<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q



  X      Quarterly report pursuant to section 13 or 15(d) of the Securities
-----    Exchange Act of 1934


For the quarterly period ended July 1, 2001 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
                                               --------

                                Prandium, Inc.
                                --------------
            (Exact name of registrant as specified in its charter)


     Delaware                               33-0197361
     -------------------------------        -----------------------------------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)


               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
                             -------        _______


As of August 10, 2001, the registrant had issued and outstanding 180,380,513
shares of common stock, $.01 par value per share.

                                      -1-
<PAGE>

                         PART I. FINANCIAL INFORMATION
                         -----------------------------

Item 1. Financial Statements
-------

                                PRANDIUM, INC.
                                --------------

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     -------------------------------------
                               ($ in thousands)
                               ----------------

<TABLE>
<CAPTION>
                                                                                        July 1,         December 31,
                                                                                         2001               2000
                                                                                     -----------        ------------
                                                                                     (Unaudited)
<S>                                                                                  <C>                <C>
ASSETS
------

Current assets:
    Cash and cash equivalents                                                        $    32,128        $     53,505
    Restricted cash                                                                       14,598               2,500
    Receivables                                                                            2,207               2,075
    Inventories                                                                            2,163               2,386
    Other current assets                                                                   2,963               2,574
                                                                                     -----------        ------------
      Total current assets                                                                54,059              63,040

Property and equipment, net                                                              119,650             124,922
Costs in excess of net assets of business acquired, net                                   16,592              16,814
Other assets                                                                              11,813              15,736
                                                                                     -----------        ------------
                                                                                     $   202,114        $    202,512
                                                                                     ===========        ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

Current liabilities:
    Current portion of long-term debt, including capitalized lease obligations       $   235,065        $      2,060
    Accounts payable                                                                       6,940               8,150
    Current portion of self-insurance reserves                                             3,199               2,812
    Other accrued liabilities                                                             69,573              58,760
    Income taxes payable                                                                   3,340               3,523
                                                                                     -----------        ------------
      Total current liabilities                                                          318,117              75,305

Self-insurance reserves                                                                    4,911               5,298
Other long-term liabilities                                                                2,863               3,590
Long-term debt, including capitalized lease obligations, less current portion              1,640             235,696

Commitments and contingencies

Stockholders' deficit:
    Common stock - authorized 300,000,000 shares, par value $.01 per share,
     180,380,513 shares issued and outstanding on July 1, 2001 and on
     December 31, 2000                                                                     1,804               1,804
    Additional paid-in capital                                                           222,353             222,353
    Accumulated deficit                                                                 (349,574)           (323,534)
                                                                                     -----------        ------------
      Total stockholders' deficit                                                       (125,417)            (99,377)
                                                                                     -----------        ------------
                                                                                     $   202,114        $    220,512
                                                                                     ===========        ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                      -2-
<PAGE>

                                 PRANDIUM, INC
                                 -------------

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                -----------------------------------------------
                  ($ in thousands, except per share amounts)
                  ------------------------------------------
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                   For the Quarters Ended
                                                                          ----------------------------------------
                                                                                July 1,               June 25,
                                                                                  2001                  2000
                                                                           ----------------      -----------------
<S>                                                                        <C>                   <C>
 Sales                                                                     $         74,528      $         137,855
                                                                           ----------------      -----------------

 Product costs                                                                       19,846                 36,274
 Payroll and related costs                                                           26,509                 48,832
 Occupancy and other operating expenses                                              22,402                 35,637
 Depreciation and amortization                                                        3,900                  6,950
 General and administrative expenses                                                  5,842                  7,693
 Opening costs                                                                           57                     15
 Loss on disposition of properties, net                                                 369                    566
 Restructuring costs                                                                  2,057                      -
                                                                           ----------------      -----------------

      Total costs and expenses                                                       80,982                135,967
                                                                           ----------------      -----------------

 Operating income (loss)                                                             (6,454)                 1,888

 Interest expense, net                                                                7,066                  8,583
                                                                           ----------------      -----------------

 Loss before income tax provision                                                   (13,520)                (6,695)

 Income tax provision                                                                   107                    127
                                                                           ----------------      -----------------

 Net loss                                                                  $        (13,627)      $         (6,822)
                                                                           ================       ================

 Net loss per share - basic and diluted                                    $          (0.08)      $          (0.04)
                                                                           ================       ================

 Weighted average shares outstanding - basic and diluted                        180,380,513            180,380,513
                                                                           ================       ================
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                      -3-
<PAGE>

                                PRANDIUM, INC.
                                --------------

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                -----------------------------------------------
                  ($ in thousands, except per share amounts)
                  ------------------------------------------
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                                   For the Six Months Ended
                                                                               --------------------------------
                                                                                July 1,               June 25,
                                                                                  2001                  2000
                                                                               --------------- ----------------
<S>                                                                            <C>             <C>
 Sales                                                                         $    150,510    $      270,969
                                                                               --------------- ----------------

 Product costs                                                                       40,307            70,354
 Payroll and related costs                                                           54,116            96,016
 Occupancy and other operating expenses                                              44,790            70,696
 Depreciation and amortization                                                        8,077            14,050
 General and administrative expenses                                                 11,715            15,476
 Opening costs                                                                          107                86
 Loss on disposition of properties, net                                                 771               454
 Provision for divestitures                                                             189                 -
 Restructuring costs                                                                  2,553                 -
                                                                               --------------- ----------------

      Total costs and expenses                                                      162,625           267,132
                                                                               --------------- ----------------

 Operating income (loss)                                                            (12,115)            3,837

  Interest expense, net                                                              13,712            17,149
                                                                               --------------- ----------------

 Loss before income tax provision                                                   (25,827)          (13,312)

 Income tax provision                                                                   213               254
                                                                               --------------- ----------------

 Net loss                                                                      $    (26,040)   $      (13,566)
                                                                               =============== ================

 Net loss per share - basic and diluted                                        $      (0.14)   $        (0.08)
                                                                               =============== ================

 Weighted average shares outstanding - basic and diluted                        180,380,513       180,380,513
                                                                               =============== ================
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                      -4-
<PAGE>

                                PRANDIUM, INC.
                                --------------

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                -----------------------------------------------
                               ($ in thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                              For the Six Months Ended
                                                                                         --------------------------------
                                                                                            July 1,             June 25,
                                                                                              2001                2000
                                                                                         ---------------- ---------------
<S>                                                                                      <C>              <C>
Cash flows from operating activities:
      Cash received from customers, franchisees and licensees                            $    151,197     $     271,438
      Cash paid to suppliers and employees                                                   (154,701)         (253,968)
      Interest received (paid), net                                                               406           (16,746)
      Opening costs                                                                              (107)              (86)
      Restructuring costs                                                                      (1,223)                -
      Income taxes paid                                                                          (396)             (375)
                                                                                         ---------------- ---------------

          Net cash provided by (used in) operating activities                                  (4,824)              263
                                                                                         ---------------- ---------------

 Cash flows from investing activities:
      Proceeds from disposal of property and equipment                                            139             1,067
      Proceeds from payments on notes receivable                                                  348               350
      Capital expenditures                                                                     (2,994)           (5,146)
      Lease termination payments                                                                 (611)             (468)
      Other divestment expenditures                                                            (1,023)           (1,035)
      Cash required for the El Torito Sale                                                     (1,085)             (658)
      Increase in restricted cash, net                                                         (9,568)                -
      Other                                                                                    (1,125)              (55)
                                                                                         ---------------- ---------------

          Net cash used in investing activities                                               (15,919)           (5,945)
                                                                                         ================ ===============

