $ 115,019
  Cash paid to suppliers and employees...................  (112,043)  (115,076)
  Interest paid, net.....................................    (6,967)    (6,336)
  Opening costs..........................................      (276)         0
  Income taxes paid......................................      (126)      (159)
                                                          ---------  ---------
    Net cash used in operating activities................    (5,722)    (6,552)
                                                          ---------  ---------
Cash flows from investing activities:
  Proceeds from disposal of property and equipment.......        44         15
  Capital expenditures...................................    (3,398)    (1,843)
  Mandatory lease buyback, net...........................         0     (2,818)
  Lease termination payments.............................      (211)    (2,151)
  Other..................................................        74     (1,034)
                                                          ---------  ---------
    Net cash used in investing activities................    (3,491)    (7,831)
                                                          ---------  ---------
Cash flows from financing activities:
  Reductions of long-term debt, including capitalized
   lease obligations.....................................      (972)      (892)
  Net proceeds from issuance of notes....................    11,620          0
  Payment of debt issuance costs.........................       (92)    (1,305)
                                                          ---------  ---------
    Net cash provided by (used in) financing activities..    10,556     (2,197)
                                                          ---------  ---------
Net increase (decrease) in cash and cash equivalents.....     1,343    (16,580)
Cash and cash equivalents at beginning of period.........    32,518     33,820
                                                          ---------  ---------
Cash and cash equivalents at end of period............... $  33,861  $  17,240
                                                          =========  =========
Reconciliation of net loss to net cash used in operating
 activities:
Net loss................................................. $  (8,210) $  (8,101)
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Depreciation and amortization..........................     5,339      5,570
  Amortization of debt issuance costs....................       297        251
  Expense of unamortized openings costs..................       344          0
  Loss on disposition of properties......................       668      1,467
  Accretion of interest..................................     1,908        294
  Decrease in receivables, inventories and other current
   assets................................................       251      1,053
  Decrease in accounts payable, self-insurance reserves,
   other accrued liabilities and income taxes payable....    (6,319)    (7,086)
                                                          ---------  ---------
Net cash used in operating activities.................... $  (5,722) $  (6,552)
                                                          =========  =========
</TABLE>    
 
     See accompanying notes to condensed consolidated financial statements
 
                                      Q-4
<PAGE>
 
                           FAMILY RESTAURANTS, INC.
 
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
  1. Company. Family Restaurants, Inc. (together with its subsidiaries, the
"Company") was incorporated in Delaware in 1986 and is primarily engaged in
the operation of full-service restaurants through its subsidiaries. At March
29, 1998, the Company operated 273 restaurants in 30 states, with
approximately 65% of its restaurants located in California, Ohio,
Pennsylvania, Michigan, Illinois and Indiana. Additionally, as of March 29,
1998, the Company was the franchisor and licensor of two restaurants in the
United States and 24 restaurants outside the United States.
 
  2. Financial Statements. The Condensed Consolidated Financial Statements in
this Form 10-Q have been prepared in accordance with Securities and Exchange
Commission Regulation S-X. Reference is made to the Notes to the Consolidated
Financial Statements for the Year Ended December 28, 1997 included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1997 (the "Form 10-K") for information with respect to the Company's
significant accounting and financial reporting policies, as well as other
pertinent information. The Company believes that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of the interim periods presented have been made. The results of
operations for the quarter ended March 29, 1998 are not necessarily indicative
of those for the full year.
 
