UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D. C. 20549
                                 
                                 
                             FORM 10-K

(Mark One)
                                 
[X]  Annual report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934 for the fiscal year ended
     December 29, 1996
                                 

[ ]  Transition report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934


                 Commission File Number:  0-20716


                         TACO CABANA, INC.

      (Exact name of registrant as specified in its charter)

            DELAWARE                       74-2201241
(State or other jurisdiction of         (I.R.S. Employer
 incorporation or organization)      Identification Number)

                   8918 Tesoro Drive, Suite 200
                    San Antonio, Texas   78217
   (Address of principal executive offices, including ZIP Code)
                                 
                  Telephone Number (210) 804-0990
       (Registrant's telephone number, including area code)

    Securities Registered Pursuant to Section 12(b) of the Act:
     
  Title of Each Class        Name of Exchange on Which Registered
            None                            None
     
      Securities Registered Pursuant to Section 12(g) of the
                               Act:
     
                        Title of Each Class
                   Common Stock, $0.01 par value
                                 
                                 
      Indicate  by check mark whether the Registrant (1) has  filed
all  reports  required to be filed by Section 13 or  15(d)  of  the
Securities Exchange Act of 1934 during the preceding 12 months  (or
for  such shorter period that the registrant was required  to  file
such reports), and (2) has been subject to such filing requirements
for the past 90 days:  Yes   X  No
     
     Indicate  by  check mark if disclosure of  delinquent  filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will  not  be contained, to the best of Registrant's knowledge,  in
definitive   proxy  or  information  statements   incorporated   by
reference  in Part III of this Form 10-K or any amendment  to  this
Form 10-K.    X
    
     As  of  February 28, 1997, the aggregate market value of  the
voting stock held by non-affiliates of the Registrant, based on the
last sale price of the Common Stock of the Registrant as quoted  on
the  NASDAQ  National was $58,377,034 (for purposes of  calculating
this amount, only directors, officers, and beneficial owners of  5%
or  more  of  the capital stock of the Registrant have been  deemed
affiliates).
   
     The  number  of shares of the Common Stock of the  Registrant
outstanding as of February 28, 1997 was 15,706,537.


                                 
                                 
                          FORM 10-K INDEX

                             PART I


ITEM 1.   BUSINESS                                                  3

ITEM 2.   PROPERTIES                                                9

ITEM 3.   LEGAL PROCEEDINGS                                        10

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS      10

                            PART II

ITEM 5.   MARKET  FOR  REGISTRANT'S COMMON STOCK  AND  RELATED
          STOCKHOLDER MATTERS                                      11

ITEM 6.   SELECTED FINANCIAL DATA                                  13

ITEM 7.   MANAGEMENT'S  DISCUSSION AND ANALYSIS  OF  FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS                      14

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA              23

ITEM 9.   CHANGES  IN  AND  DISAGREEMENTS WITH ACCOUNTANTS  ON
          ACCOUNTING AND FINANCIAL DISCLOSURE                      23

                            PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT      24

ITEM 11.  EXECUTIVE COMPENSATION                                  26

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND
          MANAGEMENT                                              31

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS          33

                            PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND  REPORTS
          ON FORM 8-K                                             34





                             PART I


ITEM 1.   BUSINESS

General

      Taco  Cabana,  Inc., a Delaware corporation (the  "Company"),
pioneered  the Mexican patio cafe concept with its first restaurant
in  1978  and,  as of December 29, 1996, operates and franchises  a
total  of 121 such restaurants system-wide.  Of these, the  Company
owns and operates 96 Taco Cabana restaurants, two free-standing Two
Pesos  restaurants, and four mall-unit Two Pesos restaurants.   The
Company  also owns and operates two Mexican patio cafes  under  the
Sombrero  Rosa name.  Subsequent to year end, the Company converted
two  of the mall-unit Two Pesos and one  Sombrero Rosa to the  Taco
Cabana  name.   Franchisees  of the Company  own  and  operate  the
remaining  17  Taco Cabana restaurants.  The Company's  restaurants
(including franchises) are located primarily in Texas, and are also
located in Arizona, Colorado, Georgia, Indiana, New Mexico, Nevada,
and Oklahoma.

      Taco  Cabana restaurants feature generous portions of  fresh,
premium  quality Tex-Mex and traditional Mexican style food  at  an
exceptional value.  The restaurants provide interior, semi-enclosed
and  patio  dining areas with a festive Mexican theme.  Menu  items
include  flame-grilled beef and chicken fajitas served on  sizzling
iron   skillets,  "Chicken  Flameante"TM  (a  marinated  rotisserie
chicken),   quesadillas,    traditional   Mexican   and    American
breakfasts,  other Tex-Mex dishes, fresh, hot flour tortillas,  and
lighter  items such as a variety of salad entrees.  Unlike many  of
its  competitors, the Company makes most menu items fresh daily  in
each of its restaurants.

Taco Cabana Food and Pricing Philosophy

      The  Company  is committed to selling premium food  which  it
believes  to  be  among the highest quality of  any  chain  in  the
restaurant industry.  This process begins with the selection of the
freshest  available  ingredients.  The  Company's  menu  items  are
prepared  strictly  in  accordance with authentic  and  well-tested
recipes.   Taco Cabana restaurants also offer a variety of beverage
choices,   including  margaritas  and  beer.   Alcoholic  beverages
currently account for approximately 5% of gross sales.

      The  Ingredients.  The Company has implemented  a  purchasing
program  structured to ensure that all of the ingredients  used  in
the  preparation of the Taco Cabana menu items are of  the  highest
quality. The Company regularly inspects its vendors to ensure  both
that  the  products  purchased  by  the  Company  conform  to   its
standards, and that the prices offered are competitive.  The   meat
used   in  making  fajitas  as  well  as  certain  other  principal
ingredients  are  purchased  through  supply  contracts  to  ensure
availability and minimize the risks of price fluctuation.

      The  Preparation.  The menu items offered at any Taco  Cabana
restaurant  are  prepared at that restaurant from  fresh  meat  and
produce  ingredients delivered by suppliers at  least  three  times
each  week  to  each  restaurant.   The  Company  is  committed  to
differentiating  itself  from  sit-down  Mexican  and   fast   food
restaurants,  which  management  believes  offers  a  substantially
greater  number of items that are either pre-prepared, pre-packaged
or frozen.

      Pricing Philosophy.  The Company offers value by pricing  its
menu  items  below the price of comparable menu items  in  sit-down
Mexican  restaurants.   Although Taco Cabana's  food  costs  (as  a
percentage of sales) are generally higher than fast food chains  as
a  result  of the premium quality of ingredients used, the  Company
believes  that  this  point of differentiation contributes  to  the
achievement  of  average unit volumes in excess of most  fast  food
restaurants.


Taco Cabana Restaurants

       Restaurant   Layout.    Taco  Cabana   restaurants   average
approximately  3,200 square feet (exclusive of the exterior  dining
area)  and  provide  seating for approximately 80  customers,  with
additional patio seating for approximately 50 customers.

     Taco Cabana restaurants are typically a vivid pink color (with
painted  and  neon accents), conveying a distinctive Mexican  theme
and  permitting easy identification by passing motorists.   Inside,
exposed  elements  of  the kitchen display the  freshness  of  Taco
Cabana's  food  and  the  authenticity of  its  preparation.   Taco
Cabana's  restaurant  design  enables customers  to  observe  fresh
fajitas  cooking on a charcoal grill, a machine making  fresh,  hot
flour  tortillas,  Chicken FlameanteTM rotating on  spits  and  the
preparation  of other food items.  Upon entry, the customer  places
an  order  selected from an overhead menu board,  proceeds  down  a
service  line  to where the order is picked up, and then  passes  a
Salsa  Bar en route to the dining area.  The distinctive Salsa  Bar
offers  Taco  Cabana customers freshly prepared, authentic  Tex-Mex
ingredients  such as Salsa de Fuego (made with charred peppers  and
tomatoes),  pico  de  gallo  and salsa  (all  "made  from  scratch"
throughout  the  day  at  each restaurant), and  cilantro,  pickled
jalapeno  slices,  crisp chopped onions, and  fresh  sliced  limes.
According  to the season, time of day and personal preference,  the
customer  may  choose  to dine either in the restaurant's  brightly
colored  and  festive interior dining area or the semi-enclosed  or
outdoor  patio areas.  The addition of traditional and contemporary
Latin   music,  tropical  landscaping,  and  authentic   decorative
artifacts  create an overall dining environment which  the  Company
believes  is  both  attractive  and  festive.   Most  Taco   Cabana
restaurants also offer drive-thru service.

      During  November  1996, the Company opened  a  new  prototype
restaurant  in the Dallas market, which  incorporates  several  new
and  different  features that set it apart from  the  current  Taco
Cabana  restaurant  design.  The new prototype features  a  rounded
front, as well as Southwest accents such as a clay tile roof, heavy
wood  beams and a trellis that shades the patio area, and adds  the
use  of  bright colors outside and inside, including colored tiles,
doors,  windows, and awnings.  Corrugated metal wall  panels,  aged
wood  finishes,  and distressed stainless steel  counter  tops  are
featured  inside,  all of which are intended to  replicate  an  old
Mexican  cafe.   Bright  neon  on  the  exterior  of  the  building
broadcasts  the unique menu items served at Taco Cabana.   Favorite
features retained from the original Taco Cabana restaurants include
working  garage doors that open up the dining area to  the  outside
when  weather permits, display cooking where the guest can see  the
food  being  prepared, liberal use of the Taco  Cabana's  signature
pink color, and the self-serve fresh Salsa Bar.  The prototype  was
designed  to reduce overall construction costs, improve  functional
efficiency,  allow for better guest service, and  to  enhance  Taco
Cabana's unique patio cafe image.

      Restaurant  Locations.  The following table  sets  forth  the
number  of restaurants as of December 29, 1996 by area of  dominant
influence ("ADI") for television and radio advertising:

                            Company-   Franchised(1)   Total
                             Owned          
   ADI*                                                 
   Houston                    30 (2)        0          30
   San Antonio                29 (3)        0          29
   Austin                     13            0          13
   Dallas/Fort Worth          12            0          12
   Denver, Colorado            7            0           7
   El Paso                     7            0           7
   Rio Grande Valley           2            0           2
   Phoenix, Arizona            2 (4)        0           2
   Lubbock                     2            0           2
   Tyler                       0            1 (6)       1
   Atlanta, Georgia            0            3 (5)(7)    3
   Bryan/College Station       0            2           2
   Las Vegas, Nevada           0            1           1
   Tulsa, Oklahoma             0            1           1
   Waco                        0            1           1
   Albuquerque, New Mexico     0            2           2
   Amarillo                    0            2           2
   Eagle Pass                  0            1           1
   Corpus Christi              0            1           1
   Ft. Wayne, Indiana          0            1           1
   Killeen                     0            1           1
                                                                               
        Total                104           17         121
                             ===          ===         ===                     




*   All  of  the  ADIs  are located in Texas  except  as  otherwise
    indicated.


(1)  Represents franchised Taco Cabana restaurants, except as
     otherwise indicated.  Does not include licensed Two Pesos
     franchises
(2)  Includes four mall-unit Two Pesos restaurants
(3)  Includes two Sombrero Rosa restaurants
(4)  Represents free-standing Two Pesos restaurants
(5)  Represents a joint-venture
(6)  Restaurant was closed subsequent to year end
(7)  Two of the three restaurants were closed subsequent to year
     end



Customer Convenience

      The  Company operates its restaurants to enable customers  to
dine-in   or  take-out,  as  they  choose.   In  most  cases,   the
restaurants  also  provide the convenience  of  drive-thru  windows
which,  in  the  aggregate, account for approximately  38%  of  the
Company's sales.  A majority of the restaurants are open 24 hours a
day.  This strategy is continually evaluated for economic viability
on a restaurant by restaurant basis.

Customer Service

      The  Company is committed to consistently providing personal,
attentive  and  efficient  service  in  order  to  attract   repeat
customers.  Restaurant and shift managers are encouraged to  follow
a "front of the house" style of management, which requires that the
managers  spend  most of their time attending to customers  at  the
register, drive-thru windows or in the dining areas.

Marketing

      The Company is utilizing an integrated, multi-level marketing
calendar  for 1997 which includes monthly company-wide  promotions,
direct mail, in-store promotions, local store marketing, and  other
strategies,   including   the  use  of  television   and/or   radio
advertising  in its major markets.  The Company will  execute  this
plan utilizing a marketing budget of approximately 4% of sales.

      In  March 1996, the Company  selected The Richards  Group  of
Dallas,   Texas  as  its  advertising  agency  for   broad   market
advertising.  Additionally, in April 1996, Montemayor Y  Associados
of San Antonio, Texas was named as Taco Cabana's advertising agency
for  Hispanic marketing.  The Company believes the selection of the
two   agencies   provides  the  opportunity  for  development   and
implementation of an improved advertising and marketing strategy.

Expansion

      The  Company's strategy is to achieve a dominant  or  leading
position  among  Mexican food restaurants in each of  its  targeted
markets  in  order to obtain marketing and operating  efficiencies.
The  Company seeks to implement this strategy by selectively adding
restaurants  in  existing markets and opening  restaurants  in  new
markets where it believes it can obtain a significant market share.
In  accordance  with  this strategy, the  Company  may  locate  new
restaurants  in close proximity to existing Taco Cabana restaurants
in  order  to provide the Company with increased market penetration
and market profitability, even if this may result in a reduction in
comparable store sales volumes of certain restaurants.

      The  Company's  1997  objective  is  to  open  six  to  eight
freestanding  and  two  non-traditional  restaurants  in   existing
markets.   The  freestanding  restaurants  will  utilize  the   new
prototype  design  described previously.  The  two  non-traditional
restaurants are located within H-E-B grocery stores.

      The  Company  believes  the site selection  process  is  very
important  in  determining the potential success  of  a  particular
restaurant  and  senior  management devotes  substantial  time  and
resources  to analyzing each prospective site. The Company  focuses
on selecting locations with the potential of matching or surpassing
its  average current per unit economic performance and of producing
significant  revenues  while controlling capital  expenditures  and
rent  as  a  percentage  of net sales.  A variety  of  factors  are
considered  in the site selection process, including  local  market
demographics, site visibility and accessibility (including drive-by
traffic  and  ease  of  drive-thru  accessibility),  proximity   to
competitive  operations, and proximity to generators  of  potential
customers,  such  as  major retailers, retail centers,  medical  or
hospital  facilities, office complexes, hotel  concentrations,  and
stadiums, arenas, theaters or other entertainment centers.   During
1996,  using  the  services  of  a  consulting  firm,  the  Company
developed  a  software model which is currently  used  to  evaluate
potential locations.

Restaurant Operations and Management

      The Company seeks to maintain quality and consistency in  its
restaurant   operations  by  carefully  training  and   supervising
personnel  and  establishing exacting standards  relating  to  food
quality,  friendliness of service and cleanliness of the restaurant
facility.  It is the Company's policy to ensure that customers  are
served  quickly and that customers receive orders correctly  filled
and delivered in a courteous manner.