 Cash flows from financing activities:
      Proceeds from working capital borrowings, net                                                 -             4,050
      Proceeds from equipment financing                                                             -             2,672
      Reductions of long-term debt, including capitalized lease obligations                      (634)           (2,078)
                                                                                         ---------------- ---------------

          Net cash provided by (used in) financing activities                                    (634)            4,644
                                                                                         ---------------- ---------------

 Net decrease in cash and cash equivalents                                                    (21,377)           (1,038)
 Cash and cash equivalents at beginning of period                                              53,505             3,600
                                                                                         ---------------- ---------------

 Cash and cash equivalents at end of period                                              $     32,128     $       2,562
                                                                                         ================ ===============

 Reconciliation of net loss to net cash used in operating activities:

 Net loss                                                                                $    (26,040)    $     (13,566)

 Adjustments to reconcile net loss to net cash provided by (used in) operating
      activities:
          Depreciation and amortization                                                         8,077            14,050
          Amortization of debt issuance costs and deferred gain                                   183               379
          Loss on disposition of properties                                                       771               454
          Provision for divestitures                                                              189                 -
          (Increase) decrease in receivables, inventories and other current assets               (202)            1,365
          Increase (decrease) in accounts payable, self-insurance reserves,
            other accrued liabilities and income taxes payable                                 12,198            (2,419)
                                                                                         ---------------- ---------------

 Net cash provided by (used in) operating activities                                     $     (4,824)    $         263
                                                                                         ================ ===============
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                      -5-
<PAGE>

                                PRANDIUM, INC.
                                --------------

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             ----------------------------------------------------
                                  (Unaudited)

     1.   Company.  Prandium, Inc. (together with its subsidiaries, the
          -------
"Company"), was incorporated in Delaware in 1986.  The Company is primarily
engaged in the operation of restaurants in the full-service and fast-casual
segments, through its subsidiaries.  At July 1, 2001, the Company operated 194
restaurants in 21 states, approximately 65% of which are located in California,
Ohio, Pennsylvania, Indiana and Michigan, and franchised and licensed 13
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 Fiscal Year Ended December 31, 2000 included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000
(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 and six months ended July 1, 2001 and June 25, 2000 are not
necessarily indicative of those for the full year.

     3.   Going Concern Matters and Recapitalization Plan.  The Company's
          -----------------------------------------------
consolidated financial statements have been presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. As shown in its Consolidated Financial Statements
included in the Form 10-K, the Company incurred losses of $41,772,000,
$36,491,000 and $63,133,000 for the fiscal years ended December 31, 2000,
December 26, 1999 and December 27, 1998, respectively. As further shown in the
Condensed Consolidated Financial Statements in this Form 10-Q, the Company
incurred an additional loss of $26,040,000 for the six months ended July 1, 2001
and had a stockholders' deficit of $125,417,000 on July 1, 2001.

     During 1999 and the first half of fiscal 2000, the Company explored several
financing transactions and other strategic alternatives in an effort to meet its
debt service requirements.  This process culminated in the completion of the
sale of the El Torito restaurant division on June 28, 2000 (the "El Torito
Sale").  A portion of the net cash proceeds from that transaction was used to
pay indebtedness outstanding under the Company's credit facility with Foothill
Capital Corporation (the "Foothill Credit Facility") of $25.9 million.  In
addition, Acapulco Acquisition Corp. assumed $9.8 million of long-term debt,
consisting primarily of capitalized lease obligations, as part of the El Torito
Sale.  After completion of the El Torito Sale, however, the Company has
continued to be highly leveraged and  has significant annual debt service
requirements.

     During the second half of fiscal 2000, the Company began considering other
alternatives to address its debt service requirements.  As a result of
discussions and deliberation among the Company and its legal and financial
advisors, the Company's subsidiary FRI-MRD Corporation

                                      -6-
<PAGE>

("FRI-MRD") elected not to pay the semi-annual interest payments due January 31,
2001 and July 31, 2001 on its outstanding long-term debt (the "FRI-MRD Notes").
The Company also elected not to pay the semi-annual interest payments due
February 1, 2001 and August 1, 2001 on its outstanding long-term debt (the
"Prandium Notes"). Under the terms of the note agreements governing the FRI-MRD
Notes and the indentures governing the Prandium Notes, these non-payments became
or, with respect to the payments due August 1, 2001, will become, "Events of
Default" and the holders of all such debt have become entitled to certain
rights, including the right to accelerate the debt. In addition, the vesting of
the right (whether or not exercised) of the noteholders to accelerate the debt
caused an "Event of Default" to occur under the Foothill Credit Facility, and
Foothill Capital Corporation ("Foothill") became entitled to certain additional
rights. As a result of these "Events of Default," the Company has classified all
debt outstanding under the FRI-MRD Notes and the Prandium Notes (approximately
$233.4 million at July 1, 2001) as current in the condensed consolidated balance
sheet. The Company is currently negotiating with its creditors to reach
agreement on an acceptable capital restructuring of the Company and its
subsidiaries. There can be no assurances, however, that the Company will be able
to successfully negotiate with its creditors. These factors raise substantial
doubt about the Company's ability to continue as a going concern for a
reasonable period of time.

     The accompanying condensed consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain modifications in its financial and capital structure and ultimately to
attain profitable operations.  Management is continuing its efforts to
restructure its existing debt so that the Company can meet its obligations and
sustain operations.  There can be no assurances, however, that the Company will
be able to successfully negotiate with its creditors.

     4.   Strategic Divestment Programs.  In the fourth quarter of 1999, three
          -----------------------------
non-strategic Koo Koo Roo restaurants were designated for divestment (the "KKR
Strategic Divestment Program"). In conjunction with the KKR Strategic Divestment
Program, the Company recorded a provision for divestitures of $904,000. This
provision consisted of costs associated with lease terminations, subsidized
subleases, brokerage fees and other divestment costs. During 2000, two of the
restaurants were subleased and the third restaurant's lease was terminated. In
the fourth quarter of 2000, ten additional non-strategic Koo Koo Roo restaurants
were designated for divestment. In conjunction with the KKR Strategic Divestment
program, the Company recorded a provision for divestitures of $4,510,000 in
2000. This provision consisted of (i) $2,765,000 for the write-down to net
realizable value of the property and equipment associated with such restaurants
and (ii) $1,745,000 for costs associated with lease terminations, subsidized
subleases, brokerage fees and other divestment costs. In the first quarter of
2001, the Company recorded a provision for severance costs of $189,000
associated with certain restaurant managers in connection with the restaurants
to be divested. During the six months ended July 1, 2001, these restaurants
(including six restaurants divested or closed in 2001) had sales of $2,857,000
and restaurant level operating losses of $554,000. For the six months ended July
1, 2001, the Company paid (i) $46,000 for severance costs associated with
certain restaurant managers who were terminated in connection with the
restaurants divested and (ii) $655,000 for net costs associated with lease
terminations, brokerage fees and other divestment costs.

                                      -7-
<PAGE>

For the six months ended June 25, 2000, the Company paid $18,000 for such costs.
The KKR Strategic Divestment Program is scheduled to be completed by the end of
fiscal 2001, and the designated restaurants' operating results will be included
in the Company's consolidated statement of operations until the divestments are
completed.