  3. Long-Term Debt. On August 12, 1997, FRI-MRD Corporation (a wholly-owned
subsidiary of the Company) ("FRI-MRD") issued new senior discount notes (the
"Senior Discount Notes") in the face amount of $61 million at a price of
approximately 75% of par. The Senior Discount Notes are due on January 24,
2002 and accrete at a rate of 15% per annum until July 31, 1999, and
thereafter, interest will be payable in cash semi-annually at the rate of 15%
per annum. The $61 million of Senior Discount Notes were issued to an existing
holder of the Company's 9-3/4% Senior Notes due 2002 (the "Senior Notes") in
exchange for $15.6 million of Senior Notes plus approximately $34 million of
cash, and are part of an agreement pursuant to which FRI-MRD had the ability
to issue up to a maximum of $75 million of Senior Discount Notes. The gain of
$3,548,000 realized on the exchange of Senior Notes has been deferred and
classified as an element of long-term debt in accordance with the guidelines
of Emerging Issues Task Force Issue No. 96-19 because the present value of the
cash flows of the Senior Discount Notes was not at least 10% different from
the present value of the cash flows of the Senior Notes exchanged. The
deferred gain is being amortized as a reduction of interest expense over the
life of the Senior Discount Notes. On January 14 and 15, 1998, FRI-MRD issued
the remaining $14 million in face amount of the Senior Discount Notes
available under such agreement to the same purchaser at a price of 83% of par.
FRI-MRD received approximately $11.6 million in cash as a result of this
subsequent sale. Proceeds from the sales of the Senior Discount Notes have
been and will continue to be used to fund the Company's capital expenditure
programs and for general corporate purposes.
 
  4. Opening Costs. Opening costs are incurred in connection with the opening
or remodeling of a restaurant and are principally related to stocking the
restaurant and training its staff. Through the year ended December 28, 1997,
the Company's policy had been to capitalize such opening costs and amortize
them over one year. In the second quarter of 1998, the American Institute of
Certified Public Accountants is expected to issue a Statement of Position
("SOP"), "Reporting on the Costs of Start-Up Activities," which specifies that
all costs of start-up activities, including restaurant opening costs, should
be expensed as incurred. Although this SOP is to be effective for fiscal years
beginning after December 15, 1998, early adoption is allowed, and the Company
has elected to adopt the provisions of the proposed SOP in the quarter ended
March 29, 1998.
 
  Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) has been expensed in the accompanying
condensed consolidated statement of operations for the quarter ended March 29,
1998, along with $276,000 of opening costs incurred during the quarter. No
opening costs were incurred in the quarter ended March 30, 1997.
 
                                      Q-5
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
  Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve known and unknown risks and uncertainties that could result in actual
results of the Company or the restaurant industry differing materially from
expected results expressed or implied by such forward-looking statements.
Although it is not possible to itemize all of the factors and specific events
that could affect the outlook of a restaurant company operating in a
competitive environment, factors that could significantly impact expected
results include (i) the development of successful marketing strategies for
Chi-Chi's and El Torito, (ii) the effect of national and regional economic
conditions, (iii) the availability of adequate working capital, (iv)
competitive products and pricing, (v) changes in legislation, (vi) demographic
changes, (vii) the ability to attract and retain qualified personnel, (viii)
changes in business strategy or development plans, (ix) business disruptions,
(x) changes in consumer preferences, tastes and eating habits and (xi)
increases in food and labor costs. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
events or developments.
 
  The following should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" presented in
the Form 10-K.
 
  As used herein, "comparable restaurants" means restaurants operated by the
Company on January 1, 1997 and that continued in operation through the end of
the first quarter of 1998.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  A. Liquidity
   
  The Company reported net cash used in operating activities for the quarters
ended March 29, 1998 and March 30, 1997. Liquidity requirements were funded by
available cash balances, supplemented if necessary by working capital advances
available under the Foothill Credit Facility (as defined below). In addition,
FRI-MRD raised approximately $45.6 million in cash from the issuance of the
Senior Discount Notes to supplement its liquidity needs. The Company's
viability has been and will continue to be dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, and
to comply with the terms of its financing agreements.     
   
  Statement of Cash Flows. For the first quarter of 1998, the Company reported
net cash used in operating activities of $5.7 million compared to net cash
used in operating activities of $6.6 million for the same period in 1997. The
difference in cash received from customers, franchisees and licensees as
compared to cash paid to suppliers and employees improved by $1.7 million from
1997 to 1998 which more than offset cash paid for opening costs of $0.3
million and an increase in interest paid, net of $0.6 million. For the first
quarter of 1998, the Company reported net cash used in investing activities of
$3.5 million compared to net cash used in investing activities of $7.8 million
for the same period in 1997. The decrease in net cash used in investing
activities of $4.3 million was primarily due to the mandatory lease buyback of
$2.8 million in 1997 and a reduction in lease termination payments from 1997
to 1998 of $1.9 million which more than offset an increase in capital
expenditures from 1997 to 1998 of $1.6 million. For the first quarter of 1998,
the Company reported net cash provided by financing activities of $10.6
million compared to net cash used in financing activities of $2.2 million for
the same period in 1997. During 1998, $11.6 million in net cash proceeds from
the issuance of notes was received, while payment of debt issuance costs
increased $1.2 million from 1997.     
   