      The  Company maintains financial and accounting controls  for
each  of its restaurants through use of centralized accounting  and
management   information  systems.   The  Company   has   installed
throughout  all   of  its  company-owned  restaurants  an  in-store
computer-based  management support system  that  allows  for  daily
polling  of sales and labor information.  Additionally, a  separate
management information system has been developed and implemented in
all  company-owned restaurants which provides for daily polling  of
food  costs.  This system records the receipt of inventory  through
the  scanning  of bar-codes and integrates with the point  of  sale
system  thus  providing immediate cost of sales data and  inventory
records.   The system is designed to improve food cost  management,
provide  corporate management quicker access to financial data  and
reduce   the   time   devoted  by  its   restaurant   managers   to
administrative responsibilities.

      Operations  are  managed by restaurant general  managers  who
complete  an  intensive  training program  during  which  they  are
instructed  in  all  areas of Taco Cabana's restaurant  operations.
Such  areas of training include food preparation, customer service,
cost  controls,  facility  maintenance, communications  skills  and
employee  relations.  Restaurant general managers are  overseen  by
division leaders (individuals with responsibility for the operation
of  multiple  restaurants within a market)  and  by  regional  Vice
Presidents  of Operations.  An incentive plan has been  established
in  which all restaurant and division managers participate.  Awards
under  the  incentive plan are tied to the achievement of specified
sales, profitability and qualitative performance goals.

Franchising Program

      At  December 29, 1996, the Company had 8 franchisees and  one
joint  venture  partner  operating  a  total  of   17  Taco  Cabana
restaurants.

      The  Company typically offers area development agreements  to
franchisees for construction of several restaurants over a  defined
period  of  time  within  a specific geographic  area.   Under  the
standard  development agreement, a franchisee is generally required
to  pay  a  nonrefundable $25,000 fee at the time the agreement  is
signed  for  each  restaurant  to  be  developed.   The  number  of
potential  restaurants  is determined by  negotiation  between  the
Company and the franchisee.  The Company's current area development
agreement  also  provides for a franchise fee of $50,000  for  each
restaurant (with the $25,000 development fee applied as  a  partial
credit).   The  balance of the $50,000 franchise fee  is  due  when
construction  is  commenced  for each  restaurant.   Each  standard
franchise agreement has a 20 year initial term with certain renewal
rights  and  typically  provides for  payment  to  the  Company  of
royalties  equal  to  4%  of gross sales and  advertising  fees  or
required marketing expenditures of up to 3.5% of gross sales.   The
Company  requires  each  franchisee to have an  approved  full-time
principal  operator  who  is responsible for  the  supervision  and
conduct of the franchise.

      The  Company did not enter into any new franchise  agreements
during  1996  and  does  not currently anticipate  significant  new
franchisee signings until 1998.





Competition

       Taco  Cabana's  restaurants  compete  both  with  fast  food
operations  and  with  traditional  sit-down  Mexican  restaurants.
Management  believes  that  the Company's  combination  of  freshly
prepared food, distinctive ambiance, and superior service  help  to
distinguish  Taco  Cabana restaurants from  fast  food  operations,
while  Taco  Cabana's price-value relationship  differentiates  its
restaurants   from  more  expensive  sit-down  or   casual   dining
restaurants.

      The  food  service  industry  is intensely  competitive  with
respect to price, service, location and food quality, and there are
many   well-established   national,  regional   and   locally-owned
competitors  in  the  Company's market areas, some  of  which  have
greater  financial and other resources than the Company.   Some  of
such  competitors  have  also been in  existence  longer  than  the
Company  and  are better established in areas where  Taco  Cabana's
restaurants  are  or will be located.  The restaurant  business  is
often  affected by changes in consumer tastes, economic conditions,
population,  traffic patterns, availability of employees  and  cost
increases.

Employees

     At December 29, 1996, the Company employed approximately 3,300
persons, of whom approximately 3,200 were operations employees  and
the remainder were corporate personnel.  Most employees, other than
restaurant  management  and corporate personnel,  are  paid  on  an
hourly  basis.   The  Company believes  that  it  provides  working
conditions  and  wages  that are comparable  with  those  of  other
companies in the restaurant industry operating in its market  area.
The  Company's employees are not covered by a collective bargaining
agreement.

      The  Company  does not subscribe to any workers' compensation
insurance  program in the State of Texas, where the great  majority
of  its company-owned restaurants are currently located.  As  such,
it  is  subject to negligence actions by its employees and  is  not
able  to assert contributory negligence and certain other defenses.
In  addition, employees might be able to recover certain  types  of
damages  that  would  not  be available  to  them  if  the  Company
subscribed  to  a  workers' compensation  insurance  program.   The
Company  self-insures a portion of such risk,  and  carries  excess
liability coverage that it believes is adequate.  This practice has
not  had  any material adverse effect upon the Company's operations
or financial position since it was adopted in November 1988.

Trademarks, Service Marks and Trade Dress

      The  Company regards its trademarks, service marks and  trade
dress  as  having significant value and as being important  to  its
marketing  efforts.  The Company has registered its principal  Taco
Cabana  logo and design with the United States Patent and Trademark
Office  on  the  Principal  Register as  a  service  mark  for  its
restaurant  services,  has secured or has  applied  for  state  and
federal   registrations of several other advertising or promotional
marks,  including variations of its principal mark and the  service
mark  "Get  Real,"  and  has applied for registrations  in  foreign
countries  of  its  principal mark and several  other  marks.   The
Company's  policy is to pursue registration of its principal  marks
and  to  oppose strenuously any infringement of its marks or  trade
dress.

Government Regulation

      Each  company-owned and franchised restaurant is  subject  to
regulation  by federal agencies and to licensing and regulation  by
state   and  local  health,  sanitation,  safety,  fire  and  other
departments   relating  to  the  development   and   operation   of
restaurants,  including regulations relating to alcoholic  beverage
sales, environmental, building and zoning requirements, preparation
and  sale  of  food, and laws governing the Company's  relationship
with  its employees, including minimum wage requirements, overtime,
working  conditions and citizenship requirements.  Difficulties  or
failures  in  obtaining the required licenses  or  approvals  could
delay or prevent the opening of new restaurants.

      The  Company  is subject to Federal Trade Commission  ("FTC")
regulation  and state laws which regulate the offer  and  sales  of
franchises.   The  Company may also become subject  to  state  laws
which  regulate  substantive aspects of  the  franchisor-franchisee
relationship.   The  FTC  requires  the  Company  to   furnish   to
prospective  franchisees a franchise offering  circular  containing
prescribed  information.  A number of states in which  the  Company
might  consider  franchising also regulate the offer  and  sale  of
franchises and require registration of the franchise offering  with
state     authorities.    State    laws    that    regulate     the
franchisor-franchisee relationship presently exist in a substantial
number  of  states and bills have been introduced in  Congress  and
other  states from time to time which would provide for  regulation
of  the  franchisor-franchisee relationship  in  certain  respects.
Certain  of  such laws may restrict a franchisor in the termination
of a franchise agreement, although these provisions have not had  a
significant effect on the Company's operations.

      The  Company is subject to the Fair Labor Standards  Act  and
various   state  laws  governing  such  matters  as  minimum   wage
requirements, overtime and other working conditions and citizenship
requirements.  A significant number of the Company's  food  service
personnel are paid at rates related to the federal minimum wage and
increases  in  the minimum wage will increase the  Company's  labor
costs.   In September 1997, the federal minimum wage will  increase
to $5.15 per hour.  The Company is subject to the Texas "dram-shop"
laws  and  may be subject to the "dram-shop" laws of certain  other
states.   Dram-shop laws provide a person injured by an intoxicated
person  the  right  to recover damages from an  establishment  that
wrongfully  served  alcoholic beverages to the intoxicated  person.
The  Company is also subject to the Americans with Disabilities Act
of  1990,  which,  among  other things, may require  certain  minor
renovations  to  existing  restaurants to meet  federally  mandated
access and use requirements.  The cost of these renovations is  not
expected to be material to the Company.

      The  Company  believes  that it is operating  in  substantial
compliance  with  applicable  laws and  regulations  governing  its
operations.

ITEM 2.   PROPERTIES

      The Company currently owns 43 of its restaurant buildings, 30
of  its  sites, and leases the remaining restaurant locations.  The
Company  may purchase a number of its current and future restaurant
locations where it is cost effective to do so. Substantially all of
Taco  Cabana's restaurants are free-standing buildings. The Company
has  typically  needed 90 days after the signing  of  a  lease  and
obtaining required permits to complete construction and open a  new
restaurant.  Additional time is sometimes needed to obtain  certain
government approvals and licenses, such as liquor licenses.

      Land  leased by the Company is typically leased under "triple
net"  leases that require the Company to pay real estate taxes  and
utilities and maintain insurance with respect to the premises  and,
in  many cases, to pay contingent rentals based on sales in  excess
of  specified amounts. The leases have initial terms of  10  to  20
years with options to renew for additional periods which range from
5  to  15 years. Approximately 91% of the Company's current  leases
have  remaining terms or renewal options extending more  than  five
years from December 29, 1996.

ITEM 3.   LEGAL PROCEEDINGS


     On September 13, 1995 a shareholder lawsuit (A.L. Park, et al.
v.  Taco  Cabana,  Inc.,  et al) was filed  in  the  United  States
District  Court  for  the  Western District  of  Texas  (Cause  No.
SA95CA0847) seeking status as a class action.  The lawsuit  alleged
that  the  defendants violated federal securities laws  by  alleged
misrepresentations  which the plaintiffs  claim  were  designed  to
artificially  inflate the Company's stock price.  The suit  alleged
that  the  defendants misrepresented the condition of the Company's
business, principally with regard to the success of its acquisition
of  certain  Two Pesos restaurants, its future earnings  prospects,
and  its declining sales volume.  The allegations covered the  time
period  from April 8, 1993 to September 17, 1994, including  public
offerings  of the Company's stock on July 7, 1993 and  December  7,
1993.

      On  July  24,  1996,  the  Company entered  into  a  proposed
settlement,  (the  "Settlement"), subject  to  court  approval  and
certain  other conditions.  Under the terms of the Settlement,  the
plaintiffs  will  receive a total of $6.0  million.  The  Company's
insurance  carrier has deposited $3.05 million  in  cash,  and  the
Company  has deposited $2.95 million in cash into an escrow account
for  such  purposes.  Additionally, the Company  accrued  and  paid
approximately $450,000 for legal and related expenses  incurred  in
connection with the Settlement.

      The  Company  has  denied  any  liability  or  wrongdoing  in
connection  with  the Lawsuit. The Settlement was entered  into  to
avoid  continuing distraction of management, reduce  overall  legal
cost  liability  and  exposure  to risk  of  adverse  outcome.  The
Settlement was approved by the U.S. District Court on December  20,
1996.

      In addition, the Company is a party to routine negligence  or
employment-related  litigation  in  the  ordinary  course  of   its
business.  No  such  pending  matters,  individually  or   in   the
aggregate,  are deemed to be material to the results of  operations
or financial condition of the Company.

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

      The  Company  did  not submit any matter  during  the  fourth
quarter of the Company's fiscal year ended December 29, 1996  to  a
vote  of  the  Company's stockholders, through the solicitation  of
proxies or otherwise.

                            PART II

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

      The  Common  Stock, $.01 par value, of the  Company  ("Common
Stock") began trading on the NASDAQ National Market on October  16,
1992,  the effective date of the Company's initial public offering.
Prior  to  October  16, 1992, there was no public  market  for  the
Common Stock.

      The  table  below sets forth, for the periods indicated,  the
reported  high  and  low last sale prices of the  Company's  Common
Stock, as reported on the NASDAQ National Market:

                                        High            Low
Fiscal  Year Ended December 29,1996                        
 Quarter Ended December 29, 1996      $  7 3/4       $  5 5/16
 Quarter Ended September 29, 1996        8 3/16         5 9/16
 Quarter Ended June 30, 1996             8 7/8          7
 Quarter Ended March 31, 1996            6 11/16        5
   
                                                            
Fiscal  Year Ended December 31, 1995                              
  Quarter Ended December 31, 1995        6  1/8         4  5/8
  Quarter Ended October  1,  1995        6  3/8         5  1/8
  Quarter Ended July 2, 1995             7 1/16         5  1/8
  Quarter Ended April 2, 1995            9              5  5/8
  
                                                     

      As  of February 28, 1997, the last reported sale price of the
Common  Stock  on the NASDAQ National Market System was  $5.25  per
share.   As  of  February 28, 1997, there were approximately  1,000
record holders of Common Stock.

      On  June  9, 1995 the Board of Directors declared a  dividend
distribution of Preferred Share Purchase Rights.  The Rights may be
redeemed by the Board of Directors for one cent per Right prior  to
the  close of the tenth day (subject to extension by the  Board  of
Directors to the 30th day) after a person or group acquires (or has
obtained  the right to acquire or announces an intent  to  acquire)
through open-market purchases, a tender offer or otherwise, 15%  or
more  of the Company's shares.  For a 120-day period after any date
of  a change (resulting from a proxy or consent solicitation) in  a
majority  of  the  Board of Directors in office  at  the  time  the
solicitation  was  commenced, the Rights may only  be  redeemed  if
there are directors then in office who are continuing directors and
the  Board of Directors of the Company, with the concurrence  of  a
majority   of  such  continuing  directors,  determine   that   the
redemption  is  in  the  best  interest  of  the  Company  and  its
stockholders.

      The  Rights  were issued on June 20, 1995 to stockholders  of
record  on that date and will expire in ten years.  The Rights  are
not  currently exercisable and automatically trade with the  common
shares. However, upon the earlier of (i) ten days after a person or
group acquires or has obtained the right to acquire 15% or more  of
the  Company's shares, or (ii) ten business days after a person  or
group  commences  or discloses an intent to commence  a  tender  or
exchange  offer  the  consummation of which would  result  in  such
person  or  group owning 15% or more of the shares, and subject  to
the Board's right to set a later date (which date will not be later
than  the  30th day after an event described in (i) or  (ii)),  the
Rights   will   become   exercisable  and   separate   certificates
representing the Rights will be distributed.

      When  the Rights first become exercisable, a holder  will  be
entitled to buy from the Company one one-thousandth of a share of a
new series of participating cumulative preferred stock for $37.50.

      If  the  Company  is involved in a merger or  other  business
combination with, or 50% or more of its assets or earning power are
sold to, a publicly-traded person or group that has acquired 15% or
more  of  the  Company's shares, the "flip-over" provision  of  the
Rights  will be triggered and the Rights will entitle a  holder  to
buy  a  number  of shares of common stock of the acquiring  company
having  a  market value of twice the exercise price of each  Right.
If the acquiring person or group is not publicly traded, the "flip-
over" provision of the Rights will be triggered and the Rights will
entitle  the  holder to buy at the exercise price, at the  holder's
option  (i) the number of shares of the surviving company having  a
book  value of twice the exercise price, (ii) the number of  shares
of  the acquiring company having a book value of twice the exercise
price,  or  (iii)  the  number of shares  of  any  publicly  traded
affiliate of the acquiring company having a market value  of  twice
the exercise price.

      If any person or group acquires or has obtained the right  to
acquire 15% or more of the Company's outstanding common stock,  the
"flip-in" provision of the Rights will be triggered and the  Rights
will entitle a holder (other than such person or any member of such
group)  to  buy that number of one one-thousandths of  a  preferred
share  equivalent to the number of shares of common  stock  of  the
Company  having a market value of twice the exercise price of  each
Right.