     In the fourth quarter of 1998, 48 non-strategic Chi-Chi's restaurants were
designated for divestment (the "CC Strategic Divestment Program").  In
conjunction with the CC Strategic Divestment Program, the Company recorded a
provision for divestitures of $22,884,000, including divestment reserves of
$12,256,000.  During the fourth quarter of 1999, the Company determined that it
would not be able to satisfactorily negotiate lease terminations or subleases
for 20 operating restaurants of the 48 Chi-Chi's restaurants designated for
divestment.  As a result, these 20 restaurants were removed from the CC
Strategic Divestment Program, and $1,048,000 previously recorded in conjunction
with the provision for divestitures was reversed during the fourth quarter of
1999.  After this reversal, the eight restaurants remaining in the CC Strategic
Divestment Program were divested during 2000. For the six months ended July 1,
2001 and June 25, 2000, the Company paid (i) $29,000 and $189,000, respectively,
for severance costs associated with certain restaurant and regional managers who
were terminated in connection with the restaurants divested and (ii) $897,000
and $1,033,000, respectively, for net costs associated with lease terminations,
subsidized subleases, brokerage fees and other divestment costs.

     Three other non-strategic restaurants were identified for divestment during
2000. The Company recorded a provision for divestitures with respect to such
restaurants of $1,805,000 in 2000.  This provision consisted of (i) $1,730,000
for the write-down to fair value of the property and equipment associated with
such restaurants and (ii) $75,000 for costs associated with broker commissions
and other divestment costs.  During the quarter ended April 1, 2001, these
restaurants were divested  and had sales of $99,000 and restaurant level
operating losses of $99,000.  For the six months ended July 1, 2001, the Company
(i) paid $2,000 for severance costs associated with certain restaurant managers
who were terminated in connection with  these divested restaurants and (ii)
received $7,000 in net divestment proceeds.

     In the second quarter of 2001, the Company announced an organizational
restructuring that would eliminate approximately 40 positions in the Company's
support center prior to the end of the third quarter of 2001.  The Company
recorded a provision of $1,607,000 for severance and outplacement services in
restructuring costs.  For the quarter ended July 1, 2001, 10 employees were
terminated and a total of $277,000 was paid for severance and outplacement
services.

     5.   Segment Information.  The Company operates exclusively in the food-
          -------------------
service industry. Substantially all revenues result from the sale of menu
products at restaurants operated by the Company.  The Company's reportable
segments are based on restaurant operating divisions.  Operating income (loss)
includes the operating results before interest.  The corporate component of
sales, depreciation and amortization and operating income (loss) represents
operating results of the two full-service and four fast-casual restaurants not
included in the El Torito Sale, as well as corporate general and administrative
expenses.  Corporate assets include corporate cash, restricted cash,
investments, receivables, asset portions of financing instruments and the two
full-service and four fast-casual restaurants not included in the El Torito
Sale.  Fiscal year 2000 segment information

                                      -8-
<PAGE>

for the El Torito restaurant division has been restated to exclude the results
of the two full-service and four fast-casual restaurants not included in the El
Torito Sale.

                                      -9-
<PAGE>

<TABLE>
<CAPTION>
                                                    For the Quarters Ended          For the Six Months Ended
                                                  --------------------------      ----------------------------
                                                   July 1,          June 25,        July 1,          June 25,
                                                    2001              2000           2001              2000
                                                  --------------------------      ----------------------------
                                                                          (Unaudited)
                                                                        ($ in thousands)
<S>                                              <C>             <C>               <C>             <C>
 Sales
     El Torito Division                          $        -      $   58,059        $         -     $   111,500
     Chi-Chi's Division                              52,602          55,916            106,059         111,855
     Koo Koo Roo Division                            20,642          22,117             41,868          44,117
     Corporate                                        1,284           1,763              2,583           3,497
                                                   ---------      ----------        -----------     -----------
        Total Sales                              $   74,528      $  137,855        $   150,510     $   270,969
                                                   =========      ==========        ===========    ============

 Depreciation and Amortization
     El Torito Division                          $        -      $    2,576        $         -     $     5,291
     Chi-Chi's Division                               2,638           2,665              5,412           5,370
     Koo Koo Roo Division                               949           1,326              2,003           2,660
     Corporate                                          313             383                662             729
                                                   ---------      ----------        -----------     -----------
        Total Depreciation and Amortization      $    3,900      $    6,950        $     8,077     $    14,050
                                                   =========      ==========        ===========     ===========

 Operating Income (Loss)
     El Torito Division                          $        -           4,920        $         -     $     7,690
     Chi-Chi's Division                              (2,280)         (2,427)            (4,817)         (2,848)
     Koo Koo Roo Division                              (730)           (181)            (1,763)           (500)
     Corporate                                       (3,444)           (424)            (5,535)           (505)
                                                   ---------      ----------        -----------     -----------
        Total Operating Income (Loss)            $   (6,454)     $    1,888        $   (12,115)    $     3,837
                                                   =========      ==========        ===========     ===========

 Interest Expense, net
     El Torito Division                          $        -      $      613        $         -     $     1,220
     Chi-Chi's Division                                 100             426                206             830
     Koo Koo Roo Division                                47              39                 89              77
     Corporate                                        6,919           7,505             13,417          15,022
                                                   ---------      ----------        -----------     -----------
        Total Interest Expense, net              $    7,066      $    8,583        $    13,712     $    17,149
                                                   =========      ==========        ===========     ===========

 Capital Expenditures
     El Torito Division                          $        -      $      713        $         -     $     1,031
     Chi-Chi's Division                                 624           1,457              1,202           2,154
     Koo Koo Roo Division                               621           1,007              1,588           1,188
     Corporate                                           36             547                204             773
                                                   ---------      ----------        -----------     -----------
        Total Capital Expenditures               $    1,281      $    3,724        $     2,994     $     5,146
                                                   =========      ==========        ===========     ===========

                                                                                       July 1,     December 31,
                                                                                        2001           2000
                                                                                    ------------   -----------
                                                                                     (Unaudited)
                                                                                           ($ in thousands)

 Total Assets
     Chi-Chi's Division                                                            $    99,612     $   104,387
     Koo Koo Roo Division                                                               45,447          46,202
     Corporate                                                                          57,055          69,923
                                                                                    ------------   -----------
        Total Assets                                                               $   202,114     $   220,512
                                                                                    ============   ===========
</TABLE>

                                      -10-
<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," "intends," "plans," "estimates" 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 cause actual results of the Company or the restaurant
industry to differ 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:

     .  the ability of the Company to satisfy or restructure its debt
        obligations;

     .  the continuing development of successful marketing strategies for each
        of the Company's concepts;

     .  the effect of national and regional economic conditions;

     .  the availability of adequate working capital;

     .  competitive products and pricing;

     .  changes in legislation;

     .  demographic changes;

     .  the ability to attract and retain qualified personnel;

     .  changes in business strategy or development plans;

     .  business disruptions;

     .  changes in consumer preferences, tastes and eating habits;

     .  increases in food and labor costs; and

     .  increases in utility costs and the impact of potential utility
        interruptions.

     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.

                                      -11-
<PAGE>

     As used herein, "comparable restaurants" means restaurants operated by the
Company for at least eighteen months and that continued in operation through the
end of the second quarter of 2001.

Liquidity and Capital Resources
-------------------------------

     A. Liquidity

     The Company reported net cash used in operating activities of $4.8 million
for the six months ended July 1, 2001 and net cash provided by operating
activities of $0.3 million for the six months ended June 25, 2000.  Cash needs
are being funded by available cash balances which resulted from the El Torito
Sale. The Company's viability is dependent upon its ability to restructure its
capital structure. The Company is currently negotiating with its creditors to
reach agreement on an acceptable capital restructuring of the Company and its
subsidiaries. The Company cannot provide any assurance that an agreement can be
reached or on the terms of an agreement or its effects on the Company's
operations and interests.  If the Company cannot reach agreement with Foothill,
the holders of the FRI-MRD Notes and the holders of the Prandium Notes, the
Company will need to consider other alternatives, including but not limited to,
a federal bankruptcy filing. Even if the Company does reach an agreement with
its creditors, the filing of a Chapter 11 case may become necessary to implement
the terms of such an agreement.  Assuming the Company is able to work out an
acceptable capital structure, its continuing viability will be dependent upon
its ability to generate sufficient operating cash flow or cash flow from other
sources to meet its obligations on a timely basis and to comply with the terms
of any new financing agreements or to be able to renegotiate such obligations
and terms.