  EBITDA. For the first quarter of 1998, the Company reported EBITDA (defined
as earnings (loss) before opening costs, gain (loss) on disposition of
properties, provision for divestitures and write-down of long-lived assets,
restructuring costs, interest, taxes, depreciation and amortization) of $4.4
million, compared to $3.5 million for the same period in 1997. The $0.9
million improvement was due to the continuing impact     
 
                                      Q-6
<PAGE>
 
of El Torito and Chi-Chi's cost reduction and reengineering strategies, which
have improved operating margins, and positive comparable store sales at Chi-
Chi's. This improved EBITDA is the continuation of the trend that began in
1996 when new management was installed at both El Torito and Chi-Chi's. Since
1995, the divisional EBITDA of the Company's ongoing operations is set forth
in the following table.
 
<TABLE>
<CAPTION>
                                                                  DIVISIONAL
                                                                    EBITDA
                                                               ----------------
                                                                 EL      CHI-
     FISCAL YEAR ENDED                                         TORITO   CHI'S
     -----------------                                         ------- --------
                                                               ($ IN THOUSANDS)
     <S>                                                       <C>     <C>
     December 31, 1995 (a).................................... $13,508 $(10,455)
     December 29, 1996........................................  11,956   (4,278)
     December 28, 1997........................................  17,627       36
</TABLE>
--------
(a) Includes 53 weeks of operations and, in accordance with Company policy at
    that time, excludes certain unallocated corporate overhead.
   
  The Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, operating income
(loss) as an indicator of operating performance or to cash flows from
operating activities as a measure of liquidity. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.     
 
  Working Capital Deficiency. The Company operates with a substantial working
capital deficiency because (i) restaurant operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(ii) rapid turnover allows a limited investment in inventories and (iii) cash
from sales is usually received before related accounts payable for food,
beverages and supplies become due. The Company had a working capital
deficiency of $59.0 million on March 29, 1998.
 
  Credit Facility. The Company has a $35 million credit facility with Foothill
Capital Corporation (the "Foothill Credit Facility") to provide for the
ongoing working capital needs of the Company. The Foothill Credit Facility
provides for up to $15 million in revolving cash borrowings and up to $35
million in letters of credit (less the outstanding amount of revolving cash
borrowings). The Foothill Credit Facility is secured by substantially all of
the real and personal property of the Company, contains customary restrictive
covenants, including the maintenance of certain financial ratios, and expires
on January 10, 2002. The Company is in compliance with all financial ratios
for the quarter ended March 29, 1998. Letters of credit are issued under the
Foothill Credit Facility primarily to provide security for future amounts
payable under the Company's workers' compensation insurance program ($15.9
million of such letters of credit were outstanding as of May 8, 1998). No
revolving cash borrowings were outstanding as of May 8, 1998.
 
  Other. On August 12, 1997, FRI-MRD issued the Senior Discount Notes in the
face amount of $61 million to an existing holder of the Company's Senior Notes
in exchange for $15.6 million of Senior Notes plus approximately $34 million
of cash. On January 14 and 15, 1998, FRI-MRD issued the remaining $14 million
in face amount of the Senior Discount Notes to the same purchaser for
approximately $11.6 million in cash. Proceeds from the sales of the Senior
Discount Notes have been and will continue to be used to fund the Company's
capital expenditure programs and for general corporate purposes. The Company
is currently considering additional sources of cash, such as the sale of non-
core assets.
 
  The Company continues to be highly leveraged and has significant debt
service requirements. Although management believes that its current sources of
cash should be sufficient to meet its operating and debt service requirements
for the foreseeable future, there can be no assurance that the Company will be
able to repay or refinance its Senior Notes and its 10-7/8% Senior
Subordinated Discount Notes due 2004, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes, at their respective maturities.
 