      Following the acquisition by any person or group  of  15%  or
more  of  the  Company's common stock, the Board of Directors  will
also  have the ability to exchange the Rights, in whole or in part,
for   consideration  per  Right  consisting  of  one-half  of   the
securities that would be issuable at such time upon the exercise of
one Right or cash equal to the exercise price of the Right.

      In  addition to authorizing the Stockholder Rights Plan,  the
Board authorized a new series of participating cumulative preferred
stock  purchasable upon exercise of the Rights.  The shares of  the
new  series  of  participating cumulative preferred stock  will  be
nonredeemable.   Each  preferred  share  will  be  entitled  to   a
quarterly dividend equal to the greater of $.01 per share or  1,000
times  any  dividend  declared on the  common  shares  during  such
quarter.  In the event of liquidation, the holders of the preferred
shares will be entitled to receive an aggregate liquidation payment
equal to the greater of $.01 per whole share or an amount per share
equal  to  1,000 times the payment made per share of common  stock.
Each  preferred share will have 1,000 votes, voting  together  with
the   common  shares.   Finally,  in  the  event  of  any   merger,
consolidation  or  other  transaction in which  common  shares  are
exchanged,  each preferred share will be entitled to receive  1,000
times  the  amount  received per common share.   These  rights  are
protected by customary anti-dilution provisions.  In the  event  of
issuance of preferred shares upon exercise of the Rights, in  order
to  facilitate trading a depository receipt may be issued for  each
one one-thousandth of a preferred share.  The dividend, liquidation
and voting rights, and the non-redemption feature, of the preferred
shares  are  designed  so  that  the value  of  the  one-thousandth
interest  in  a  preferred share purchasable with each  right  will
approximate the value of one share of common stock.

      The Company has never declared or paid cash dividends on  the
Common Stock or any of its other securities.  The Company presently
intends to retain all earnings for the operation and development of
its  business and does not anticipate paying any cash dividends  on
the   Common   Stock  in  the  foreseeable  future.    Any   future
determination as to the payment of cash dividends will depend on  a
number of factors, including future earnings, capital requirements,
the  financial condition and prospects of the Company  and  present
restrictions under credit facilities, as well as such other factors
as  the  Board  of Directors may deem relevant.  There  can  be  no
assurance that the Company will pay any dividends in the future.

ITEM 6.   SELECTED FINANCIAL DATA

     The following selected financial data, which set forth certain
financial  information  with respect  to  the  Company,  have  been
derived  from  the  financial  statements  of  the  Company.    The
financial statements of the Company for each of the fiscal years in
the  five-year period ended December 29, 1996 have been audited  by
Deloitte  &  Touche LLP, independent certified public  accountants.
The following selected financial data should be read in conjunction
with  the  Consolidated Financial Statements and the notes  thereto
included elsewhere in this report.

<TABLE>
                                          
<S>                             <C>         <C>         <C>         <C>           <C>
                                January 2,  January 1,  January 1,  December 31,  December 29,
                                  1993(1)     1994(2)     1995(3)     1995          1996
 
                                        (in thousands, except per share data)
                                          
Income Statement Data:                                            
REVENUES:                                                    
Restaurant sales                 $58,277  $95,290      $124,826     $137,191      $131,680
Franchise fees and royalty
  income                             968    1,582         2,424        1,342           516
                                  -------  ------       -------      -------       ------- 
Total revenues                    59,245   96,872       127,250      138,533       132,196
                                      
                                                             
COSTS AND EXPENSES:                                          
Restaurant cost of sales
  and operating costs             48,053   77,871       102,236      115,195       107,703
General and administrative         2,845    3,393         4,818        6,068         6,445
Depreciation and
  amortization                     2,524    4,705         7,112       10,301         9,245
Litigation settlement (4)              -        -             -            -         3,400
Special charge (5)                     -        -             -        8,100         2,497
Reserve for notes and other
  receivables (6)                      -        -             -        3,500             -
                                  ------   ------       -------      -------   -------  
Total costs and expenses          53,422   85,969       114,166      143,164   129,290
                                  ------   ------       -------      -------   -------
                                                            
INCOME (LOSS) FROM OPERATIONS      5,823   10,903        13,084       (4,631)    2,906
                                  ------   ------       -------      -------   -------
                                                             
NON-OPERATING INCOME (EXPENSE):
Interest income (expense)           (644)      46           220       (1,397)   (1,348)
Gain (loss) on sale of assets         11      (43)            -            -         -
                                  ------   ------       -------       ------   -------
                                                             
Total non operating income
  (expense)                         (633)        3          220       (1,397)   (1,348)
                                  ------   -------      -------       ------   -------
                                                             
INCOME (LOSS) BEFORE INCOME
  TAXES                            5,190    10,906       13,304       (6,028)    1,558
   
                                                             
BENEFIT (PROVISION)
  FOR INCOME TAXES               (1,998)   (3,850)       (4,784)       2,230      (854)
                                  -----    ------       -------       ------   -------
                                                             
NET INCOME (LOSS)                 3,192     7,056         8,520       (3,798)      704
                                  =====    ======       =======       ======   =======
                                                             
NET INCOME (LOSS) PER SHARE        0.40     0.55           0.55        (0.24)     0.04
                                  =====    =====        =======       ======   =======                           
WEIGHTED AVERAGE SHARES
  OUTSTANDING (7)                  7,909   12,945         15,644       15,648    15,695
                                  ======   ======       ========      =======  ========
                                                             
Balance Sheet Data:                                          
Total assets                      42,496  118,747        152,222      148,578   142,706
                                          
Line of credit, long-term
  debt and capital leases,
  including current maturities     1,854    4,730         12,945       19,290    13,668
   
Stockholders' equity              35,402  100,964        115,652       112,327  113,172
                                  
Dividends per common                   -        -              -             -        -
   share
                                                             
</TABLE>
                                                             
                                                             
                                                             
                                                             
                                                         


(1)  Includes  results of operations of the acquired Sombrero  Rosa
     and  TaCasita  restaurants  since  the  respective  dates   of
     acquisition.
(2)  Includes  results  of  operations of the  acquired  Two  Pesos
     restaurants  and  five acquired franchised  restaurants  since
     their respective dates of acquisition.
(3)  Includes  results  of  eight acquired  franchised  restaurants
     since their respective dates of acquisition.
(4)  Includes the 1996 litigation settlement for $3.4 million  pre-
     tax,  as  described  in  Note 2 to the Consolidated  Financial
     Statements.
(5)  Includes  the charge related to the 1995 operations review  of
     $8.1   million  and  the  1996  write-down  of  the  Company's
     investment in a joint venture and the accrual of related  exit
     costs  of  $2.5  million,  as described  in  Note  3   to  the
     Consolidated Financial Statements.
(6)  Reserve resulted from the 1995 operations  review as described
     in Note 4 to the Consolidated Financial Statements.
(7)  Reflects  a  three-for-two stock split effective  October  18,
     1993.


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

Introduction

      The Company commenced operations in 1978 with the opening  of
its  first  Taco Cabana restaurant in San Antonio.  As of  December
29,  1996,  the  Company had 104 company-owned  restaurants,  three
joint-venture  owned and 14 franchised restaurants.  The  Company's
revenues   are   derived  primarily  from  sales  by  Company-owned
restaurants,  with  franchise fees and royalty income  contributing
less than 1% of total revenues for the 1996 fiscal year.

      Since  April  1992, the Company has acquired a  total  of  57
restaurants.   These  acquisitions were  accounted  for  under  the
purchase  method of accounting. Goodwill aggregating  approximately
$47.7  million recognized in connection with these acquisitions  is
being amortized on a straight-line basis over periods ranging  from
25 to 40 years.  Management assesses the recoverability of goodwill
on   the  basis  of  actual  and  projected  cash  flows  from  the
restaurants acquired.

      During  the fiscal year ended December 29, 1996, the  Company
opened  one restaurant, and closed three restaurants. Additionally,
franchisees of the Company closed five restaurants and a franchisee
of  the Company, in which the Company has a joint-venture interest,
opened one restaurant.




Results of Operations

      The following table sets forth the percentage relationship to
total  revenues,  unless  otherwise indicated,  of  certain  income
statement data.  The table also sets forth certain restaurant  data
for the periods indicated.

                                        Fiscal Year Ended
                             ---------------------------------------
                             January 1,  December 31,    December 29,
                                1995        1995             1996
                                                
Income Statement Data:                               
REVENUES:                                       
Restaurant sales               98.1%        99.0%            99.6%
Franchise fees and royalty
  income                        1.9          1.0              0.4
                              -----        -----            -----
Total revenues                100.0%       100.0%           100.0%
                              =====        =====            =====              
COSTS AND EXPENSES:                             
Restaurant cost of sales (1)   33.1         32.1             31.4
Labor (1)                      25.1         26.4             26.3
Occupancy (1)                   6.2          6.0              6.2
Other restaurant operating
  costs (1)                    17.5         19.4             17.9
General and administrative 
  costs                         3.8          4.4              4.9
Depreciation and amortization   5.6          7.4              7.0
Litigation settlement             -            -              2.6
Special charge                    -          5.8              1.9
Reserve for notes and other
 receivables                      -          2.5                -
                                                     
INCOME (LOSS) FROM OPERATIONS   10.3        (3.3)             2.2
                                                     
INTEREST INCOME (EXPENSE), NET   0.2        (1.0)            (1.0)
                                ----       -----             ----              
INCOME (LOSS) BEFORE INCOME
  TAXES                         10.5        (4.3)             1.2

INCOME TAXES                    (3.8)        1.6             (0.6)
                               -----       -----             ----              
NET INCOME (LOSS)                6.7%       (2.7)%            0.5%
                               =====       ======            =====              
Restaurant Data:                                     
COMPANY-OWNED RESTAURANTS:                           
  Beginning of period             82         104             106
  Opened                          20          12               1
  Acquired                         8           1               -
  Sold (Refranchised)             (4)         (3)              -
  Closed                          (2)         (8)             (3)
                                 ---         ---             ---
  End of period                  104         106             104
                                                     
FRANCHISED RESTAURANTS (2):                           
    End of period                 17          21              17
                                 ---         ---             ---
TOTAL RESTAURANTS:                                   
    End of period                121         127             121
                                 ===         ===             ===
                                                     

________________________________
     (1) As a percentage of restaurant sales.
     (2) Excludes Two Pesos licensed restaurants.



Fiscal 1996 Compared to Fiscal 1995

     Restaurant Sales.  Restaurant sales decreased by $5.5 million,
or  4.0%, to $131.7 million for fiscal 1996 from $137.2 million for
fiscal  1995.  The decrease in sales is due to a  decrease  in  the
number of restaurants open during 1996 compared to 1995 and due  to
a  decrease  in comparable store in 1996 compared to 1995.  In  the
aggregate,  the  number of operating weeks declined  2.9%  in  1996
compared  to 1995.  Comparable store sales, defined as Taco  Cabana
restaurants that have been open 18 months or more at the  beginning
of  each  quarter,  decreased 2.1% during 1996.   Comparable  store
sales  in  the  Company's  core markets  of  San  Antonio,  Austin,
Houston,  and  Dallas, which represent over 90%  of  the  Company's
sales  volume  increased 0.1% during 1996.   Management  attributes
much of the decline in sales to the adverse economic conditions  in
the  Texas - Mexico border market.  The Company also experienced  a
decrease  in sales in its Colorado market during 1996.   Management
is attempting to counteract the sales decline in these markets with
a  significant increase in marketing expenditures in these  markets
during 1997.

     Franchise Fees and Royalty Income.  Franchise and royalty fees
decreased by approximately $826,000 to $516,000 for 1996,  compared
to approximately $1.3 million for 1995, due primarily to a decrease
in  fees  from  new  franchise development agreements  and  related
franchise  royalties  and  due  to a  decrease  in  the  number  of
franchises open during 1996 compared to 1995.

       Restaurant  Cost  of  Sales.   Restaurant  cost  of   sales,
calculated as a percentage of restaurant sales, decreased to  31.4%
in  1996  from  32.1% in 1995.  The decrease was due  primarily  to
continued  improvements in the management  of  food  costs  through
utilizing  increased  controls  and improved  purchasing  programs,
including  the  negotiation of favorable commodity pricing  at  the
beginning of 1996.

      Labor.   Labor costs calculated as a percentage of restaurant
sales  improved slightly to 26.3% during 1996 from 26.4%  in  1995.
The  labor  costs were negatively impacted due to  an  increase  in
salaried  restaurant  management and  a  relatively  high  rate  of
restaurant  management  turnover.  The  turnover  is  part  of  the
Company's   continuing  process  of  raising  the   standards   and
accountability within the management ranks of the Company.

      Occupancy.   Occupancy costs decreased slightly  during  1996
compared to 1995.  The decrease is due to a decrease in the  number
of  restaurants open during fiscal 1996 compared to fiscal 1995. As
a percentage of restaurant sales, occupancy costs increased to 6.2%
in  1996 compared to 6.0% in 1995. The increase is due to decreased
sales at the restaurant level.

      Other Restaurant Operating Costs.  Other restaurant operating
costs  as  a percentage of restaurant sales decreased to  17.9%  in
1996  from  19.4%  for  1995.  This decrease is  due  primarily  to
management's increased focus on unit level operations.

       General  and  Administrative.   General  and  administrative
expenses increased to $6.4 million from $6.1 million, and increased
as a percentage of total revenues to 4.9% for fiscal 1996 from 4.4%
for  fiscal 1995.  This increase was primarily attributable to  the
addition   of  management,  as  well  as  an  increased  level   of
expenditures to support the Company's operations.




      Depreciation and Amortization.  Depreciation and amortization
expense consisted of the following:

                                             Year Ended
                                     ----------------------------
                                     December 31,    December 29,
                                        1995            1996
                                                       
Depreciation of property and
  equipment                          $ 6,209,000     $7,079,000
Amortization of  intangible assets     1,663,000      1,651,000
Amortization of  pre-opening costs     2,429,000        515,000

Depreciation  expense increased by approximately $870,000  for  the
year  ended  December 29, 1996 compared to the year ended  December
31,  1995.  The  increase was due primarily to restaurant  openings
during   1995,  as  well  as  capital  expenditures   on   existing
restaurants   during  1996.  Amortization  of   pre-opening   costs
decreased by approximately $1.9 million in the year ended  December
29,  1996 compared to the year ended December 31, 1995, due to  the
decrease  in  the  number of stores opened during the  most  recent
twelve-month  period  compared  to the  twelve-month  period  ended
December 31, 1995.