     Statement of Cash Flows. For the six months ended July 1, 2001, net cash
used in operating activities was $4.8 million compared to net cash provided by
operating activities of $0.3 million for the same period in 2000. This change
was primarily due to the $21.0 million decline in cash received from customers,
franchisees and licensees net of cash paid to suppliers and employers and $1.2
million in restructuring costs, partially offset by a $17.2 million reduction in
interest paid. For the first six months of 2001, net cash used in investing
activities was $15.9 million compared to $5.9 million used in investing
activities for the same period in 2000. This change was primarily due to an
increase in restricted cash, net of $9.6 million. For the first six months of
2001, net cash used in financing activities was $0.6 million compared to $4.6
million provided by financing activities for the same period in 2000. During the
first six months of 2000, $4.1 million in proceeds from working capital
borrowings and $2.7 million in proceeds from equipment financing were received.

     EBITDA. For the first six months of 2001, the Company reported EBITDA
(defined as earnings (loss) before opening costs, loss (gain) on disposition of
properties, provision for divestitures, restructuring costs, interest, taxes,
and depreciation and amortization) of negative $418,000, compared to positive
$18.4 million in the same period of 2000. The $18.8 million decrease was
composed of (i) a $13.2 million decrease as the result of the sale of the El
Torito Division on June 28, 2000; (ii) a $2.1 million decrease in the Chi-Chi's
Division; (iii) a $1.3 million decrease in the Koo Koo Roo Division; and (iv)
$2.2 million of general and administrative expenses that were previously
allocated to the El Torito Division which have not been eliminated. As a result
of the sale of the El Torito Division, the Company will be operating at lower
EBITDA levels for the foreseeable future.

                                      -12-
<PAGE>

     During the second quarter of 2001, the Company announced plans for the sale
of its Hamburger Hamlet chain of restaurants.  There are currently 14 Hamburger
Hamlet restaurants operating in Southern California and the Washington, D.C.
area.  During the six months ended July 1, 2001, these restaurants had sales of
$16,588,000 and restaurant level cash flow of $2,600,000.

     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 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 normally operates with a working
capital deficiency because:

     .  restaurant operations are conducted primarily on a cash (and cash
        equivalent) basis with a low level of accounts receivable;

     .  rapid turnover allows a limited investment in inventories; and

     .  cash from sales is applied to the payment of related accounts payable
        for food, beverages and supplies which are generally purchased on trade
        credit terms.

     The Company had a working capital deficiency of $264.1 million on July 1,
2001.  This amount includes the classification of approximately $233.4 million
in debt outstanding under the FRI-MRD Notes and Prandium Notes as current.

     Credit Facility and Other Long-Term Debt.   On January 10, 1997, the
Company entered into the Foothill Credit Facility which called for a five-year,
$35 million credit facility to provide for the ongoing working capital needs of
the Company.  As a result of the acquisition of Koo Koo Roo, Inc. and The Hamlet
Group, Inc. ("Hamlet") on October 30, 1998, the Company increased the Foothill
Credit Facility to $55 million.  In connection with the El Torito Sale, (i) the
Company used a portion of the cash proceeds from the sale to repay $25.9 million
outstanding under the Foothill Credit Facility and (ii) the Foothill Credit
Facility was amended and restated to adjust all restrictive covenants to reflect
the El Torito Sale and reduce the credit facility to a maximum of $20 million
(subject to certain limitations) of letters of credit and revolving cash
borrowings.  The Foothill Credit Facility:

     .  is secured by substantially all of the real and personal property of the
        Company (other than the capital stock of Hamlet);

     .  contains covenants which restrict, among other things, the Company's
        ability to incur debt, pay dividends on or redeem capital stock, make
        certain types of investments, make dispositions of assets and engage in
        mergers and consolidations; and

     .  expires on January 10, 2002; however, if by October 2, 2001 the
        Company's senior and subordinated debt maturities for those issues that
        currently mature in 2002 are not

                                      -13-
<PAGE>

        extended by at least one year, then (i) any revolving borrowings must be
        repaid and (ii) letters of credit must be cash collateralized on October
        2, 2001.

     The Company was not in compliance with certain financial ratios at July 1,
2001, April 1, 2001 and December 31, 2000.   In addition, the vesting of the
FRI-MRD noteholders' right to accelerate the debt caused an Event of Default to
occur under the provisions of the Foothill Credit Facility.  The Company has
notified Foothill of all such Events of Default.  Letters of credit are issued
under the Foothill Credit Facility in large part to provide security for future
amounts payable under the Company's workers' compensation insurance program
([$11.3] million of letters of credit were outstanding as of August 10, 2001,
all of which were cash collateralized as described below).  No working capital
borrowings were outstanding as of August 10, 2001.

     After completion of the El Torito Sale, the Company continues to be highly
leveraged and has significant annual debt service requirements. During the
second half of fiscal 2000, the Company began considering various alternatives
to address its debt service requirements.  As a result of discussions and
deliberations among the Company and its legal and financial advisors, the
Company's subsidiary FRI-MRD elected not to pay the semi-annual interest
payments due January 31, 2001 and July 31, 2001 on the FRI-MRD Notes.  The
Company also elected not to pay the semi-annual interest payments due February
1, 2001 and August 1, 2001 on the Prandium Notes.  Under the terms of the note
agreements governing the FRI-MRD Notes and the indentures governing the Prandium
Notes, these non-payments became or, with respect to the payments due August 1,
2001, will become, "Events of Default" and the holders of all such debt have
become entitled to certain rights, including the right to accelerate the debt.
In addition, the vesting of the right (whether or not exercised) of the
noteholders to accelerate the debt caused an "Event of Default" to occur under
the Foothill Credit Facility and Foothill became entitled to certain additional
rights.

     Foothill, FRI-MRD and Chi-Chi's entered into a letter agreement as of March
29, 2001 whereby FRI-MRD and Chi-Chi's acknowledged certain specified events of
default and acknowledged that as a result of such events of default, Foothill
has no further obligation to make advances under the Foothill Credit Facility,
and Foothill agreed that, subject to certain conditions, it would forbear from
exercising its remedies relative to the events of default specified in the
letter agreement until May 15, 2001.  On May 15, 2001, Foothill, FRI-MRD and
Chi-Chi's entered into a subsequent letter agreement, whereby FRI-MRD and Chi-
Chi's acknowledged certain specified events of default and acknowledged that as
a result of such events of default, Foothill has no further obligation to make
advances under the Foothill Credit Facility.  In addition, pursuant to such
letter agreement, Foothill agreed that, subject to certain conditions, it would
forbear from exercising its remedies relative to the events of default specified
in the letter agreement until the earliest to occur of:  (i) June 15, 2001 (or
such later date as Foothill may designate in writing in its sole discretion);
and (ii) the occurrence of any Event of Default under the Foothill Credit
Facility (other than those defaults set forth in the letter agreement).  As a
condition to receiving Foothill's forbearance, on May 15, 2001, FRI-MRD paid a
forbearance fee in the amount of $100,000 and transferred $4,000,000 in cash to
be held as cash collateral and as additional security for the outstanding
letters of credit. On June 18, 2001, Foothill, FRI-MRD and Chi-Chi's entered
into a subsequent letter agreement effective as of June 15, 2001, whereby FRI-
MRD and Chi-Chi's acknowledged that certain specified events of default had
occurred and acknowledged that as a result of such events of default, Foothill
has no further obligation to make advances or otherwise extend credit under the
Foothill Credit Facility.  FRI-MRD and Chi-Chi's also agreed to cash
collateralize all letters of credit outstanding