                                      Q-7
<PAGE>
 
  B. Capital Expenditures
 
  Net cash used in investing activities was $3.8 million for the first quarter
of 1998, including $3.4 million for capital expenditures, as compared to net
cash used in investing activities of $7.8 million for the same period in 1997.
 
  Capital expenditures of approximately $30 million are planned for fiscal
1998, including approximately $6 million devoted to normal improvements of the
Company's restaurants. The Company is continuing its remodeling of both El
Torito and Chi-Chi's restaurants and anticipates spending approximately $13
million to $14 million for this purpose in fiscal 1998. In fiscal 1998, the
Company also anticipates opening up to seven new El Torito restaurants,
including its newly developed quick-service casual-style restaurant, "El
Torito Express Grill." The Company also plans to upgrade El Torito's in-store
POS technology during fiscal 1998.
 
  By May 8, 1998, the Company had completed the remodeling of eight additional
El Torito restaurants, primarily in the Los Angeles/Orange County market, and
six additional Chi-Chi's restaurants in various markets. The Company has
announced plans for an aggressive remodel program for the Chi-Chi's chain over
the next three years. This program could cost up to $50 million.
 
  Included in 1998 capital spending are continuing expenditures to replace the
Company's mainframe computer software applications with new software to be run
in a client/server environment. The new software includes work flow
capabilities allowing for improved processes and wider access to data. In
addition, acquisition of the new software will insure that the Company's
computer systems are year 2000 compliant. The Company expects to spend
approximately $1.6 million on the new software and related hardware and
installation costs in 1998. The project is expected to be completed before
year-end 1998. The Company is requesting year 2000 compliance reports from
significant vendors and service providers. If the computer systems of a
significant vendor or service provider were not year 2000 compliant, it could
have a material adverse effect on the Company.
 
RESULTS OF OPERATIONS.
 
  The Company's total sales of $113,306,000 for the first quarter of 1998
decreased by $1,672,000 or 1.5% as compared to the same period in 1997. As
shown below, this decrease was due to restaurants divested or closed in 1997
and 1998, partially offset by increased sales of comparable restaurants.
 
<TABLE>
<CAPTION>
                                                                 FIRST QUARTER
                                                                 SALES DECREASE
                                                                ----------------
                                                                ($ IN THOUSANDS)
   <S>                                                          <C>
   Decrease in Sales of Restaurants Divested or Closed.........     $(1,757)
   Increase in Sales of Comparable Restaurants.................          85
                                                                    -------
     Total.....................................................     $(1,672)
                                                                    =======
</TABLE>
 
  Sales for comparable restaurants of $111,631,000 for the first quarter of
1998 increased by $85,000 or 0.1% as compared to the same period in 1997. As
shown below, this increase was due to increased sales for comparable Chi-Chi's
restaurants which, while continuing to reflect a competitive operating
environment for restaurants, more than offset decreased sales for comparable
El Torito restaurants.
 
<TABLE>
<CAPTION>
                                                                  FIRST QUARTER
                                                                  SALES INCREASE
                                                                  ---------------
                                                                  AMOUNT  PERCENT
                                                                  ------  -------
                                                                      ($ IN
                                                                    THOUSANDS)
   <S>                                                            <C>     <C>
   Comparable Chi-Chi's.......................................... $ 701     1.2%
   Comparable El Torito..........................................  (616)   (1.2)
                                                                  -----    ----
     Total....................................................... $  85     0.1%
                                                                  =====    ====
</TABLE>
 
                                      Q-8
<PAGE>
 
  El Torito comparable sales in the first quarter were down 1.2% as compared
to the same period in 1997. Sales were impacted by severe weather during six
weeks of the quarter. Especially hard-hit was the St. Louis market and
southern Orange County, California, where sales declines accounted for over
75% of the unfavorable sales variance in the first quarter. The "Getaway to
Mexico at El Torito" advertising campaign continued with a focus on the
Yucatan region in the first quarter via promotional television and radio
advertising. A shift to lower media weights and reduced spending levels for
advertising in the first quarter of 1998, along with the non-comparable
calendar alignment of marketing events in 1998 versus 1997, may have also
adversely affected the first quarter comparable sales results.
 