     Litigation Settlement.  On July 24, 1996, the Company approved
the  proposed settlement of A.L. Park, et al v. Taco Cabana,  Inc.,
et al., a suit originally filed in September 1995 seeking status as
a class action.  As a result thereof, the Company recorded a charge
of  $3.4  million  pre-tax, $2.2 million after-tax,  or  $0.14  per
share, during the second quarter of fiscal 1996. Under the terms of
the  settlement,  the  plaintiffs will  receive  a  total  of  $6.0
million.   The  Company's  insurance carrier  has  deposited  $3.05
million  in  cash, and the Company has deposited $2.95  million  in
cash  into an escrow account for such purposes.  Additionally,  the
Company  has accrued and paid approximately $450,000 for legal  and
related expenses incurred in connection with the settlement

      Special  Charge.  The Company has a 50% interest in  a  joint
venture  which  operated three restaurants in the  Atlanta  market.
During  the fourth quarter of 1996, the Company decided  to  write-
down  its  investment in the joint venture and accrue  for  certain
costs  associated with the closing of two of the three  restaurants
operated by the joint venture. This decision resulted in a  special
charge  of approximately $2.5 million pre-tax, $1.7 million  after-
tax  or  $0.11 per share. The special charge was comprised  of  the
following:

Write-down of investment in joint venture             $1,191,000
Reserve for notes and accounts receivable                268,000
Estimated lease obligations                              632,000
Legal and professional fees                              245,000
Other costs                                              161,000


Subsequent to December 29, 1996, two of the three restaurants in
the Atlanta market were closed.  It is currently anticipated that
the third restaurant will remain in operation.

      Interest Income (Expense). Interest expense, net of  interest
capitalized  on  construction costs, decreased to $1.1  million  in
1996  from $1.2 million in 1995 as a result of the repayment  of  a
substantial portion of the Company's outstanding borrowings  during
1996. The Company earned $201,000 of interest income during 1996 on
cash balances compared to $310,000 of interest income earned during
1995.   The   decrease  was  due  to  a  reduction  in   short-term
investments during 1996.

      Net  Income  (Loss)  and Net Income (Loss)  Per  Share.   The
Company recorded net income of $704,000 for 1996 compared to a  net
loss of $3.8 million for 1995.  The recorded net income was 0.5% as
a  percentage of total revenues for 1996 compared to  net  loss  of
2.7%  for 1995.  Income per share was   $0.04 for 1996 compared  to
loss  per  share  of  $0.24 in 1995.  Disregarding  the  litigation
settlement,  the  reserve for notes and other receivables  and  the
special charges, the Company would have reported net income of $4.7
million  equal  to  $0.30  per share or 3.6%  as  a  percentage  of
revenues for 1996 compared to $3.5 million equal to $0.22 per share
or  2.5%  as a percentage of total revenues for 1995.  Disregarding
the  litigation  settlement  and the  special  charges,  management
believes that the remaining increase is largely due to better  cost
controls  at the restaurant level as well as a substantial decrease
in amortization of pre-opening costs.

Fiscal 1995 Compared to Fiscal 1994

       Restaurant  Sales.   Restaurant  sales  increased  by  $12.4
million,  or  9.9%, to $137.2 million for fiscal 1995  from  $124.8
million  for fiscal 1994. In the aggregate, the number of operating
weeks  increased 18.5% in 1995 compared to 1994.  Comparable  store
sales,  defined as Taco Cabana restaurants that have been  open  18
months  or  more  at the beginning of each quarter, decreased  7.3%
during  1995.  Management attributed much of this decline in  sales
to  the  effect  of opening new restaurants in close  proximity  to
existing  restaurants  as well as increased levels  of  competition
from other restaurants in the Company's core markets.

     Franchise Fees and Royalty Income.  Franchise and royalty fees
decreased  by approximately $1.1 million to $1.3 million for  1995,
compared to approximately $2.4 million for 1994, due primarily to a
decrease  in  fees  from new franchise development  agreements  and
related franchise royalties.

     Restaurant Cost of Sales.  Restaurant cost of sales calculated
as  a  percentage of restaurant sales, decreased to 32.1%  in  1995
from  33.1%  in 1994.  The decrease was due primarily to  continued
improvements  in  the  management of food costs  through  utilizing
increased controls and improved purchasing programs.

      Labor.   Labor costs calculated as a percentage of restaurant
sales  increased to 26.4% in 1995 from 25.1 % in 1994. The increase
was  primarily  due  to  lower average  unit  volumes  during  1995
compared to 1994.

      Occupancy.  Occupancy costs increased to $8.2 million in 1995
from $7.8 million in 1994.  The increase was due to an increase  in
the  number  of  restaurants open during fiscal  1995  compared  to
fiscal  1994. As a percentage of restaurant sales, occupancy  costs
decreased to 6.0% in 1995 compared to 6.2% in 1994.

       General  and  Administrative.   General  and  administrative
expenses increased to $6.1 million from $4.8 million, and increased
as  a  percentage of revenues to 4.4% for 1995 from 3.8%  in  1994.
The increase as a percentage of total revenues was attributable  to
the  addition of middle and senior level management to support  the
Company's operations.



      Depreciation and Amortization.  Depreciation and amortization
expense consisted of the following:

                                            Year Ended
                                     ------------------------------
                                       January 1,     December 31,
                                          1995            1995
                                                         
Depreciation of property and
  equipment                           $ 3,991,000     $ 6,209,000
Amortization of  intangible assets      1,574,000       1,663,000
Amortization of  pre-opening costs      1,547,000       2,429,000

      Depreciation  and  amortization  expense  increased  by  $3.2
million  to  $10.3  million for 1995 compared to $7.1  million  for
1994.   Of  the  total increase, $1.5 million was  attributable  to
additional  depreciation  expense  associated  with  the   18   new
restaurants that were opened during 1995 and the fourth quarter  of
1994.    Amortization   of    preopening   costs   accounted    for
approximately $900,000 of the increase.  The remaining increase was
attributable to increases in corporate depreciation and  intangible
asset amortization.

      Special  Charge.   During the second  quarter  of  1995,  the
Company recorded a reserve for notes and other receivables of  $3.5
million and a special charge of $8.1 million.  The charges were the
result of a review of all operations which was performed during the
second quarter of 1995.  The review was precipitated by a change in
the  Company's  core markets, including a decline in  average  unit
volumes  and  profitability, as well as a change in  the  Company's
senior management.

      The  sales  trends of the Company's core markets  had  turned
negative.   Comparable  restaurants sales trends  softened  in  the
third  and fourth quarters of 1994, declining by about 2.9% in  the
third  quarter  and  5.9%  in  the fourth  quarter.   The  decrease
continued  in the first quarter of 1995, when comparable restaurant
sales declined by approximately 10.1%.  The decline continued  into
the  second  quarter  of 1995, which finished  with  a  decline  of
approximately  7.7%.  This decline in sales led  to  a  decline  in
profitability.

      In  late April 1995, Stephen Clark was hired as President and
Chief  Operating  Officer of Taco Cabana.  After several  weeks  of
analyzing  the then recent trends and personnel, Mr.  Clark  led  a
comprehensive  review  of  the Company's operations.   The  review,
which  took  place  during May and June 1995, included  a  detailed
review  of  the  existing  restaurants including  their  sales  and
profitability   trends,   recent  and   future   marketing   plans,
development  plans  for  new Company restaurants  as  well  as  for
franchisees;  relationships with current franchisees; and  overhead
components,  including  mid  and senior  level  management,  office
space, non-restaurant assets, and bonus payouts.

     To reverse the adverse trends in operating results, management
began  implementing a plan to improve the unit level  economics  of
the  Company's  restaurants.  In particular,  the  Company  created
several   operations-related  positions  to  design  and  implement
comprehensive  labor management and restaurant  operating  systems;
increased  the  number  of  operations supervisory  positions  thus
lowering  the  average  number of restaurants  each  supervisor  is
responsible  for,  in order to increase the effectiveness  of  such
positions;  redirected its marketing program to increase  focus  on
local  store  marketing efforts and promotional-based  advertising;
performed  market  research to enhance  the  effectiveness  of  the
Company's marketing efforts and to provide improved market data  to
aid  in  the design and location of future restaurants; and revised
its  development  criteria,  including construction  costs,  design
factors,  menu  strategy, and began reviewing  the  possibility  of
alternative  development (e.g., in-line and  other  non-traditional
construction versus stand-alone restaurants).

       The  review  resulted  in  the  decision  to  close  several
restaurants, allow several franchise restaurants to close or revert
back  to  the  Company's control, restructure  or  forgive  several
franchise-related  receivables, make several  management  personnel
changes,   sell   certain  non-restaurant   assets,   pay   certain
discretionary bonuses which related to the prior year but were  not
going  to  be  paid by prior management, restructure the  Company's
marketing   efforts,  slow  all  current  Company   and   franchise
development, and write-off certain prepaid costs determined  to  no
longer  have future value due to the changes management planned  to
make.

      These decisions resulted in the Company's recording a special
charge  of  $8.1 million pretax, and a reserve for notes and  other
receivables  of $3.5 million pretax (a total of $7.3 million  after
tax,  or $0.47 per share).  The special charge of $8.1 million  was
comprised of:

*   Market  valuation adjustments totaling $2.65 million  resulting
from  the  decision  to  close six Company-owned  restaurants,  and
dispose of those restaurant assets;

*   A  provision of $1.225 million to record the estimated  monthly
lease  obligation, net of expected sublease receipts,  for  certain
other restaurants which had been closed or were to be closed;

*   Market  valuation adjustments totaling $1.225 million to  allow
for  the  disposition  of  certain non-restaurant  capital  assets,
including  the  Company's principal office and corporate  airplanes
(most  of  which  assets were owned by the  Company,  so  that  the
disposition of such assets would generate cash);

*   The  accrual  of $980,000 related to the severance  of  certain
contractual employment and consulting agreements and the payment of
relocation  expenses  for  Mr.  Clark  and  other  new  members  of
management;

*   The  write-off of $810,000 related to certain capitalized media
production  assets which will no longer be utilized or were  deemed
to  no  longer  have  value  due to the  change  in  the  Company's
marketing philosophy described above;

*   The write-off of $370,000 in development costs associated  with
the  sites which were under development at the time of the decision
to slow development;

*   An  accrual of $300,000 for the payment of certain  operational
bonuses which are described above;

*  An accrual of $420,000 for certain employee litigation claims;

*  An accrual of $120,000 for miscellaneous expenses.

      Reserve  for  Notes and Other Receivables.  The  reserve  for
notes  and  other  receivables  included  $2.0  million  for  notes
receivable which were outstanding in connection with the  sales  of
restaurants  to  franchisees.  The decision to  reserve  for  these
notes was based on discussions held with the franchisees during the
second  quarter  of 1995 and a review of their financial  position.
Three notes totaling approximately $1.3 million of this amount were
reserved due to the fact that the franchisee approached the Company
during   the  second  quarter  of  1995  and  indicated  that   the
devaluation  of  the Mexican Peso in December 1994 had  permanently
harmed  its restaurants to an extent that they were going to  close
the  restaurants.  These restaurants were all closed  during  1995.
The  remaining  amount relates to a restaurant whose  sales  trends
were continuing to erode and there was substantial doubt as to  the
recoverability of the balance.  This restaurant was  closed  during
the first quarter of 1997.  The reserve amounts were calculated  by
reducing  the outstanding note balances to the estimated  value  of
the underlying collateral and reserving the remaining balance.  The
restaurants reserved for were all in Texas.

      The  remaining $1.5 million primarily relates  to  franchisee
receivables.   Approximately $250,000 of  this  amount  relates  to
periodic  franchise and royalty fees owed by the franchisees  noted
above, including interest.  An additional $500,000 was reserved due
to a franchisee's failure to meet a contractual obligation and make
payment  on  a development agreement during the second  quarter  of
1995.   Approximately  $350,000 of the amount relates  to  periodic
royalty  fees  and franchise fees from a franchisee with  whom  the
Company had been in discussions to acquire its restaurants.  Due to
the  Company's decision to slow all development, the Company  broke
off these negotiations.  The remaining balances, totaling $400,000,
included  various  types of receivables including other  franchisee
amounts, employee receivables, and other miscellaneous receivables.

      Interest Income (Expense).  Interest expense, net of interest
capitalized on construction costs, increased to $1,707,000 in  1995
from  $422,000  in 1994 as a result of interest expense  associated
with  the  utilization of the Company's line of  credit  and  notes
associated with the purchase and construction of restaurants.   The
Company  earned  $310,000 in interest income during  1995  on  cash
balances.   The  Company earned $642,000 of interest income  during
1994.

      Net  Income  (Loss)  and Net Income (Loss)  Per  Share.   The
Company  recorded a net loss of      $3.8 million for 1995 compared
to  net income of $8.5 million for 1994.  The recorded net loss was
2.7%  as  a percentage of total revenues for 1995 compared  to  net
income  of  6.7%  for  1994.  Loss per share  was  $0.24  for  1995
compared  to  income per share of $0.55 in 1994.  Disregarding  the
reserve  for receivables and the special charge, the Company  would
have  reported net income of $3.5 million for 1995, equal to  $0.22
per  share or 2.5% as a percentage of total revenues.  Disregarding
the  reserve  for  receivables and the special  charge,  management
believes that the remaining decrease is largely due to decreases in
average unit volumes, which resulted in higher restaurant operating
costs  as  a percentage of sales, lower franchise fees and  royalty
income, higher depreciation and amortization, lower interest income
and higher interest expense.

Liquidity and Capital Resources

      Historically, the Company has financed business and expansion
activities  by  using  funds generated from  operating  activities,
build-to-suit  leases, equity financing, short and  long-term  debt
and  capital  leases.   The  Company  maintains  credit  facilities
totaling  $20 million, including  a $5 million unsecured  revolving
line  of  credit.  As of March 5, 1997, approximately $9.6  million
had been used under these commitments.

    Net cash provided by operating activities was $12.2 million for
1996, and $5.8 million for 1995. Management attributes much of  the
increase  to  the  receipt of $2.5 million of  federal  income  tax
refunds  during  1996, as well as less cash being utilized  in  the
reduction of accrued and acquisition liabilities.

     Net  cash  used in investing activities was $8.7  million  for
1996,  representing primarily capital expenditures for improvements
to  existing  restaurants, the construction of one restaurant,  and
the  purchase  of two pieces of land for future development.   This
compares to $17.7 million for 1995, representing primarily  capital
expenditures   for   the   construction  of  twelve   Company-owned
restaurants.

    Net cash used in financing activities was $5.5 million for 1996
representing  primarily repayment of the Company's line  of  credit
and  long-term  debt compared to net cash provided  from  financing
activities  of $7.4 million in the same period of 1995 representing
borrowings from the Company's debt facilities.

     In connection with the special charge of $2.5 million recorded
during 1996, the Company has accrued approximately $1.0 million for
estimated exit costs. The Company expects to pay these costs during
1997.

     The  special  charge recorded in the second  quarter  of  1995
included  an  accrual of approximately $1.2 million to  record  the
estimated   monthly  lease  payments,  net  of  expected   sublease
receipts,  associated  with  certain restaurants  which  have  been
closed.  Cash  requirements  for this  accrual  were  approximately
$362,000  in  1996.  Several  of the restaurants  which  have  been
closed,  as  well as the Company's previous corporate offices,  are
currently  for  sale.  Although there can be no  assurance  of  the
particular price at which any of such properties will be sold,  the
Company  expects  to receive funds equal to or  in  excess  of  the
carrying  value  upon the actual disposition of  these  properties.
During  1996, the Company sold properties relating to  the  special
charge which resulted in proceeds of $788,000. In addition, certain
acquisition  and  accrued  liabilities related  to  the  Two  Pesos
acquisition  were  reduced  by payments of  approximately  $730,000
during  1996.