                                      -14-
<PAGE>

under the Foothill Credit Facility in an amount equal to 105% of face value.
Foothill agreed that, subject to certain conditions, it would forbear from
exercising its remedies relative to the events of default specified in the
letter agreement until the earliest to occur of: (i) September 15, 2001 (or such
later date as Foothill may designate in writing in its sole discretion); and
(ii) the occurrence of any Event of Default under the Foothill Credit Facility
(other than those defaults set forth in, and certain future defaults
contemplated by, the letter agreement). As a condition to receiving Foothill's
forbearance, FRI-MRD transferred approximately $8,068,000 in cash to be held as
cash collateral and as additional security for the outstanding letters of credit
bringing the total amount held by Foothill for such purpose to approximately
$12,068,000. This amount is included in restricted cash on the Company's July 1,
2001 condensed consolidated balance sheet. Foothill further agreed to release
its liens on the real property of the Company and its subsidiaries pledged as
collateral under the Foothill Credit Facility. Foothill has also agreed to waive
any termination payment required under the Foothill Credit Facility in the event
of an acceptable refinancing thereof.

     The Company is currently negotiating with its creditors to reach agreement
on an acceptable capital restructuring of the Company and its subsidiaries.
There can be no assurances that the Company will be able to successfully reach
an agreement with its creditors or successfully resolve its capital structure.
In such an event, the Company's ability to continue to operate in the ordinary
course may be materially adversely affected.

      B. Capital Expenditures

     Net cash used in investing activities was $15.9 million for the first six
months of 2001, including $3.0 million used for capital expenditures, as
compared to net cash used in investing activities of $5.9 million for the same
period in 2000.  The change in net cash used in investing activities for the
first six months of 2001 was primarily due to an increase in restricted cash,
net of $9.6 million.

     Capital expenditures of up to approximately $8.4 million have been
identified for fiscal 2001.  In fiscal 2001, the Company  opened one new Koo Koo
Roo restaurant and anticipates expanding a new Koo Koo Roo menu test to up to
four restaurants.  Actual capital expenditures for 2001 will be dependent on the
availability of required funds.  During the first six months of 2001, total
capital expenditures were $3.0 million, which were used to construct a new Koo
Koo Roo in Woodland Hills, California and to repair and replace equipment in the
normal course of business.

Recent Accounting Pronouncements
--------------------------------

     In July 2001, the FASB issued Statement No.141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets."  Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001.  Statement 141 also specifies
criteria for intangible assets acquired in a purchase method business
combination to meet in order to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142.  Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance

                                      -15-
<PAGE>

with Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of."

     The Company is required to adopt the provisions of Statement 141
immediately and the provisions of Statement 142 effective January 1, 2002.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.

     Statement 141 will require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill.  Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations and make any
necessary amortization period adjustments by the end of the first interim period
after adoption.  In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period.  Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.

     In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption.  To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption.  The Company will then have up to six months from
the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount.  To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and the Company must perform the
second step of the transitional impairment test.  In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption.  This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption.  Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.

     As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $16,369,000 which will be subject to the transition
provisions of Statements 141 and 142.  Amortization expense related to goodwill
was $2,416,000 for the year ended December 31, 2000 and $111,000 and $222,000,
respectively, for the quarter and six months ended July 1, 2001.  Because of the
extensive effort needed to comply with adopting Statements 141 and 142, it is
not practicable to reasonably estimate the impact of adopting these Statements
on the Company's financial statements at the date of this report, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.

                                      -16-
<PAGE>

Results of Operations.
---------------------

     The Company's total sales of $74,528,000 for the second quarter of 2001
decreased by $63,327,000 or 45.9% as compared to the same period in 2000.  For
the first six months of 2001, total Company sales of $150,510,000 decreased by
$120,459,000 or 44.5% as compared to the same period in 2000.  These decreases
were the result of (i) the sale of the El Torito Division on June 28, 2000; (ii)
sales decreases for restaurants sold or closed, other than those included in the
sale of the El Torito Division; and (iii) declines in comparable restaurant
sales for Chi-Chi's, Koo Koo Roo and Hamburger Hamlet for the second quarter of
2001 and declines in comparable restaurant sales for Chi-Chi's and Koo Koo Roo,
partially offset by an increase in comparable restaurant sales for Hamburger
Hamlet, for the first six months of 2001, with all such decreases partially
offset by sales from new Koo Koo Roo restaurants.  The breakdown of the sales
decreases for the second quarter and first six months of 2001 is shown in the
following table:

<TABLE>
<CAPTION>
                                                                                   Change in
                                                                   Change in       First Six
                                                                Second Quarter       Months
                                                                  2001 Sales       2001 Sales
                                                                  ----------       ----------
                                                                       ($ in thousands)
<S>                                                             <C>                <C>
Decrease in Sales From the Sale of the El Torito Division          $(58,059)       $(111,500)
Decrease in Sales from Restaurants Sold or Closed Other Than
  Those Included in the Sale of the El Torito Division               (2,884)          (6,085)
Net Decrease in Sales of Comparable Restaurants                      (3,109)          (4,116)
Sales from New Restaurants                                              725            1,242
                                                                   --------        ---------
     Total                                                         $(63,327)       $(120,459)
                                                                   ========        =========
</TABLE>

     Overall, sales for comparable restaurants were $71,903,000 for the second
quarter of 2001, a $3,109,000 or 4.1% decline from the same period in 2000.
For the first six months of 2001, sales of comparable restaurants of
$145,268,000 decreased by $4,116,000 or 2.8% as compared to the same period in
2000.  As shown in the following table, these declines resulted from decreased
sales in comparable Chi-Chi's, Koo Koo Roo and Hamburger Hamlet restaurants for
the second quarter of 2001 and from decreased sales in comparable Chi-Chi's and
comparable Koo Koo Roo restaurants, partially offset by increased sales in
comparable Hamburger Hamlet restaurants, for the first six months of 2001.

<TABLE>
<CAPTION>
                                                           Change in First Six
                                      Change in Second     -------------------
                                     Quarter 2001 Sales     Months 2001 Sales
                                     ------------------     -----------------
                                     Amount     Percent     Amount     Percent
                                     ------     -------     ------     -------
                                                 ($ in thousands)
     <S>                            <C>         <C>         <C>        <C>
     Comparable Chi-Chi's           $(1,884)     (3.5)%    $(2,266)     (2.1)%
     Comparable Koo Koo Roo          (1,124)     (9.2)      (1,897)     (7.7)
     Comparable Hamburger Hamlet       (101)     (1.2)          47       0.3
                                    -------                -------
                Total               $(3,109)     (4.1)%    $(4,116)     (2.8)%
                                    =======     =====      =======     =====
</TABLE>

                                      -17-
<PAGE>

     Sales for comparable Chi-Chi's restaurants declined 3.5% in the second
quarter of 2001 compared to the same period in 2000.  The major promotion during
the second quarter was Fantastic Fajitas starting at $9.99.  This promotion ran
from April 23 through June 10 and was supported by broadcast media for six weeks
toward the beginning of the campaign, as well as in-store merchandising.  The
average food check increased during this promotion by 91c.  A free-standing
newspaper insert with coupons valid from June 17 through July 31 focused on the
lunch meal occasion and carry-out.  Cinco de Mayo celebrations resulted in
average per restaurant sales gains of approximately 11% for the day.