  Comparable Chi-Chi's sales in the first quarter of 1998 were up 1.2% as
compared to the same period in 1997. This was the first quarter of positive
comparable sales since Chi-Chi's was merged into the Company in January 1994
and continues the improving comparable sales trends reported each quarter
during fiscal 1997. Sales were buoyed by print advertising distributed in
January 1998 and an accompanying system-wide employee incentive contest which
were formulated to stimulate trial of the new Chi-Chi's menu introduced in
December 1997. The new menu expanded the product offerings to appeal to a
greater segment of the population by adding grilled meats and barbeque items,
related to Mexican cuisine, but not considered traditional Mexican dishes, as
well as new Mexican combination entrees. Additionally, the first Chi-Chi's
television and radio campaign of 1998 began in the second week of March
featuring the Outrageous Burrito and other Mexican grill items.
 
  Product cost of $30,763,000 for the first quarter of 1998 increased by
$398,000 or 1.3% as compared to the same period in 1997. The increase is
primarily due to the impact of (i) higher commodity prices, especially related
to produce and cheese, and (ii) higher food costs at Chi-Chi's associated with
new menu items, which more than offset the impact of the eight restaurants
sold or closed since the beginning of 1997 and the effects of the El Torito
and Chi-Chi's cost reduction strategies. As a percentage of sales, product
cost increased to 27.2% in the first quarter of 1998 as compared to 26.4% in
the same period of 1997.
 
  Payroll and related costs of $40,206,000 for the first quarter of 1998
decreased by $661,000 or 1.6% as compared to the same period in 1997. The
decrease is due to the impact of the eight restaurants sold or closed since
the beginning of 1997. As a percentage of sales, payroll and related costs of
35.5% in the first quarter of 1998 remained the same as compared to the same
period in 1997. Savings realized from the El Torito and Chi-Chi's cost
reduction strategies which have focused on improving labor scheduling and
efficiencies were offset by the impact of the minimum wage increases
nationally on September 1, 1997 and on March 1, 1997 and March 1, 1998 in
California.
 
  The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively freezes the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, California voters approved a
proposition on November 5, 1996 that increased the state's minimum wage to
$5.00 on March 1, 1997 and further increased the state's minimum wage to $5.75
on March 1, 1998. In response to the minimum wage increases on October 1,
1996, March 1, 1997 and March 1, 1998, the Company raised menu prices at its
El Torito restaurants in an effort to recover the higher payroll costs. Chi-
Chi's also raised menu prices in October and December 1997 as a result of the
cumulative impact of these minimum wage increases. At the request of President
Clinton, the Congress is considering further increases in the Federal minimum
wage over the next two years. In addition, the California legislature is
considering another minimum wage increase which would be effective in 1999.
 
  Occupancy and other operating expenses of $30,848,000 for the first quarter
of 1998 decreased by $1,902,000 or 5.8% as compared to the same period in
1997. The decrease for the first quarter is due, in part, to
 
                                      Q-9
<PAGE>
 
the impact of the eight restaurants sold or closed since the beginning of
1997. As a percentage of sales, occupancy and other operating expenses
decreased to 27.2% in the first quarter of 1998 as compared to 28.5% in the
same period in 1997. This decrease primarily reflects (i) the impact of El
Torito and Chi-Chi's cost reduction strategies and (ii) a decrease in media
expense in both El Torito and Chi-Chi's in the first quarter of 1998 as
compared to the same period of 1997.
 
  Depreciation and amortization of $5,339,000 for the first quarter of 1998
decreased by $231,000 or 4.2% as compared to the same period in 1997 due to
the impact of (i) the eight restaurants sold or closed since the beginning of
1997 and (ii) the write-down of certain long-lived assets in the second
quarter of 1997.
 