     The  Company  believes  that  existing  cash  balances,  funds
generated from operations, its ability to borrow, and the  possible
use  of   lease financing will be sufficient to meet the  Company's
capital  requirements through 1997, including the  planned  opening
of    six   to   eight    free  standing  and  two  non-traditional
restaurants.   The average total investment for the  free  standing
restaurants,  including land, is expected to be approximately  $1.3
million  per restaurant.  Cash investment requirements are expected
to  average $1.1 million per restaurant. Total capital expenditures
for  1997  are expected to approximate $12.0 to $15.0  million  and
will include, in addition to new construction, a program to remodel
several of the Company's existing restaurants.


Impact of Inflation

      Although  increases in labor, food or other  operating  costs
could  adversely  affect the Company's operations, management  does
not believe that inflation has had a material adverse effect on the
Company's operations to date.

Seasonality and Quarterly Results

      The Company's sales fluctuate seasonally.  Historically,  the
Company's highest sales and earnings occur in the second and  third
quarters.   In  addition, quarterly results  are  affected  by  the
timing  of the opening of new stores, and the Company's growth  may
offset  the  impact  of seasonal influences.  Therefore,  quarterly
results are not indicative of results for the entire year.
   

Forward-Looking Statements

     Statements in this Annual Report, including those contained in
the  foregoing  discussion and other items herein,  concerning  the
Company which are (a) projections of revenues, capital expenditures
or  other  financial items, (b) statements of plans and  objectives
for   future   operations,  (c)  statements  of   future   economic
performance,   or  (d)  statements  of  assumptions  or   estimates
underlying   or   supporting  the  foregoing  are   forward-looking
statements within the meaning of Section 27A of the Securities  Act
of  1933  and  Section  21E of the Securities  Act  of  1934.   The
ultimate  accuracy of forward-looking statements is  subject  to  a
wide  range  of  business risks and changes in  circumstances,  and
actual  results  and outcomes often differ from expectations.   Any
number  of  important factors could cause actual results to  differ
materially  from  those in the forward-looking  statements  herein,
including  the  following:  the timing and  extent  of  changes  in
prices; actions of our customers and competitors; state and federal
environmental, economic, safety and other policies and regulations,
any  changes therein, and any legal or regulatory delays  or  other
factors  beyond the Company's control; execution of planned capital
projects; weather conditions affecting the Company's operations  or
the  areas  in  which the Company's products are marketed;  natural
disasters affecting operations; and adverse rulings, judgments,  or
settlements  in  litigations or other legal matters.   The  Company
undertakes  no  obligation to publicly release the  result  of  any
revisions to any such forward-looking statements that may  be  made
to  reflect  events or circumstances after the date  hereof  or  to
reflect  the occurrence of unantincipated events.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements and supplementary data are set forth
in this annual report on Form 10-K commencing on page F-1.


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

     None.
                            PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

      The directors and executive officers of the Company and their
respective ages are as follows:

    Name               Age          Position
-----------------      ---     ---------------------------
Stephen V. Clark       43      Chief Executive Officer,
                                 President, and Director
James A. Eliasberg     39      Executive Vice President and
                                 General Counsel
David G. Lloyd         33      Senior Vice President -
                                 Finance, Chief Financial
                                 Officer, Secretary and
                                 Treasurer
William J. Nimmo       42      Director
Richard Sherman        53      Director
Cecil Schenker         54      Director
                               


      Mr. Clark has served as the Company's Chief Executive Officer
since November 1996, and as the President, Chief Operating Officer,
and  as a Director since April 1995.  Prior to that, Mr. Clark  was
with  Church's  Chicken, a division of America's Favorite  Chicken,
for  eighteen  years with his final title having been  Senior  Vice
President  and  Concept General Manager.  He  also  served  on  the
executive  committee of America's Favorite Chicken and was  on  the
Board  of  Directors of Church's Operators Purchasing  Association.
In  his  final position with America's Favorite Chicken, Mr.  Clark
was  primarily  responsible for the day-to-day operations  of  over
1100 company-owned and franchised units with aggregate sales volume
in excess of $600 million.

      Mr.  Eliasberg  has  served as the Company's  Executive  Vice
President and General Counsel since April 1995.  From January  1991
to  April  1995, Mr. Eliasberg served as the Company's Senior  Vice
President  and  General Counsel.  Prior to that, Mr. Eliasberg  was
engaged  in  the private practice of law in Southern California  at
the  law firms of Fierstein & Sturman (March 1989 to January 1991),
Hill,  Wynne,  Troop  & Meisinger (May 1986 to February  1989)  and
Jones,  Day,  Reavis  & Pogue (October 1984  to  March  1986).   In
addition  to  supervising all of the Company's legal  affairs,  Mr.
Eliasberg's responsibilities include real estate, construction  and
franchise  development.   Mr.  Eliasberg  is  a  graduate  of   the
University of Chicago law school.

     Mr. Lloyd joined the Company in October 1994 as Vice President
- Finance, Chief Financial Officer, Secretary and Treasurer and was
promoted to Senior Vice President in May 1996.  From August 1985 to
October  1994, Mr. Lloyd served in various capacities with Deloitte
&  Touche  (the  Company's  independent auditors),  with  his  last
position  being  Senior Audit Manager.  Mr. Lloyd  is  a  certified
public accountant.

      Mr.  Nimmo  has  served as a director of  the  Company  since
November  1991.   Mr.  Nimmo has served  as  Managing  Director  of
Cornerstone Equity Investors, Inc., and its predecessor firm, since
September 1989.  For the ten years prior to that, Mr. Nimmo  was  a
Vice President of J.P. Morgan & Co.

      Mr. Sherman has been a director of the Company since November
1991.   Mr.  Sherman  is a private investor and retail  consultant.
Mr.  Sherman  served  as President and Chief Executive  Officer  of
Rally's,  Inc.  from September 1987 to January 1991.   From  August
1989  to  January 1991, he also served as Chairman of the Board  of
Rally's,  Inc.   Mr. Sherman currently serves as a  member  of  the
Board of Trustees of Paul Quinn College in Dallas, Texas and  as  a
director of Reed's Jewelers, Inc., Papa John's International, Inc.,
and PJ America, Inc.

      Mr. Schenker has been a director of the Company since January
1992.   Mr. Schenker is a corporate securities attorney and is  the
managing  partner of the San Antonio, Texas office of the law  firm
of Akin, Gump, Strauss, Hauer & Feld, L.L.P., of which Mr. Schenker
has  been  a  partner, through his professional  corporation  since
January  of  1984.  Akin, Gump, Strauss, Hauer & Feld,  L.L.P.  has
regularly   performed  legal  services  for   the   Company.    See
"Compensation Committee Interlocks and Insider Participation."  Mr.
Schenker is also a director of 50-Off Stores, Inc.

      The  Board  of Directors has a compensation and stock  option
committee and an audit committee, each of which currently  consists
of William J. Nimmo, Richard Sherman and Cecil Schenker.  The Board
of  Directors does not currently have a nominating committee.   All
directors  serve for a term of one year and until their  successors
are duly elected.  Each director who is not also an employee of the
Company,  except William J. Nimmo, receives an annual  retainer  of
$25,000, and an attendance fee of $2,500 per Board meeting  for  up
to  four  meetings  each  year.   All  non-employee  directors  are
reimbursed for their expenses.

Compliance  with  Section 16(a) of the Securities Exchange  Act  of
1934

      Section  16(a)  of the Securities Exchange Act  of  1934,  as
amended  (the "Exchange Act") requires each director and  executive
officer of the Company, and each person who owns more than 10% of a
registered  class  of the Company's equity securities  to  file  by
specific  dates  with the Securities and Exchange  Commission  (the
"SEC")  initial  reports  of ownership and  reports  of  change  in
ownership  of  Common  Stock and other  equity  securities  of  the
Company.  Officers, directors and 10% stockholders are required  by
SEC  regulation to furnish the Company with copies of  all  Section
16(a)  forms they file.  The Company is required to report in  this
report any failure of its directors and executive officers to  file
by  the relevant due date any of these reports during the Company's
fiscal year.

       To   the  Company's  knowledge,  all  Section  16(a)  filing
requirements  applicable to the Company's officers, directors,  and
10% stockholders were complied with.



ITEM 11.  EXECUTIVE COMPENSATION

      Summary  Compensation Table.  The following table sets  forth
certain  information concerning the compensation earned during  the
Company's  last three fiscal years by the Company's Chief Executive
Officer  and  the  Company's  only  two  other  executive  officers
(collectively the "named executive officers"):

<TABLE>
                                         Summary Compensation Table
                         Annual Compensation          Long-Term Compensation
                         -------------------     --------------------------------
                                                       Awards             Payouts
                                                 ----------------------   -------
                                       Other                   Securities
                                      Annual     Restricted     Underly-            All Other
                                      Compen-      Stock          ing      LTIP      Compen-
Name and    Fiscal  Salary      Bonus  sation     Award(s)     Options/   Payouts     sation
Principal    Year     ($)        ($)   ($)(1)       ($)          SARs       ($)        ($)
Position                                                         (#)
<S>         <C>     <C>         <C>   <C>        <C>           <C>        <C>       <C>
----------------------------------------------------------------------------------------
Stephen V.  1996    233,404      -      -            -             -         -          -
Clark,      1995    152,455(2) 50,000   -            -          200,000      -          -
Chief,      1994       -         -      -            -             -         -          -
Executive
Officer, 
President,
Chief
Operating
Officer
----------------------------------------------------------------------------------------
James A.   1996    189,235       -      -            -             -         -          -
Eliasberg, 1995    175,025       -      -            -          200,000      -          -
Executive  1994    135,000       -      -            -           25,000(4)   -          -
Vice
President 
and General
Counsel
-----------------------------------------------------------------------------------------
David G.   1996    135,138      -       -            -             -         -          -
Lloyd,     1995    117,605      -       -            -           75,000      -          -
Senior     1994     15,769(3)   -       -            -           25,000      -          -
Vice
President,
Chief
Financial
Officer,
Secretary
and Treasurer
-----------------------------------------------------------------------------------------
      
</TABLE>

       
 __________________
(1)  Certain  of the Company's executive officers receive  personal
     benefits  in  addition  to salary; however,  the  Company  has
     concluded that the aggregate amounts of such personal benefits
     do  not  exceed the lesser of $50,000 or 10% of annual  salary
     and bonus reported for any named executive officer.

(2)  Mr. Clark joined the Company in April 1995.

(3)  Mr. Lloyd joined the Company in October 1994.

(4)  Mr.Eliasberg voluntarily rescinded his option grant in January
     1997.








      Employment  Agreements.  The Company has  written  employment
agreements  with Stephen Clark and James Eliasberg.  The  Company's
agreement with Mr. Clark expires in April 1998. Mr. Clark  receives
a base salary of not less than $200,000 per year during the term of
his contract.  Additionally, Mr. Clark can be paid a bonus based on
the  Company's achievement of certain performance goals.   Pursuant
to  such agreement, Mr. Clark has agreed not to participate in  any
manner, during his term of employment and for two years thereafter,
in  any  business  which  owns a Mexican fast  food  restaurant  or
Mexican  "quick  service"  restaurant  in  the  Continental  United
States.

      The  Company's agreement with Mr. Eliasberg expires in  April
1998.   Mr. Eliasberg receives a base salary of $185,000  per  year
during the term of his contract.  Additionally, Mr. Eliasberg  will
be  paid  a  bonus  based on the Company's achievement  of  certain
performance  goals.  Pursuant to such agreement, Mr. Eliasberg  has
agreed  not  to  participate  in any manner,  during  his  term  of
employment and for two years thereafter, in any business which owns
a   Mexican  fast  food  restaurant  or  Mexican  "quick   service"
restaurant in the Continental United States.

Stock Option Plans and Directors' Options

      Under the Taco Cabana, Inc. 1990 Stock Option Plan (the "1990
Option  Plan"), amended in August 1992, and the 1994  Stock  Option
Plan  (the  "1994 Option Plan") options to purchase up to 1,500,000
and 500,000 shares, respectively, of Common Stock may be granted to
employees,  outside directors and consultants and advisers  of  the
Company  or  any subsidiary corporation or entity.   The  stock  is
intended  to  permit  the Company to retain and  attract  qualified
individuals  who  will contribute to its overall  success.   Shares
that by reason of the expiration of an option (other than by reason
of exercise) or which are no longer subject to purchase pursuant to
an   option   granted  under  an  Option  Plan  may  be  reoptioned
thereunder.  The 1990 and 1994 Option Plans are administered  by  a
committee  of  outside directors (the "Committee").  The  Committee
sets  specific  terms and conditions of options granted  under  the
1990 and 1994 Option Plans and administers the 1990 and 1994 Option
Plans, as well as the Company's other employee benefit plans  which
may  be  in  effect  from  time to time.  The  Committee  currently
consists of  William J. Nimmo, Cecil Schenker and Richard Sherman.

      The  Company's  employees  are  eligible  to  receive  either
incentive  stock  options  or  nonqualified  stock  options  or   a
combination  of  both,  as the Committee determines.   Non-employee
participants may be granted only nonqualified stock options.  Stock
options  may  be granted for a term not to exceed ten  years  (five
years  with  respect to a holder of 10% or more  of  the  Company's
shares  in  the  case  of an incentive stock option)  and  are  not
transferable  other  than  by  will or  the  laws  of  descent  and
distribution.  Each option may be exercised within the term of  the
option pursuant to which it is granted (so long as the optionee, if
an  employee,  continues  to  be  employed  by  the  Company).   In
addition, an incentive option may be exercised within 90 days after
the  termination  of  employment of the optionee  (subject  to  any
limitations  in  the  particular option),  within  one  year  after
termination  in  case  of  termination because  of  disability,  or
throughout  the  term of the option in the event of the  optionee's
death, to the extent in each case the option was exercisable at the
termination date.  A nonqualified stock option may be exercised for
such  period,  but  not  later  than  the  expiration  date,  after
termination of employment, disability or death, as may be specified
in the particular option.

      The exercise price of all incentive stock options must be  at
least  equal  to the fair market value of the Common Stock  on  the
date  of  grant, or 110% of fair market value with respect  to  any
incentive  stock option issued to a holder of 10% or  more  of  the
Company's  shares.  Stock options may be exercised  by  payment  in
cash  of  the  exercise price with respect  to  each  share  to  be
purchased, by delivering Common Stock of the Company already  owned
by  such optionee with a market value equal to the exercise  price,
or  by a method in which a concurrent sale of the acquired stock is
arranged,  with the exercise price payable in cash from  such  sale
proceeds.

      The 1994 Option Plan provides that each outside director will
automatically  receive a grant of 3,000 nonqualified stock  options
each  year  on  the fifth business day following the  first  public
release  of  the Company's audited earnings report  on  results  of
operations  for the preceding fiscal year.  Each such  option  will
become exercisable in whole or in part on the first anniversary  of
the  award  through the balance of its ten-year term.   Subject  to
availability  of shares allocated to the 1994 Option Plan  and  not
already  reserved  for  other outstanding  stock  options,  outside
directors who join the Board in the future will in addition receive
an  initial  grant of options for 35,000 shares, which will  become
exercisable  in  five  equal  increments  beginning  on  the  first
anniversary  of  the award and on each of the next four  succeeding
anniversary dates.  Such options will be exercisable for a term  of
ten years.  Such options will be awarded upon their appointment  or
election  to  the Board.  Options, once granted and to  the  extent
exercisable,  will  remain  exercisable  throughout   their   term,
regardless  of  whether the holder continues as  a  director.   The
exercise  price of the options is equal to 100% of the fair  market
value of a share of  Common Stock at the time of grant.