     During the second quarter of 2001, sales of comparable Koo Koo Roo
restaurants were 9.2% lower than the same period in 2000.  Koo Koo Roo continues
to test and refine new menu items that may have an appeal to a broader audience.
Second quarter 2001 comparable sales for Hamburger Hamlet were 1.2% lower than
the second quarter of 2000.  However, for the first six months of 2001,
Hamburger Hamlet comparable sales were 0.3% higher than 2000.  Second quarter
menu introductions were (i) the Spring Hamlet At Night menu featuring Thai
Chicken, Blackened Mahi Mahi served with rice pilaf and the Sizzlin' Fajita
Combo Platter that included grilled shrimp, steak and chicken fajitas; (ii) one
new appetizer, Asian Pacific Lettuce Wraps; and (iii) one new dessert, the
Caramel Banana Sundae in a margarita glass.  All introductions were supported by
print advertising and in-store merchandising.

     In the following discussion of the Company's operating results, one of the
major components of the variance of 2001 versus 2000 was the El Torito Sale.
Reported results for  2001 included no operations for El Torito, while results
for 2000 included a full second quarter and six months of operations for El
Torito.  Therefore, when the discussion references the impact of the El Torito
Sale, the impact to which it refers is this absence of the El Torito restaurant
division's operating results in 2001.

     Product costs of $19,846,000 for the second quarter of 2001 decreased
$16,428,000 or 45.3% compared to the same period in 2000.  For the first six
months of 2001, product costs of $40,307,000 decreased by $30,047,000 or 42.7%
as compared to the same period in 2000.  Product costs as a percentage of sales
for the second quarter of 2001 increased 0.3% points from 26.3% in 2000 to 26.6%
in 2001.  For the first six months of 2001, product costs as a percentage of
sales increased 0.8% points from 26.0% in 2000 to 26.8% in 2001.  The sale of
the El Torito Division accounted for $14,574,000 (88.7%) and $27,427,000 (91.3%)
of the decreases, respectively. The remainder of the product costs decreases
were related to the sales declines from comparable and closed restaurants and
favorable cheese prices, particularly in the first quarter of 2001.  If the
results of the El Torito Division were excluded from 2000, product costs as a
percentage of sales decreased 0.6% points, from 27.2% to 26.6% for the second
quarter of 2001 and 0.1% point, from 26.9% to 26.8% for the first six months of
2001.

     Payroll and related costs of $26,509,000 decreased $22,323,000 or 45.7% for
the second quarter of 2001 as compared to the second quarter of 2000.  For the
first six months of 2001, payroll and related costs of $54,116,000 decreased
$41,900,000 or 43.6% as compared to the same period in 2000.  As a percentage of
sales, payroll and related costs were 35.6% in the second quarter of 2001, 0.2%
points higher than the same period in 2000.  For the first six months of 2001,
payroll and related costs were 36.0% of sales, 0.6% points higher than the same
period in 2000.  The sale of the El Torito Division accounted for $20,059,000
(89.9%) and $38,790,000 (92.6%) of the total

                                      -18-
<PAGE>

variances, respectively, and 0.1% point of both the second quarter and first six
months variances related to payroll and related costs as a percentage of sales.
The remainder of the payroll and related costs decreases were related to the
sales declines from comparable and closed restaurants. The primary component of
the remaining increases as a percentage of sales was increased claims expense in
employee health insurance.

     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. In October 2000, the California
Industrial Welfare Commission voted to increase the state's minimum wage by 50c
to $6.25 on January 1, 2001 with another 50c increase to occur on January 1,
2002.  No increases to the $5.15 Federal minimum wage are currently scheduled
for 2001.  In response to previous minimum wage increases, the Company has
implemented various menu price increases, and each of the Company's concepts
raised prices in early 2001.

     Occupancy and other operating expenses were $22,402,000 for the second
quarter of 2001, $13,235,000 or 37.1% lower than the same period in 2000.  For
the first six months of 2001, occupancy and other operating expenses of
$44,790,000 decreased by $25,906,000 or 36.6% as compared to the same period in
2000. As a percentage of sales, occupancy and other operating expenses were
30.1% in the second quarter of 2001, 4.2% points higher than the same period in
2000.  For the first six months of 2001, occupancy and other operating expenses
were 29.8% as a percentage of sales, 3.7% points higher than the same period in
2000.  The sale of the El Torito Division contributed $13,040,000  (98.5%) and
$26,492,000 (102.3%) of the respective variances and 2.4% points and 1.6% points
of the respective percentage of sales variances.  The remainder of the variances
were primarily related to (i) utilities expense, particularly natural gas for
Chi-Chi's; (ii) the expense associated with two system-wide menu distributions
and added plateware in Chi-Chi's; and (iii) added advertising expense in both
Chi-Chi's and Koo Koo Roo.  In order to offset the impact of the increasing cost
of utilities, Chi-Chi's charged a temporary energy surcharge of 25c per entree
from July 2, 2001 to July 28, 2001 and Koo Koo Roo instituted a menu price
increase on July 3, 2001.

     Depreciation and amortization of $3,900,000 for the second quarter of 2001
decreased by $3,050,000 or 43.9% as compared to the same period in 2000.  For
the first six months of 2001, depreciation and amortization of $8,077,000
decreased by $5,973,000 or 42.5% as compared to the same period in 2000.  These
decreases were primarily due to the El Torito Sale which accounts for $2,576,000
(84.5%) and $5,291,000 (88.6%) of the decreases, respectively.

     General and administrative expenses for the second quarter of 2001 were
$5,842,000, $1,851,000 or 24.1% lower than the same period in 2000.  For the
first six months of 2001, general and administrative expenses were $11,715,000,
$3,761,000 or 24.3% lower than the first six months of 2000.  As a percentage of
sales, general and administrative expenses were 7.8% in both the second quarter
and the first six months of 2001, 2.2% and 2.1% points higher than the same
periods in 2000, respectively.  The sale of the El Torito Division accounted for
$2,738,000 or 147.9% of the second quarter variance and $5,553,000 or 147.6% of
the first six months variance, offset by approximately

                                      -19-
<PAGE>

$1.0 million in the second quarter of 2001 and $2.2 million in the first six
months of 2001 of certain general and administrative expenses which were
previously allocated to the El Torito Division and have not been eliminated.
This is in spite of the elimination of over 100 positions in the Company's
support center since the end of 1999. Approximately 40 additional positions will
be phased out by the end of the third quarter of 2001 in connection with the
Company's recently announced organizational restructuring.

     Opening costs of $57,000 in the second quarter of 2001 increased $42,000 or
280.0% from 2000 and opening costs of $107,000 in the first six months of 2001
increased $21,000 or 24.4% from 2000 as the Company opened one new Koo Koo Roo
restaurant in Woodland Hills, California and began a test of a new, expanded
menu in certain restaurants.  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.

     The Company reported a loss on disposition of properties of $369,000 in the
second quarter of 2001 as compared to a loss of $566,000 for the second quarter
in 2000.  For the first six months of 2001, the Company reported a loss on
disposition of properties of $771,000 as compared to a loss on disposition of
properties of $454,000 for the same period in 2000.  In addition, the Company
recorded a $189,000 provision for divestitures in the first quarter of 2001
which represents severance costs for the KKR Strategic Divestment Program.

     The Company reported restructuring costs of $2,057,000 in the second
quarter of 2001 and $2,553,000 in the first six months of 2001.  These costs are
primarily related to amounts paid to legal and financial advisors in connection
with the Company's proposed debt restructuring and accrued severance and related
costs due to the announced organizational restructuring designed to centralize
certain divisional functions, reduce corporate support center costs and gain
efficiencies for the Company going forward.