  General and administrative expenses of $7,118,000 for the first quarter of
1998 decreased by $360,000 or 4.8% as compared to the same period of 1997. As
a percentage of sales, general and administrative expenses decreased to 6.3%
in the first quarter of 1998 as compared to 6.5% in the same period of 1997
primarily reflecting (i) higher royalty and license payments, which are
recorded as an offset to general and administrative expenses, and (ii) lower
litigation-related expenses. Management continues to closely evaluate the
Company's general and administrative cost structure for savings opportunities.
 
  The Company reported a loss on disposition of properties of $0.7 million in
the first quarter of 1998 as compared to a loss of $1.5 million for the first
quarter in 1997. These amounts reflect losses associated with restaurant
divestments and closures in such periods.
 
  Interest expense, net for the first quarter of 1998 of $5,827,000 increased
by $1,421,000 or 32.3% as compared to the same period in 1997. The first
quarter increase was primarily the result of the issuance of the Senior
Discount Notes in August 1997 and January 1998 and the accretion of interest
thereon, partially offset by the elimination of cash interest expense
associated with the $15.6 million of Senior Notes received as part of the
exchange on August 12, 1997.
 
SELECTED DIVISION OPERATING DATA.
 
  The Company primarily operates full-service Mexican restaurants in two
divisions under the El Torito, Chi-Chi's, Casa Gallardo and other names. At
March 29, 1998 the Company's El Torito restaurant division operated 94 full-
service restaurants and the Company's Chi-Chi's restaurant division operated
179 full-service restaurants.
 
                                     Q-10
<PAGE>
 
  The following table sets forth certain information regarding the Company,
its El Torito and Chi-Chi's restaurant divisions, and the various operations
divested in 1996.
 
<TABLE>
<CAPTION>
                                                   FOR THE QUARTER ENDED
                                            ---------------------------------
                                            MARCH 29,   MARCH 30,   MARCH 31,
                                              1998        1997        1996
                                            ---------   ---------   ---------
                                                  ($ IN THOUSANDS,
                                            EXCEPT AVERAGE CHECK AMOUNT)
<S>                                         <C>         <C>         <C>
EL TORITO RESTAURANT DIVISION
Restaurants Open at End of Period:
  Owned/operated...........................        94          97          98
  Franchised and Licensed..................        10           7           5
Sales...................................... $  51,809   $  53,600   $  54,434
Restaurant Level Cashflow..................     7,087       7,234       5,848
Divisional EBITDA(a).......................     4,313       4,249       2,874
Percentage decrease in comparable
 restaurant sales..........................      (1.2)%      (1.5)%      (3.1)%
Average check.............................. $    9.92   $    9.55   $    9.43
CHI-CHI'S RESTAURANT DIVISION
Restaurants Open at End of Period:
  Owned/operated...........................       179         182         199
  Franchised and Licensed..................        16          18          21
Sales...................................... $  61,497   $  61,378   $  74,753
Restaurant Level Cashflow..................     4,128       3,478        (607)
Divisional EBITDA(a).......................       102        (690)     (4,512)
Percentage increase (decrease) in
 comparable restaurant sales...............      1.2 %      (12.7)%     (10.9)%
Average check.............................. $    7.84   $    7.52   $    7.44
ONGOING OPERATIONS
Restaurants Open at End of Period:
  Owned/operated...........................       273         279         297
  Franchised and Licensed..................        26          25          26
Sales...................................... $ 113,306   $ 114,978   $ 129,187
Divisional EBITDA(a).......................     4,415       3,559      (1,638)
DIVESTED OPERATIONS(B)
Restaurants Open at End of Period:
  Owned/operated...........................         0           0         367
  Franchised and Licensed..................         0           0         261
Sales...................................... $       0   $       0   $ 129,865
Divisional EBITDA(a).......................         0           0      11,948
TOTAL COMPANY
Restaurants Open at End of Period:
  Owned/operated...........................       273         279         664
  Franchised and Licensed..................        26          25         287
Sales...................................... $ 113,306   $ 114,978   $ 259,052
EBITDA(c)..................................     4,371       3,518      10,431
</TABLE>
--------
(a) Divisional EBITDA with respect to any operating division is defined as
    earnings (loss) before opening costs, gain (loss) on disposition of
    properties, interest, taxes, depreciation and amortization.
 