      The 1990 Option Plan will terminate on October 14, 2000.  The
1994 Option Plan will terminate on October 17, 2004.  The Board  of
Directors  may, however, terminate the 1990 and  1994 Option  Plans
at  any  time prior to such respective dates.  Termination  of  the
1990  and  1994 Option Plans will not alter or impair, without  the
consent  of the optionee, any of the rights or obligations pursuant
to any option granted under the Option Plans.

      As of December 29, 1996, options for 635,158 shares of common
stock  had  been  granted  under the  1990  Option  Plan  and  were
outstanding,  with a weighted average exercise price of  $6.42  per
share,  and  no additional shares were available for issuance  upon
exercise  of  options which may be granted in  the  future.  As  of
December 29, 1996, options for 861,842 shares had been exercised.

      As of December 29, 1996, options for 476,342 shares of common
stock  had  been  granted  under the  1994  Option  Plan  and  were
outstanding,  with a weighted average exercise price of  $5.76  per
share,  and  23,658 additional shares were available  for  issuance
upon exercise of options which may be granted in the future. As  of
December 29, 1996, no options had been exercised.



      Stock  Option  Grant Table.  The following table  sets  forth
certain  information  concerning  options  granted  to  the   named
executive officers during the Company's fiscal year ended  December
29, 1996:


                       Option Grants in Last Fiscal Year

                                               
                                                        Potential Realizable 
                      Percent                             Value at Assumed
                         of                                Annual Rates of
            Options    Total    Exercise                    Stock Price
            Granted   Options      or       Expiration      Appreciation
              #(1)    Granted    Base          Date      of Option Term (2)
                         to      Price                   ------------------
Name                 Employees                            5%($)     10%($)
---------------------------------------------------------------------------    
Stephen V.     -         -         -            -           -        -
Clark

James A.       -         -         -            -           -        -
Eliasberg

David G.       -         -         -            -           -        -
Lloyd
                                                           
                                                           



Stock  Option  Exercises  and Holdings Table.   The  following  table
provides information concerning the exercise of options and value  of
unexercised options held by the named executive officers at  December
29, 1996:

          Aggregated Option Exercises in Last Fiscal Year
                 and Fiscal Year-End Option Values
            
              Shares                           
             Acquired                           
                on      Value   Number of Unexercised    Value of Unexercised
             Exercise  Realized        Options            In-the-Money Options
Name           (#)       ($)    at Fiscal Year End (#)   at Fiscal Year End
                                                               ($)(1)
-----------------------------------------------------------------------------
                                Exercis-  Unexercis-     Exercis-  Unexercis-
                                  able      able           able       able
-----------------------------------------------------------------------------
Stephen V.       -       -     40,000     160,000        $85,000   $340,000
Clark                                
                          
James A.         -       -     83,000     166,000        $160,114  $365,038
Eliasberg                              
                                           
David G.         -       -     25,000      75,000        $ 21,570  $ 86,280    
Lloyd                                  
                                                
                                                            
(1)  Values stated are based on the last sale price of $7.31 per share
   of the Company's Common Stock on the NASDAQ National Market System
   on December 27, 1996, the last trading day of the fiscal year, and
   equal the aggregate amount by which the market value of the option
   shares  exceeds the exercise price of such options at the  end  of
   the fiscal year.


Compensation Committee Interlocks and Insider Participation

      During  1996,  William J. Nimmo, Richard  Sherman  and  Cecil
Schenker  served  on the Company's compensation  and  stock  option
committee.

     Since 1987, the law firm of Akin, Gump, Strauss, Hauer & Feld,
L.L.P.,  has  regularly rendered legal services as counsel  to  the
Company.  Cecil Schenker, a director of the Company and a member of
the  Company's compensation and stock option committee, is the sole
shareholder  of  Cecil  Schenker, P.C., a partner  of  Akin,  Gump,
Strauss, Hauer & Feld, L.L.P.

      The  Company believes that the abilities of Mr.  Schenker  to
make  fair  compensation  decisions  have  not  and  will  not   be
compromised by the relationships referred to above.

ITEM 12.  SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND
          MANAGEMENT

      The following table sets forth certain information concerning
the  beneficial ownership of the Company's Common Stock as of March
1,  1997,  by:  (i)  each person known by the  Company  to  be  the
beneficial  owner  of more than 5% of its Common Stock,  (ii)  each
named executive officer of the Company, (iii) each director of  the
Company,  and  (iv) all directors and officers as a  group.  Unless
otherwise  indicated, each of the stockholders has sole voting  and
investment power with respect to the shares beneficially owned.

                                     Shares Beneficially
                                            Owned
Name                                  Number      Percent
Stephen V. Clark  (1)                     40,000         *
                                                          
James A. Eliasberg  (2)                  167,750      1.1%
                                                          
David G. Lloyd (3)                        31,800         *
                                                          
William J. Nimmo                           3,817         *
                                                          
Richard Sherman  (4)                      70,003         *
                                                          
Cecil Schenker  (5)                       90,503         *
                                                          
Massachusetts Financial Services       1,305,370      8.2%
Co. (6)                                                   

Smith Barney Inc., Smith Barney        2,190,801     13.7%
Holdings Inc., Travelers Group                            
Inc. (7)
                                                          
Dimensional Fund Advisors, Inc.          995,564      6.2%
(8)                                                       

All directors and officers as a          408,873      2.5%
group (6 persons)  (9)                                    

----------------------------                                                   
* Less than 1%.                                           

(1)  Includes   40,000  shares  subject  to  presently  exercisable
     options  (or  those  exercisable  within  60  days).  Excludes
     160,000  shares  issuable pursuant to options  which  are  not
     currently exercisable (or exercisable within 60 days).
(2)  Includes   83,000  shares  subject  to  presently  exercisable
     options  (or  those  exercisable  within  60  days).  Excludes
     166,000  shares  issuable pursuant to options  which  are  not
     currently exercisable (or exercisable within 60 days).
(3)  Includes   25,000  shares  issuable  pursuant   to   presently
     exercisable  options (or those exercisable  within  60  days).
     Excludes 75,000 shares issuable pursuant to options which  are
     not currently exercisable (or exercisable within 60 days).
(4)  Represents shares subject to presently exercisable options (or
     those  exercisable  within 60 days).  Excludes  27,000  shares
     issuable   pursuant  to  options  which  are   not   currently
     exercisable (or exercisable within 60 days).
(5)  Represents shares subject to presently exercisable options (or
     those  exercisable  within 60 days).  Excludes  27,000  shares
     issuable   pursuant  to  options  which  are   not   currently
     exercisable (or exercisable within 60 days).
(6)  Based  upon Schedule 13G, filed jointly in February 1996,  and
     amended  in February 1997, indicating beneficial ownership  as
     stated  in the table, and shared dispositive power as  to  all
     shares  beneficially owned. Included in the joint filing  were
     Massachusetts  Financial Services Company ("MFS"),  indicating
     beneficial  ownership of 1,305,370 shares and sole dispositive
     power  as  to 1,305,370 shares and MFS Series Trust II  -  MFS
     Emerging  Growth  Fund  ("MEG"),  indicating  962,395   shares
     beneficially  owned  by  MFS  as well  as  MEG.  Address:  500
     Boylston Street, Boston, Massachusetts 02116.
(7)  Based  on  Schedule 13G, filed jointly  in October  1995,  and
     amended in January 1997, indicating beneficial ownership as stated
     in the table. Included in the joint filing were Smith Barney Inc.
     ("SB"), indicating shared voting and dispositive power  as  to
     1,415,801 shares, and sole voting and dispositive power as to 0
     shares; Smith Barney Holdings Inc. ("SB Holdings"), indicating
     shared voting and dispositive power as to 2,190,801, and  sole
     voting and dispositive power as to 0 shares; and Travelers Group
     Inc. ("TRV"), indicating shared voting and dispositive power as to
     2,190,801, and sole voting and dispositive power as to 0 shares.
     Address: 388 Greenwich Street, New York, New York 10013.
(8)  Based  on  Schedule  13G, filed in February  1997,  indicating
     beneficial ownership and sole dispositive power as  stated  in
     the table and sole voting power as to 665,464 shares. Address:
     1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.
(9)  Includes  308,506  shares  subject  to  presently  exercisable
     options  (or  those  exercisable  within  60  days).  Excludes
     455,000  shares  issuable pursuant to options  which  are  not
     currently exercisable (or exercisable within 60 days).


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       See   "Compensation   Committee   Interlocks   and   Insider
Participation"   for  certain  relationships  and   related   party
transactions.

      Any  future  transactions between  the  Company  and  related
parties will be approved by outside directors and will be on  terms
no  less  favorable than those which could have been obtained  from
unrelated third parties.


                              PART IV

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

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

Financial Statements

Independent Auditors' Report
Consolidated  Balance Sheets at December 31, 1995 and December  29,
  1996
Consolidated  Statements of Operations for the years ended  January
  1, 1995, December 31 1995 and December 29, 1996
Consolidated Statements of Stockholders' Equity for the years ended
  January 1, 1995, December 31, 1995 and December 29, 1996
Consolidated  Statements of Cash Flows for the years ended  January
  1, 1995, December 31, 1995 and December 29, 1996
Notes to Consolidated Financial Statements

Exhibits  
3.1       Restated Certificate of Incorporation, filed on
             December 29, 1993.  (d)
3.2       Bylaws of Registrant.  (a)
4.1       Form of Common Stock Certificate.  (a)
4.2       Rights Agreement dated as of June 9, 1995,
             between Taco Cabana, Inc. and Society National
             Bank, as Rights Agent.   (f)
10.1*     Employment Agreement dated April 24, 1995 between
             the Registrant and Stephen V. Clark.  (e)
10.4      Restaurant Assets Purchase Agreement and Plan of
             Reorganization between Registrant and Two
             Pesos, Inc., including Controlling Shareholder
             Agreement between Registrant and Ghulam
             Bombaywala and Controlling Shareholder
             Agreement between Registrant, Marno McDermott
             and The Bay Lake Limited Partnership.  (c)
10.5      Sample Franchise Agreement.  (a)
10.6      Sample Franchise Development Agreement.  (a)
10.7      Sample Beverage Sublease Agreement.  (a)
10.8      Sample Concessionaire Management Agreement.  (a)
10.9*     Amended and Restated Stock Option Plan.  (a)
10.10*    Agreement Regarding Compensation of Outside
             Director, dated as of May 29, 1992, between
             the Registrant and Richard Sherman.  (b)
10.11*    Agreement Regarding Compensation of Outside
             Director, dated as of May 29, 1992, between
             the Registrant and Cecil Schenker.  (b)
10.12     Stock Option Agreements between Registrant and
             Richard Sherman.  (a)
10.13     Stock Option Agreements between Registrant and
             Cecil Schenker.  (a)
10.14*    1994 Stock Option Plan.  (d)
10.15     Employment Agreement dated April 24, 1995 between
             the Registrant and James Eliasberg. (g)
10.16     Second Amended Loan Agreement with International
             Bank of Commerce. (g)
11.       Statement re computation of per share earnings
             (loss).  (g)
21.       Subsidiaries of the Registrant.  (g)
23.       Consent of Deloitte & Touche LLP.  (g)
24.       Powers of attorney to sign amendments to this
             report.  Reference is made to the signature
             page of this report.
27.       Financial Data Schedule. (g)
*         Executive compensation plan or arrangement.
          
(a)       Filed as an exhibit to Form S-1 Registration
             Statement No. 33-51430, effective October 16,
             1992.
(b)       Filed as an exhibit to Form S-8 Registration
             Statement No. 33-56438, effective December 24,
             1992.
(c)       Filed as an exhibit to  Form S-4   Registration
             Statement   No. 33-60672,  effective  June 11,
             1993.
(d)       Filed as an exhibit to Form 10-K for the fiscal
             year ended January 1, 1995.
(e)       Filed as an exhibit to Form 10-K for the fiscal 
             year ended December 31, 1995.
(f)       Filed  as an  exhibit to  Form 8-A  Registration
             Statement   No. 0-20716, effective June 9,
             1995
(g)       Filed herewith.
          
      (b) Reports on Form 8-K
          
          No  reports  on  Form 8-K were  filed  during  the
          fourth quarter of the fiscal year covered by  this
          report.
          


                           SIGNATURES

      Pursuant  to the requirements of Section 13 or 15(d)  of  the
Securities  Exchange Act of 1934, as amended,  the  Registrant  has
duly  caused  this  report  to  be signed  on  its  behalf  by  the
undersigned, thereunto duly authorized.

                       TACO CABANA, INC.



                       By:    STEPHEN V. CLARK
                              ----------------------------------
                              Stephen V. Clark
                              Chief    Executive   Officer   and
                              President


     Date:  March 28, 1997

      Each  person whose signature appears below authorizes Stephen
V.  Clark and David Lloyd or either of them, each of whom  may  act
without  joiner of the other, to execute in the name of  each  such
person who is then an officer or director of the Registrant and  to
file any amendments to this annual report on Form 10-K necessary or
advisable  to  enable the Registrant to comply with the  Securities
Exchange  Act  of 1934, as amended, and any rules, regulations  and
requirements of the Securities and Exchange Commission  in  respect
thereof,  which amendments may make such changes in such report  as
such attorney-in-fact may deem appropriate.

     Pursuant to the requirements of the Securities Exchange Act of
1934,  as  amended, this report has been signed  by  the  following
persons in the capacities and on the dates indicated.

     Signature             Title                Date
STEPHEN V. CLARK    Chief Executive      March 28, 1997
Stephen V. Clark    Officer, President
                    and Director
                    (Principal
                    Executive Officer)
                                         
DAVID G. LLOYD      Senior Vice          March 28, 1997
David G. Lloyd      President Finance,
                    Chief Financial
                    Officer and
                    Secretary
                    (Principal
                    Financial and
                    Accounting Officer)
                
                                         
WILLIAM J. NIMMO    Director             March 28, 1997
William J. Nimmo
                                         
RICHARD SHERMAN     Director             March 28, 1997
Richard Sherman
                                         
CECIL SCHENKER      Director             March 28, 1997
Cecil Schenker
                                         



                           EXHIBIT INDEX


Exhibit
  No.

10.15   Employment Agreement dated April  24,
        1995 between the Registrant  and  James   A.
        Eliasberg.

10.16   Second    Amended   Loan   Agreement    with
        International Bank of Commerce.

11.     Statement Regarding Computation of Per Share Earnings (Loss)

21.     Subsidiaries of the Registrant

23.     Consent of Deloitte & Touche LLP

27.     Financial Data Schedule




TACO CABANA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                               Page
Financial Statements:                                         
Independent Auditors' Report                                  F-2
Consolidated Balance Sheets at December 31, 1995 and          F-3
December 29, 1996
Consolidated Statements of Operations for the Years Ended     F-4
  January 1, 1995, December 31, 1995 and December 29, 1996    
Consolidated Statements of Stockholders' Equity for the       F-5
  Years Ended January 1, 1995, December 31, 1995 and 
  December 29, 1996
Consolidated Statements of Cash Flows for the Years Ended     F-6
  January 1, 1995, December 31, 1995 and December 29, 1996
Notes to Consolidated Financial Statements                    F-8
                                                              

                                                              
                                                              













INDEPENDENT AUDITORS' REPORT


To the Board of Directors
Taco Cabana, Inc.