     Interest expense, net for the second quarter of 2001 of $7,066,000
decreased by $1,517,000 or 17.7% as compared to the same period in 2000. For the
first six months of 2001, interest expense, net of $13,712,000 decreased by
$3,437,000 or 20.0% as compared to the same period in 2000.  These decreases are
primarily the result of no working capital borrowings required during the first
six months of 2001 and increased interest income on invested cash balances.

Seasonality.
-----------

     The Company, as a whole, does not experience significant seasonal
fluctuations in sales.   However, the Company's sales tend to be slightly
greater during the spring and summer months.


Selected Division Operating Data.
--------------------------------

     The following table sets forth certain information regarding (i) the
Company; (ii) its ongoing Chi-Chi's restaurant division, Koo Koo Roo restaurant
division and other operating restaurants; and (iii) the El Torito restaurant
division divested on June 28, 2000. At July 1, 2001, the Company's Chi-Chi's
restaurant division operated 139 full-service restaurants, the Company's Koo Koo
Roo

                                      -20-
<PAGE>

restaurant division operated 52 fast-casual and full-service restaurants and
the Company also operated three other restaurants for a total of 194.

                                      -21-
<PAGE>
<TABLE>
<CAPTION>
                                                                                For the Quarters Ended
                                                                   ---------------------------------------------------
                                                                     July 1,          June 25,          June 27,
                                                                      2001              2000              1999
                                                                   ----------------------------------------------------
                                                                       ($ in thousands, except average check amount)
<S>                                                                <C>               <C>                 <C>
Chi-Chi's Restaurant Division
-----------------------------
Restaurants Open at End of Period:
      Owned/operated                                                       139                143                  154
      Franchised and Licensed                                               13                 13                   13
Sales                                                              $    52,602       $     55,916        $      58,927
Restaurant Level Cashflow (a)                                            3,734              3,882                6,278
Divisional EBITDA (b)                                                      528%               579%               2,415%
Percentage increase (decrease) in comparable restaurant sales             (3.5)               0.3                  1.3
Average check (excluding alcoholic beverage sales)                 $     10.90       $       9.62        $        9.41

Koo Koo Roo Restaurant Division (c)
-----------------------------------
Restaurants Open at End of Period:
      Owned/operated                                                        52                 57                   56
      Franchised and Licensed                                                -                  -                    3
Sales                                                              $    20,642       $     22,117        $      22,714
Restaurant Level Cashflow (a)                                            1,960              2,725                2,949
Divisional EBITDA (b)                                                      456              1,191                1,429
Percentage decrease in comparable restaurant sales                        (6.0)%             (3.8)%               N.A.
Average check (Koo Koo Roo restaurants only)                       $      9.62       $       9.26        $        9.06

Other Operating Restaurants
---------------------------
Restaurants Open at End of Period:
      Owned/operated                                                         3                  6                    5
      Franchised and Licensed                                                -                  -                    -
Sales                                                              $     1,284       $      1,763        $       1,466
Restaurant Level Cashflow (a)                                               77                119                   45
Divisional EBITDA (b)                                                     (997)                54                  (55)

Ongoing Operations
------------------
Restaurants Open at End of Period:
      Owned/operated                                                       194                206                  215
      Franchised and Licensed                                               13                 13                   16
Sales                                                              $    74,528       $     79,796        $      83,107
Restaurant Level Cashflow (a)                                            5,771              6,726                9,272
Divisional EBITDA (b)                                                      (13)             1,824                3,789

Divested Operations (d)
-----------------------
Restaurants Open at End of Period:
      Owned/operated                                                         -                 95                   93
      Franchised and Licensed                                                -                 11                    9
Sales                                                              $         -       $     58,059        $      57,208
Restaurant Level Cashflow (a)                                                -             10,386               10,231
Divisional EBITDA (b)                                                        -              7,648                7,569

Total Company
-------------
Restaurants Open at End of Period:
      Owned/operated                                                       194                301                  308
      Franchised and Licensed                                               13                 24                   25
Sales                                                              $    74,528       $    137,855        $     140,315
EBITDA (e)                                                                 (71)             9,419               11,270

<CAPTION>
                                                                                For the Six Months Ended
                                                                   ---------------------------------------------------
                                                                     July 1,          June 25,          June 27,
                                                                      2001              2000              1999
                                                                   ---------------------------------------------------
<S>                                                                <C>               <C>                  <C>
Chi-Chi's Restaurant Division
-----------------------------
Restaurants Open at End of Period:
      Owned/operated                                                       139                143                  154
      Franchised and Licensed                                               13                 13                   13
Sales                                                              $   106,059       $    111,855        $     117,705
Restaurant Level Cashflow (a)                                            7,215              9,571               10,899
Divisional EBITDA (b)                                                      857              2,965                3,419
Percentage increase (decrease) in comparable restaurant sales             (2.1)%              0.7%                 1.2%
Average check (excluding alcoholic beverage sales)                 $     10.85       $       9.70        $        9.14

Koo Koo  Roo Restaurant  Division (c)
-------------------------------------
Restaurants Open at End of Period:
      Owned/operated                                                        52                 57                   56
      Franchised and Licensed                                                -                  -                    3
Sales                                                              $    41,868       $     44,117        $      44,768
Restaurant Level Cashflow (a)                                            4,034              5,368                5,560
Divisional EBITDA (b)                                                      996              2,294                2,651
Percentage decrease in comparable restaurant sales                        (4.5)%             (2.8)%               N.A.
Average check (Koo Koo Roo restaurants only)                       $      9.69       $       9.23        $        8.90

Other Operating Restaurants
---------------------------
Restaurants Open at End of Period:
      Owned/operated                                                         3                  6                    5
      Franchised and Licensed                                                -                  -                    -
Sales                                                              $     2,583       $      3,497        $       2,671
Restaurant Level Cashflow (a)                                               48                173                  173
Divisional EBITDA (b)                                                   (2,189)                38                  (22)

Ongoing Operations
------------------
Restaurants Open at End of Period:
      Owned/operated                                                       194                206                  215
      Franchised and Licensed                                               13                 13                   16
Sales                                                              $   150,510       $    159,469        $     165,144
Restaurant Level Cashflow (a)                                           11,297             15,112               16,632
Divisional EBITDA (b)                                                     (336)             5,297                6,048

Divested Operations (d)
-----------------------
Restaurants Open at End of Period:
      Owned/operated                                                         -                 95                   93
      Franchised and Licensed                                                -                 11                    9
Sales                                                              $         -       $    111,500        $     109,429
Restaurant Level Cashflow (a)                                                -             18,791               18,325
Divisional EBITDA (b)                                                        -             13,238               12,152

Total Company
-------------
Restaurants Open at End of Period:
      Owned/operated                                                       194                301                  308
      Franchised and Licensed                                               13                 24                   25
Sales                                                              $   150,510       $    270,969        $     274,573
EBITDA (e)                                                                (418)            18,427               18,086
</TABLE>

(a)   Restaurant Level Cashflow with respect to any operating division
      represents Divisional EBITDA (as defined below) before general and
      administrative expenses and any net franchise profit or miscellaneous
      income (expense) reported by the respective division.
(b)   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. Corporate
      general and administrative expenses that would have been allocated to the
      El Torito Division prior to the sale of that division are being charged to
      Other Operating Restaurants in 2001 so as not to distort the year-over-
      year comparisons of the Chi-Chi's and Koo Koo Roo Restaurant Divisions.
(c)   Includes both Koo Koo Roo and Hamburger Hamlet restaurant operations which
      were acquired on October 30, 1998.
(d)   Divested Operations represents the results of the El Torito Division until
      it was divested on June 28, 2000.
(e)   EBITDA is defined as earnings (loss) before opening costs, gain (loss) on
      disposition of properties, gain on sale of division, provision for
      divestitures and write-down of long-lived assets, restructuring costs,
      interest, taxes, depreciation and amortization and extraordinary items.
      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.