(b) Divested Operations in 1996 includes the results of the Family Restaurant
    Division until it was divested on May 23, 1996 and the traditional
    dinnerhouse restaurants that were divested by year-end 1996.
   
(c) EBITDA is defined as earnings (loss) before opening costs, gain (loss) on
    disposition of properties, provision for divestitures and write-down of
    long-lived assets, restructuring costs, interest, taxes, depreciation and
    amortization. The Company has included information concerning EBITDA
    herein because it understands that such information is used by certain
    investors as one measure of an issuer's historical ability to service
    debt. EBITDA should not be considered as an alternative to, or more
    meaningful than, operating income (loss) as an indicator of operating
    performance or to cash flows from operating activities as a measure of
    liquidity. Furthermore, other companies may compute EBITDA differently,
    and therefore, EBITDA amounts among companies may not be comparable.     
 
                                     Q-11
<PAGE>
 
                          PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
  The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the existing claims or
actions will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
 
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
 
  None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
  None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
ITEM 5. OTHER INFORMATION
 
  None.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibits
 
<TABLE>   
 <C>           <S>
          2(a) Stock Purchase Agreement dated as of March 1, 1996 by and among
                Family Restaurants, Inc., Flagstar Companies, Inc., Flagstar
                Corporation and FRD Acquisition Co. (Filed as Exhibit 2.1 to
                the Company's Form 10-Q filed with the SEC on May 15, 1996.)
          3(a) Fourth Restated Certificate of Incorporation of the Company.
                (Filed as Exhibit 4.1 to the Company's Form S-8 filed with the
                SEC on March 23, 1994.)
          3(b) Bylaws of the Company. (Filed as Exhibit 4.2 to the Company's
                Form S-8 filed with the SEC on March 23, 1994.)
          4(a) Indenture Dated as of January 27, 1994
                Re: $300,000,000 9-3/4% Senior Notes Due 2002. (Filed as
                Exhibit 4(a) to the Company's Form 10-K filed with the SEC on
                March 28, 1994.)
          4(b) Indenture Dated as of January 27, 1994
                Re: $150,000,000 10 7/8% Senior Subordinated Discount Notes Due
                2004. (Filed as Exhibit 4(b) to the Company's Form 10-K filed
                with the SEC on March 28, 1994.)
          4(c) First Supplemental Indenture, dated as of July 3, 1996, between
                the Registrant and IBJ Schroder Bank & Trust Company, a New
                York Banking corporation, as Trustee. (Filed as Exhibit 10.1 to
                the Company's Form 8-K filed with the SEC on July 9, 1996.)
          4(d) First Supplemental Indenture, dated as of July 3, 1996, between
                the Registrant and Fleet National Bank, as successor by merger
                to Fleet National Bank of Massachusetts, formerly known as
                Shawmut Bank, N.A., as Trustee. (Filed as Exhibit 10.2 to the
                Company's Form 8-K filed with the SEC on July 9, 1996.)
          4(e) Note Agreement Dated as of August 12, 1997
                Re: Up to $75,000,000 FRI-MRD Corporation Senior Discount Notes
                Due January 24, 2002. (Filed as Exhibit 4(e) to the Company's
                Form 10-Q filed with the SEC on November 12, 1997.)
          4(f) Joinder Agreement Dated as of January 14, 1998
                Re: FRI-MRD Corporation Senior Discount Notes due January 24,
                2002. (Filed as Exhibit 4(f) to the Company's Form 10-K filed
                with the SEC on March 30, 1998.)
         27    Financial Data Schedule. (Filed as Exhibit 27 to the Company's
                Form 10-Q filed with the SEC on May 8, 1998.)
</TABLE>    
 
  (b) Reports on Form 8-K.
 
  None.
 
 
                                     Q-12
<PAGE>
 
                                   SIGNATURE
 
  Pursuant to the requirements 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.
 
                                          Family Restaurants, Inc.
                                           (Registrant)
 
                                             /s/ Robert T. Trebing, Jr.
                                          By: _________________________________
                                                 Robert T. Trebing, Jr.
                                              Executive Vice President and
                                                 Chief Financial Officer
                                              (Principal Financial Officer)
   
Date: September 9, 1998     
 
                                      Q-13