We have audited the accompanying consolidated balance sheets of
Taco Cabana, Inc. and subsidiaries as of December 29, 1996  and
December  31, 1995, and the related consolidated statements  of
operations, stockholders' equity and cash flows for each of the
three  years  in  the period ended December  29,  1996.   These
financial  statements are the responsibility of  the  Company's
management.   Our responsibility is to express  an  opinion  on
these financial statements based on our audits.

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

In  our opinion, such consolidated financial statements present
fairly,  in  all material respects, the financial  position  of
Taco  Cabana,  Inc. and subsidiaries at December 29,  1996  and
December  31,  1995,  and the results of their  operations  and
their  cash  flows for each of the three years  in  the  period
ended  December 29, 1996 in conformity with generally  accepted
accounting principles.


DELOITTE & TOUCHE LLP


San Antonio, Texas
February 4, 1997



TACO CABANA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
                                 
                                       December 31,   December 29,
                                           1995           1996
<S>                                    <C>           <C>
ASSETS                                                      
CURRENT ASSETS:                                             
Cash and cash equivalents               $  2,749,000   $    748,000
Receivables, net                           1,376,000        792,000
Inventory                                  1,846,000      1,858,000
Prepaid expenses                           1,700,000      1,353,000
Pre-opening costs, net                       500,000        129,000
Federal income taxes receivable            2,777,000        363,000
Deferred income taxes                        497,000      1,827,000
                                         -----------    -----------
  Total current assets                    11,445,000      7,070,000
                                                            
PROPERTY AND EQUIPMENT, net               87,695,000     88,963,000
NOTES RECEIVABLE, net                        780,000        738,000
INTANGIBLE ASSETS, net                    47,038,000     45,394,000
OTHER ASSETS                               1,620,000        541,000
                                         -----------    -----------            
TOTAL ASSETS                            $148,578,000   $142,706,000
                                         ===========    ===========            
LIABILITIES AND STOCKHOLDERS' EQUITY                               
CURRENT LIABILITIES:                                               
Accounts payable                        $  5,409,000   $  4,181,000
Accrued liabilities                        3,864,000      3,171,000
Current maturities of long-term debt                               
  and capital leases                       2,074,000      2,409,000
Line of credit                             2,186,000        625,000
                                         -----------    -----------
  Total current liabilities               13,533,000     10,386,000
                                                                   
LONG-TERM OBLIGATIONS, net of current                              
  maturities:                                                      
Capital leases                             4,242,000      4,041,000
Long-term debt                            10,788,000      6,593,000
                                         -----------    -----------
Total long-term obligations               15,030,000     10,634,000
                                                                   
ACQUISITION LIABILITIES                    4,888,000      4,212,000
DEFERRED LEASE PAYMENTS                      935,000        657,000
DEFERRED INCOME TAXES                      1,865,000      3,645,000
                                                                   
STOCKHOLDERS' EQUITY:                                              
Preferred stock, series A; $.01 par                 
  value, 100,000 shares authorized                 -              -
Common stock; $.01 par value,                
  30,000,000 shares authorized --
  15,681,162 and 15,706,537 shares
  issued and outstanding at December
  31, 1995 and December 29, 1996,
  respectively                               157,000        157,000
Additional paid-in capital                96,954,000     97,095,000
Retained earnings                         15,216,000     15,920,000
                                         -----------    -----------
  Total stockholders' equity             112,327,000    113,172,000
                                         -----------    -----------            
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                                $148,578,000   $142,706,000
                                         ===========    ===========
</TABLE>
                                                                   
                                                                   


See notes to consolidated financial statements.




TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
                 

                                             Year Ended                
                                ------------------------------------
                                January 1,    December 31,   December 29,
                                   1995          1995          1996
<S>                             <C>          <C>             <C>
REVENUES:                                                            
Restaurant sales               $124,826,000  $137,191,000    $131,680,000
Franchise fees and royalty
  income                          2,424,000     1,342,000         516,000
                                -----------   -----------     -----------      
  Total revenues                127,250,000   138,533,000     132,196,000
                                -----------   -----------     -----------
                                                                     
COSTS AND EXPENSES:                                                  
Restaurant cost of sales         41,252,000    44,083,000     41,336,000
Labor                            31,374,000    36,262,000     34,653,000
Occupancy                         7,757,000     8,192,000      8,161,000
Other restaurant operating
  costs                          21,853,000    26,658,000     23,553,000
General and administrative        4,818,000     6,068,000      6,445,000
Depreciation and amortization     7,112,000    10,301,000      9,245,000
Litigation settlement                     -             -      3,400,000
Special charge                            -     8,100,000      2,497,000
Reserve for notes and other 
  receivables                             -     3,500,000              -
                                -----------   -----------     ----------       
  Total costs and expenses      114,166,000   143,164,000    129,290,000
                                -----------   -----------    -----------       
INCOME (LOSS) FROM OPERATIONS    13,084,000    (4,631,000)     2,906,000
                                             
                                                                     
INTEREST INCOME (EXPENSE), NET      220,000    (1,397,000)    (1,348,000)     
                                 ----------   -----------    -----------       
                                                                     
INCOME (LOSS) BEFORE INCOME
  TAXES                          13,304,000    (6,028,000)     1,558,000

                                                                     
BENEFIT (PROVISION) FOR INCOME
  TAXES                          (4,784,000)    2,230,000       (854,000)
                                -----------   -----------     ----------
                                                                     
NET INCOME (LOSS)               $ 8,520,000   $(3,798,000)   $   704,000
                                 ==========   ===========     ==========      
                                                                     
NET INCOME (LOSS) PER SHARE     $      0.55   $     (0.24)   $      0.04
                                 ==========   ===========     ==========       
                                                                     
WEIGHTED AVERAGE SHARES 
  OUTSTANDING                    15,643,577    15,648,624     15,694,757
                                 ==========   ===========    =========== 

</TABLE>
                                                                     
                                 
See notes to consolidated financial statements.


TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOILDERS' EQUITY
<TABLE>
                              Preferred Stock        Common Stock
                            -------------------   ------------------        Additional                  Total 
                                Shares               Shares                  Paid-in     Retained   Stockholders'   
                            Outstanding  Amount    Outstanding  Amount      Capital      Earnings       Equity
<S>                        <C>           <C>       <C>          <C>         <C>          <C>          <C>

Balance, January 1, 1994         -       $  -      14,763,814   $148,000    $90,322,000  $10,494,000  $100,964,000
Sale of stock, net of related
  cost of $67,000                -          -         225,000      2,000      3,667,000            -     3,669,000
Issuance of stock                -          -         115,385      1,000      1,500,000            -     1,501,000
Options exercised                -          -         456,963      5,000        868,000            -       873,000
Tax benefit from stock options   -          -               -          -        125,000            -       125,000
Net income                       -          -               -          -              -    8,520,000     8,520,000
                               ----       ----     ----------    -------     ----------   ----------   -----------
Balance, January 1, 1995         -          -      15,561,162    156,000     96,482,000   19,014,000   115,652,000

Options exercised                -          -         120,000      1,000        375,000            -       376,000
Tax benefit from stock options   -          -               -          -         97,000            -        97,000
Net loss                         -          -               -          -              -   (3,798,000)   (3,798,000)
                               ----       ----     ----------    -------     ----------   ----------   -----------
Balance, December 31, 1995       -          -      15,681,162    157,000     96,954,000   15,216,000   112,327,000

Options exercised                -          -          25,375          -        119,000            -       119,000
Tax benefit from stock options   -          -               -          -         22,000            -        22,000
Net income                       -          -               -          -              -      704,000       704,000
                               ----       ----     ----------    -------     ----------   ----------   -----------
Balance, December 29, 1996       -        $ -      15,706,537   $157,000    $97,095,000  $15,920,000  $113,172,000
                               ====       ====     =========     =======     ==========   ==========   ===========

</TABLE>

See notes to consolidated financial statements.  



TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>

                                                   Year Ended
                                     ------------------------------------------
                                     January 1,    December 31,    December 29,
                                        1995           1995            1996
<S>                                  <C>           <C>             <C>
CASH FLOWS FROM OPERATING                                             
ACTIVITIES:
Net income (loss)                    $8,520,000    $(3,798,000)    $  704,000
Adjustments to reconcile net                                          
  income (loss) to net cash
  provided by operating activities:
    Depreciation and amortization     7,112,000     10,301,000      9,245,000
    Deferred income taxes             1,220,000        386,000        450,000
    Special charge                            -      8,100,000      2,497,000
    Reserve for notes and other
      receivables                             -      3,500,000              -
    Capitalized interest               (312,000)      (117,000)       (12,000)
    Deferred income and lease 
      payments                            9,000       (687,000)      (278,000)
    Other                              (113,000)             -              -
    (Increase) decrease in assets, net                                       
      of effects from acquisition of
      assets of other companies:
        Receivables                    (163,000)      (953,000)       291,000
        Inventory                      (519,000)         2,000        (12,000)
        Prepaid expenses and other 
          assets                     (1,295,000)       509,000        347,000
        Pre-opening costs            (1,884,000)    (1,289,000)      (144,000)
        Federal income taxes
          receivable                    948,000     (2,415,000)     2,414,000
        Other assets                          -        526,000        393,000
    Increase (decrease) in liabilities,                                      
      net of effects from acquisition
      of liabilities of other
      companies:
        Accounts payable and accrued 
          liabilities                 1,858,000     (5,237,000)    (3,009,000)
        Acquisition liabilities               -     (3,052,000)      (676,000)
        Income taxes payable           (254,000)             -              -
                                     ----------    -----------     ----------
Net cash provided by operating
  activities                         15,127,000      5,776,000     12,210,000
                                     ----------    -----------     ----------
                                                                    
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment  (36,645,000)   (18,738,000)    (9,188,000)
Proceeds from sales of property and
  equipment                             269,000      1,179,000        846,000
Payment for acquisition of assets
  of other companies                 (1,315,000)             -              -
Investment in joint venture            (500,000)      (186,000)      (388,000)
                                     ----------    -----------     ----------
Net cash used by investing
  activities                        (38,191,000)   (17,745,000)    (8,730,000)
                                     ----------    -----------     ----------
                                                                    
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
  debt and draws on line of credit            -     19,038,000              -
Principal payments under long-term
  debt and line of credit              (344,000)   (11,823,000)    (5,398,000)
Principal payments under capital
  leases                               (166,000)      (148,000)      (224,000)
Sale of stock, net of costs           3,669,000              -              -
Exercise of stock options               873,000        376,000        119,000
Repayment of franchisee loans           139,000              -              -
                                      ---------    -----------     ----------
Net cash provided (used) by
  financing activities                4,171,000     7,443,000      (5,481,000)
                                     ----------    ----------      ----------
NET DECREASE IN CASH                (18,893,000)   (4,526,000)     (2,001,000)
                                     
                                                                      
CASH AND CASH EQUIVALENTS,                             
  beginning of period                26,168,000     7,275,000       2,749,000
                                     ----------    ----------      ----------
CASH AND CASH EQUIVALENTS, 
  end of  period                    $ 7,275,000  $  2,749,000     $   748,000
                                     ==========   ===========      ==========
</TABLE>
                                                                      
                                                                      
See notes to consolidated financial statements.



TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


SUMMARY OF NON-CASH TRANSACTIONS:

During 1996, the Company closed one restaurant and charged its  net
book value of $139,000 to acquisition liabilities.

During 1995, the Company closed four restaurants and charged  their
net  book value of $2.1 million to acquisition liabilities.   Also,
the  Company  sold  three  restaurants to  various  franchisees  in
exchange for $1.2 million in notes receivable during 1995.  Capital
leases in the amount of $405,000 were terminated due to the sale of
one of these restaurants.

During   1994,  eight  restaurants  were  purchased  from   various
franchisees in exchange for cash of $1.3 million, common  stock  of
$1.5  million, notes payable aggregating $8.0 million,  and  assets
totaling  $2.6 million. Additionally, the Company recorded goodwill
of  $8.6 million during 1994 which resulted from the finalizing  of
the  acquisition  liabilities  of previous  business  combinations.
Furthermore,  capital  lease obligations of approximately  $725,000
were  incurred  when the Company entered into new lease  agreements
for property and equipment during 1994.


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

<TABLE>
                                             Year Ended
                               -------------------------------------
                                 January 1,    December    December
                                    1995       31, 1995    29, 1996
<S>                            <C>          <C>         <C>
Cash paid for interest, net        
  of interest capitalized      $ 759,000     $1,672,000  $1,144,000
Cash received for income
  taxes                                -      1,126,000   2,504,000
Cash paid for income taxes     2,625,000        580,000     477,000

</TABLE>


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
    OPERATIONS
   
   Nature  of  Operations  -  Taco  Cabana,  Inc.  (the  "Company")
   operates  a  chain of Mexican patio style fast food  restaurants
   located  primarily  in  the  Southwestern  United  States.    At
   December 29, 1996, the Company owned and operated a total of 104
   units,  96 under the "Taco Cabana" name, two under the "Sombrero
   Rosa" name, six under the "Two Pesos" name.  There were also  17
   Taco  Cabana  franchise units and three Two Peso licensed  units
   under operation by others.
   
   Principles   of  Consolidation  -  The  consolidated   financial
   statements  include  all  accounts  of  the  Company   and   its
   wholly-owned   subsidiaries.   All   significant   inter-company
   balances and transactions have been eliminated.
   
   Fiscal Year - The Company's accounting period is based upon a 52
   or  53  week  fiscal  year  ending  on  the  Sunday  closest  to
   December  31.   The  fiscal  years  1994,  1995  and  1996  were
   comprised  of the 52 weeks ending January 1, 1995, December  31,
   1995 and December 29, 1996, respectively.
   
   Use  of  Estimates - The preparation of financial statements  in
   conformity   with   generally  accepted  accounting   principles
   requires  management  to  make estimates  and  assumptions  that
   affect  the  reported  amounts of assets  and  liabilities,  the
   disclosure of contingent assets and liabilities at the  date  of
   the  financial statements and the reported amounts  of  revenues
   and  expenses during the reporting period.  Actual results could
   differ from those estimates.
   
   Liquor  Sales  -  To conform to state liquor  laws,  the  liquor
   licenses are maintained and liquor sales are accounted for by  a
   separate  liquor corporation.  The liquor corporation  pays  the
   Company  a management fee based on liquor sales, reimburses  the
   Company  for  its share of operating costs, and  pays  base  and
   additional  rent  based  on liquor  sales.   In  order  to  more
   accurately  reflect  restaurant  operations,  all  revenues  and
   expenses  relating  to liquor sales have been  included  in  the
   consolidated financial statements of the Company.
   
   Inventory  - Inventory is stated at the lower of cost using  the
   first-in, first-out method, or market and consists primarily  of
   food products, beverages and paper supplies.
   
   Property  and  Equipment - Property and equipment is  stated  at
   cost. Equipment and buildings under capital leases are stated at
   the lower of the present value of minimum lease payments or fair
   market  value  of  the  asset at the  inception  of  the  lease.
   Depreciation   and   amortization   are   provided   using   the
   straight-line  method over the estimated  useful  lives  of  the
   assets or the applicable lease term, if less.
   