                                     -22-
<PAGE>

Item 3.   Quantitive and Qualitative Disclosure about Market Risk
------

Interest Rate Risk
------------------

     The Company's primary exposure to financial market risks is the impact that
interest rate changes could have on the Foothill Credit Facility, under which no
working capital borrowings were outstanding as of August 10, 2001.  Borrowings
under the Foothill Credit Facility bear interest at the prime rate as announced
by Wells Fargo Bank plus 1.875% for borrowings less than or equal to $10 million
and at the prime rate plus 2.875% for borrowings greater than $10 million.

                                      -23-
<PAGE>

                          PART II.  OTHER INFORMATION
                          ---------------------------

Item 1.   Legal Proceedings
------

     On January 26, 2001, a purported stockholder of the Company initiated a
stockholder derivative suit against the Company and Mr. Relyea, in the Superior
Court of the State of California for the County of Orange, seeking, among other
things, compensatory damages, a constructive trust, punitive damages and
attorneys' fees.  The suit arises out of the sale by AIF II, L.P. on December
29, 2000, of  95,831,997 shares of the Company's common stock to Mr. Relyea for
a cash purchase price of $15,000.  Mr. Relyea is the Company's Chief Executive
Officer, President and Chairman of the Board of Directors.  The suit alleges
that Mr. Relyea improperly usurped the stock purchase opportunity from the
Company and also alleges constructive fraud.  The Company and Mr. Relyea deny
any wrongdoing or impropriety and intend to defend the suit vigorously on the
grounds, among others, that the purchase of stock was not a corporate
opportunity.

     On February 13, 2001, a similar stockholder derivative suit was filed in
the Superior Court of the State of California for the County of Orange by
another purported stockholder against the Company and Mr. Relyea.  This suit
arose out of the same set of facts as the suit filed on January 26, 2001 and
sought similar damages and fees.  On April 25, 2001, the court ruled that the
two cases are related and would proceed before the same judge.  However, on June
28, 2001, the court in the case filed on February 13, 2001 granted the
plaintiff's request to dismiss his complaint without prejudice.

     The Company is involved in various other 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
------

     The Company has failed to pay the interest that came due February 1, 2001
and August 1, 2001 with respect to the Prandium Notes. Under the terms of the
Prandium Notes, the grace period for the payment of interest due February 1,
2001 has expired, and the grace period for the payment of interest due August 1,
2001 will expire on August 31, 2001. The Company does not expect to pay this
installment of interest within the grace period, so this non-payment of interest
will mature into another Event of Default. In addition, the Company's subsidiary
FRI-MRD Corporation has failed to pay the interest due January 31, 2001 and July
31, 2001 with respect to the FRI-MRD Notes. Under the terms of the FRI-MRD
Notes, the grace periods for the payment of interest due January 31, 2001 and
July 31, 2001 have expired. Under the terms of the note agreements governing the
FRI-MRD Notes and the indentures governing the Prandium Notes, these non-
payments became or, upon the expiration of the applicable grace period, will
become, "Events of Default" and the holders of all such debt have become
entitled to certain rights, including the right to accelerate the debt. The
unpaid principal amount on the FRI-MRD Notes as of May 16, 2001 amounted to

                                      -24-
<PAGE>

$99,000,000 and the amount of interest due and not paid on the FRI-MRD Notes as
of  August 15, 2001 amounted to $15,219,000.  The unpaid principal amount on the
Prandium Notes as of August 15, 2001 amounted to $134,356,000 and the amount of
interest due and not paid on the Prandium Notes as of August 15, 2001 amounted
to $13,970,000.  The Company's ability to cure these Events of Default will
depend on a successful capital restructuring of the Company and its
subsidiaries.

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

          2  (a)  Agreement and Plan of Merger, dated as of June 9, 1998 by and
                  among the Company, Fri-Sub, Inc. and Koo Koo Roo, Inc. (Filed
                  as Exhibit 2.1 to the Company's Form S-4 filed with the SEC on
                  July 1, 1998.)

          2  (b)  Stock Purchase Agreement dated as of March 27, 2000, by and
                  among the Company, FRI-MRD Corporation and Acapulco
                  Acquisition Corp. (Filed as Exhibit 2(b) to the Company's Form
                  10-K filed with the SEC on March 29, 2000.)

          2  (c)  Amendment No. 1 to Stock Purchase Agreement dated as of June
                  28, 2000, by and among the Company, FRI-MRD Corporation and
                  Acapulco Acquisition Corp. (Filed as Exhibit 2.2 to the
                  Company's Form 8-K filed with the SEC on July 5, 2000.)

          3  (a)  Sixth Restated Certificate of Incorporation of the Company.
                  (Filed as Exhibit 3(a) to the Company's Form 10-Q filed with
                  the SEC on May 12, 1999.)

          3  (b)  Second Amended and Restated Bylaws of the Company. (Filed as
                  Exhibit 3(c) to the Company's Form 10-K filed with the SEC on
                  March 29, 1999.)

          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

                                      -25-
<PAGE>

                  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.)

          4  (g)  First Amendment dated as of June 9, 1998 to the Note Agreement
                  dated August 12, 1997. (Filed as Exhibit 4.7 to the Company's
                  Form S-4 filed with the SEC on July 1, 1998.)

          4  (h)  Note Agreement dated as of June 9, 1998 Re: $24,000,000 FRI-
                  MRD Corporation Senior Secured Discount Notes due January 24,
                  2002. (Filed as Exhibit 4.8 to the Company's Form S-4 filed
                  with the SEC on July 1, 1998.)

          4  (i)  First Amendment dated as of October 30, 1998 to the Note
                  Agreement dated as of June 9, 1998. (Filed as Exhibit 4(i) to
                  the Company's Form 10-Q filed with the SEC on November 12,
                  1998.)

          4  (j)  Waiver dated as of January 29, 1999 to the Note Agreements
                  dated as of August 12, 1997 and June 9, 1998. (Filed as
                  Exhibit 4(j) to the Company's Form 10-K filed with the SEC on
                  March 29, 1999.)

          10 (a)  Letter Agreement as of March 29, 2001 by and among Foothill
                  Capital Corporation, FRI-MRD Corporation and Chi-Chi's, Inc.
                  (Filed as Exhibit 10 (x) to the Company's Form 10-K filed with
                  the SEC on April 2, 2001.)

                                      -26-
<PAGE>

          10 (b)  Letter Agreement as of May 15, 2001 by and among Foothill
                  Capital Corporation, FRI-MRD Corporation and Chi-Chi's, Inc.
                  (Filed as Exhibit 10 (b) to the Company's Form 10-Q filed with
                  the SEC on May 16, 2001.)

          10 (c)  Letter Agreement effective as of June 15, 2001 by and among
                  Foothill Capital Corporation, FRI-MRD Corporation and Chi-
                  Chi's, Inc. (Filed as Exhibit 99.1 to the Company's Form 8-K
                  filed with the SEC on June 20, 2001.)

     (b)  Reports on Form 8-K.

          On June 20, 2001, the Company filed a report on Form 8-K announcing
          that certain of its subsidiaries had signed a letter agreement with
          Foothill Capital Corporation.

                                      -27-
<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.


                              Prandium, Inc.
                              (Registrant)


                              By: /S/ Robert T. Trebing, Jr.
                                  --------------------------
                                    Robert T. Trebing, Jr.
                                  Executive Vice President and
                                    Chief Financial Officer
                                  (Duly Authorized Officer and
                                   Principal Financial Officer)

Date:  August 15, 2001

                                      -28-