   The  estimated  useful lives used in computing depreciation  and
   amortization are as follows:

      Furniture, fixtures and equipment             2-10 years
      Buildings                                    20-30 years
      Leasehold improvements                        5-30 years
                                                      
   
   Maintenance  and  repairs are charged to  expense  as  incurred;
   improvements which increase the value of the property and extend
   the useful life are capitalized.
   
   Intangible Assets - Goodwill, or the excess of acquisition costs
   over   the  fair  market  value  of  the  assets  acquired   and
   liabilities assumed, is amortized using the straight-line method
   from  25 to 40 years.  The trade name and the rights to the Taco
   Cabana  name  are amortized using the straight-line method  over
   forty  years.   Non-compete agreements are amortized  using  the
   straight-line method over their estimated useful lives,  ranging
   from   five   to   fifteen  years.   Management   assesses   the
   recoverability  of  goodwill  on  the  basis   of   actual   and
   undiscounted,   projected  cash  flows  from   the   restaurants
   acquired.   Should  projected cash flows not  be  sufficient  to
   recover   the  Company's  investment,  including  any   recorded
   goodwill, management would utilize either a discounted cash flow
   basis or other determination of current fair value, in order  to
   determine the amount of the impairment.
   
   Pre-opening  Costs  -  The  costs associated  with  opening  new
   restaurants  are capitalized and amortized over  a  twelve-month
   period.   Such  amounts are net of accumulated  amortization  of
   $1.2  million  and $4,000 at December 31, 1995 and December  29,
   1996, respectively.
   
   Franchise Income - The Company has sold franchises that give the
   franchisees  the  right  to operate Taco Cabana  restaurants  in
   specified areas.  Generally, each franchisee acquires the  right
   to  open  three  or  more restaurants.   A  development  fee  is
   recognized  as  income when the agreement is signed,  while  the
   franchise  fee on each restaurant is deferred until the  opening
   of  the  franchised  restaurant.   In  addition,  the  franchise
   agreement  requires a franchise royalty fee and  an  advertising
   fee  on  gross  sales;  such fees are recorded  as  income  when
   earned.    In   some  markets,  franchisees  pay  an  additional
   percentage of gross sales for expanded media coverage  in  their
   respective areas.
   
   Concentrations  of  Credit  Risk -  Financial  instruments  that
   potentially subject the Company to concentrations of credit risk
   consisted  principally  of  amounts  due  from  franchisees  and
   receivables from credit card sales.  These risks are limited due
   to  their geographic dispersion.  The Company has no significant
   concentrations of credit risk.
   
   Income  Taxes  -  Income taxes are recorded  using  a  liability
   approach based upon currently enacted tax rates.  The effect  of
   future  changes in tax laws will be recorded, when the laws  are
   enacted.
   
   Net  Income  (Loss) Per Share - Net income (loss) per  share  is
   computed  by dividing net income (loss) by the weighted  average
   number  of  common shares outstanding during each year.   Common
   stock  equivalent  shares, which relate to  stock  options,  are
   included in the weighted average when the effect is dilutive.
   
   Statements of Cash Flows - For purposes of reporting cash flows,
   the Company considers all highly liquid debt instruments with  a
   remaining  maturity at the date of purchase of three  months  or
   less to be cash equivalents.
   
   Commitments  and Contingencies - The Company does not  subscribe
   to  worker's  compensation insurance in its Texas  market.   The
   Company  accrues for claims based on historical actual  payments
   made  for such claims and expenses, as well as an evaluation  of
   current  and anticipated claims and expenses.  The Company  does
   maintain  an excess liability coverage which management believes
   is adequate to cover any substantial claims.
   
   Stock-Based  Compensation - The Company accounts for stock-based
   compensation  using  the intrinsic value  method  prescribed  in
   Accounting Principles Board ("APB") No. 25, Accounting for Stock
   Issued  to Employees, and related interpretations.  Accordingly,
   compensation cost for stock options is measured as  the  excess,
   if any, of the quoted market price of the Company's common stock
   at  the  date of grant over the amount an employee must  pay  to
   acquire  the  stock.   The  Company has adopted  the  disclosure
   requirements  of  Statement  of Financial  Accounting  Standards
   ("SFAS")  No.  123, Accounting for Stock-Based Compensation,  as
   included in Note 12.
   
   
2. LITIGATION SETTLEMENT AND LEGAL PROCEEDINGS
   
   On  September 13, 1995, a shareholder lawsuit (A.L. Park, et al.
   v.  Taco  Cabana, Inc., et al.) was filed in the  United  States
   District  Court  for  the  Western  District  of  Texas   (Cause
   No.  SA95CA0847)  in September 1995 seeking status  as  a  class
   action.   The  lawsuit  alleged  that  the  defendants  violated
   federal securities laws by alleged misrepresentations which  the
   plaintiffs  claim  were  designed to  artificially  inflate  the
   Company's  stock  price.  The suit alleged that  the  defendants
   misrepresented   the   condition  of  the  Company's   business,
   principally  with  regard to the success of its  acquisition  of
   certain  Two  Pesos restaurants, its future earnings  prospects,
   and  its declining sales volume.  The allegations cover the time
   period  from  April  8, 1993 to September  17,  1994,  including
   public  offerings  of the Company's stock on July  7,  1993  and
   December 7, 1993.
   
   On July 24, 1996, the Company entered into a proposed settlement
   (the  "Settlement"), subject to court approval and certain other
   conditions.  Under the terms of the Settlements, the  plaintiffs
   will  receive a total of $6.0 million.  The Company's  insurance
   carrier has deposited $3.05 million in cash, and the Company has
   deposited $2.95 million in cash into an escrow account for  such
   purposes.   Additionally,  the  Company  has  accrued  and  paid
   approximately  $450,000 for legal and related expenses  incurred
   in connection with the Settlement.
   
   The  Company  denies any liability or wrongdoing  in  connection
   with  the  lawsuit.  The Settlement was entered  into  to  avoid
   continuing distraction of management, reduce overall legal  cost
   liability  and  exposure  to  risk  of  adverse  outcome.    The
   Settlement  was approved by the U.S. District Court on  December
   20, 1996.
   
   In  addition,  the Company is a party to routine  negligence  or
   employment-related  litigation in the  ordinary  course  of  its
   business.   No  such  pending matters, individually  or  in  the
   aggregate,  are  deemed  to  be  material  to  the  results   of
   operations or financial condition of the Company.
   
   
3. SPECIAL CHARGE
   
   During fiscal 1995 and 1996, the following special charges are
   included in the Company's financial statements:
   
                                               Year Ended
                                ---------------------------------------
                                December 31, 1995     December 29, 1996
                                -----------------     ----------------- 
   Special Charge                  $8,100,000            $2,497,000
   Income tax benefit              (3,000,000)             (747,000)
   Impact on net income (loss)      5,100,000             1,750,000
   Impact on net income (loss)
     per share                          $0.33                 $0.11
  
   
    

   Fiscal  1996 - The Company has a 50% interest in a joint venture
   which  operated three restaurants in the Atlanta market.  During
   the  fourth  quarter of 1996, the Company decided to  write-down
   its investment in the joint venture and accrue for certain costs
   associated  with  the  closing of two of the  three  restaurants
   operated  by  the joint venture.  This decision  resulted  in  a
   special  charge for $2.5 million pre-tax, $1.7 million after-tax
   or  $0.11  per share.  The special charge was comprised  of  the
   following:

   Write-down of investment in joint venture             $1,191,000
   Reserve for notes and accounts receivable                268,000
   Estimated lease obligations                              632,000
   Estimated legal and professional fees                    245,000
   Other                                                    161,000
                                                          ---------
   Total                                                 $2,497,000
                                                          =========
   

   Subsequent to December 29, 1996, two of the three restaurants in 
   the Atlanta market were closed.    
   
   Fiscal  1995  - During the second quarter of 1995, a  review  of
   all  operations  of the Company was performed.  The  review  was
   precipitated  by  a  change  in  the  Company's  core   markets,
   including  a  decline in average unit volumes and profitability,
   as well as a change in the Company's senior management.
   
   Comparable  restaurant sales trends softened in  the  third  and
   fourth  quarters of 1994, declining by about 2.9% in  the  third
   quarter  and 5.9% in the fourth quarter.  The decrease continued
   in  the first quarter of 1995, when comparable restaurant  sales
   declined by approximately 10.1%.  The decline continued into the
   second  quarter  of  1995,  which finished  with  a  decline  of
   approximately 7.7%.  This decline in sales led to a  decline  in
   profitability.
   
   In  late  April  1995, Stephen Clark was hired as President  and
   Chief  Operating Officer of the Company. After several weeks  of
   analyzing   the   trends  and  personnel,  Mr.   Clark   led   a
   comprehensive review of the Company's operations.   The  review,
   which  took place during May and June 1995, included a  detailed
   review  of  the existing restaurants including their  sales  and
   profitability   trends,  recent  and  future  marketing   plans,
   development  plans for new Company restaurants as  well  as  for
   franchisees;   relationships  with  current   franchisees;   and
   overhead   components,  including  middle   and   senior   level
   management, office space, non-restaurant assets and  bonus  pay-
   outs.
   
   To  reverse  the adverse trends in operating results, management
   began implementing a plan to improve the unit level economics of
   the  Company's restaurants.  In particular, the Company  created
   several  operations-related positions to  design  and  implement
   comprehensive labor management and restaurant operating systems;
   increased  the  number of operations supervisory positions  thus
   lowering  the  average number of restaurants each supervisor  is
   responsible for, in order to increase the effectiveness of  such
   positions; redirected its marketing program to increase focus on
   local store marketing efforts and promotional-based advertising;
   performed  market research to enhance the effectiveness  of  the
   Company's marketing programs and to provide improved market data
   to  aid  in  the design and location of future restaurants;  and
   revised  its  development criteria, including  the  construction
   costs,  design  factors, menu strategy, and began reviewing  the
   possibility of alternative development (e.g., in-line and  other
   non-traditional construction versus stand-alone restaurants).
   
   The  review  described above resulted in the decision  to  close
   several  restaurants,  allow several  franchise  restaurants  to
   close  or  revert back to the Company's control, restructure  or
   forgive  several  franchise-related  receivables,  make  several
   management   personnel  changes,  sell  certain   non-restaurant
   assets, pay certain discretionary bonuses which related  to  the
   prior  year  but were not going to be paid by prior  management,
   restructure  the Company's marketing efforts, slow  all  current
   Company and franchise development, and write-off certain prepaid
   costs  determined  to no longer have future  value  due  to  the
   changes that management planned to make.
   
   These  decisions resulted in the Company's recording  a  special
   charge during the second quarter of 1995 of $8.1 million pre-tax
   ,  $5.1 million after tax or $0.33 per share which was comprised
   of:
   
   *      Market   valuation  adjustments  totaling  $2.7   million
   resulting   from   the  decision  to  close  six   Company-owned
   restaurants and dispose of those restaurant assets;
   
   *    A provision of $1.2 million to record the estimated monthly
   lease obligation, net of expected sublease receipts, for certain
   other restaurants which have been closed or were to be closed;
   
   *    Market valuation adjustments totaling $1.2 million to allow
   for  the  disposition of certain non-restaurant capital  assets,
   including the Company's principal office and corporate airplanes
   (most  of  which assets are owned by the Company,  so  that  the
   disposition of such assets will generate cash);
   
   *    The accrual of $980,000 related to the severance of certain
   contractual employment and consulting agreements and the payment
   of  relocation expenses for Mr. Clark and other new  members  of
   management;
   
   *     The  write-off of $810,000 related to certain  capitalized
   media production assets which will no longer be utilized or were
   deemed  to  no  longer  have value due  to  the  change  in  the
   Company's marketing philosophy described above;
   
   *     The  write-off of $370,000 in development costs associated
   with  the sites which were under development at the time of  the
   decision to slow development;
   
   *      An  accrual  of  $300,000  for  the  payment  of  certain
   operational bonuses which are described above;
   
   *     An  accrual  of  $420,000 for certain employee  litigation
   claims;
   
   *    An accrual of $120,000 for miscellaneous expenses.
   
   As of December 29, 1996, the Company had closed all of the six
   restaurants identified in the review above and paid costs of
   approximately $1.3 million that were applied against amounts
   accrued in the special charge.  In addition, the Company sold a
   portion of the non-restaurant assets discussed above charging
   the loss of approximately $752,000 to the related accrual and
   generating cash of $788,000.
   
4. RESERVE FOR NOTES AND OTHER RECEIVABLES
   
   During  the  second quarter of 1995, the decision  was  made  to
   reserve for notes and other receivables of $3.5 million pre-tax.
   This  reserve  included $2.0 million for notes receivable  which
   were outstanding in connection with the sales of restaurants  to
   franchisees.  The decision to reserve for these notes was  based
   on  discussions  held  with the franchisees  during  the  second
   quarter of 1995 and a review of their financial position.  Three
   notes totaling $1.3 million of this amount were reserved due  to
   the  fact that the franchisee approached the Company during  the
   second quarter of 1995 and indicated that the devaluation of the
   Mexican  Peso  in  December  1994  had  permanently  harmed  its
   restaurants  to  an  extent that they were going  to  close  the
   restaurants. These restaurants were all closed during 1995.  The
   remaining  amount  relates to a restaurant  whose  sales  trends
   continue  to  erode and there is substantial  doubt  as  to  the
   recoverability  of  the  balance.   The  reserve  amounts   were
   calculated  by  reducing the outstanding note  balances  to  the
   estimated  value of the underlying collateral and reserving  the
   remaining balance.  The restaurants were all in Texas.
   
   The  remaining  $1.5  million primarily  relates  to  franchisee
   receivables.  Approximately $250,000 of this amount  relates  to
   periodic  franchise  and royalty fees owed  by  the  franchisees
   noted  above,  including  interest.  An additional  $500,000  is
   reserved  due  to a franchisee's failure to meet  a  contractual
   obligation  and  make payment on a development agreement  during
   the  second  quarter  of 1995.  Approximately  $350,000  of  the
   amount relates to periodic royalty fees and franchise fees  from
   a  franchisee  with whom the Company had been in discussions  to
   acquire its restaurants.  Due to the Company's decision to  slow
   all  development, the Company broke off these negotiations.  The
   remaining balances, totaling $400,000, include various types  of
   receivables   including   other  franchise   amounts,   employee
   receivables and other miscellaneous receivables.


5. ACCOUNTS AND NOTES RECEIVABLE
   
   Accounts and notes receivable consisted of the following:
   
                                       December 31,      December 29,
                                          1995               1996

Trade receivables:
  Royalties                            $  696,000        $  668,000
  Other                                   510,000           451,000
Notes receivable-current portion          379,000           250,000
Employees                                 176,000            18,000
Related party                             132,000                 -
                                       ----------        ----------
Total                                   1,893,000         1,378,000
Less allowance for doubtful accounts     (517,000)         (595,000)
                                       ----------        ----------
Accounts receivable, net               $1,376,000        $  792,000
                                        =========         =========

Notes receivable - noncurrent:
  Franchisees                          $1,552,000        $1,470,000
  Other                                    93,000             4,000
                                        ---------         ---------
Total                                   1,645,000         1,474,000
Less allowance for uncollectible notes   (865,000)         (736,000)
                                        ---------         ---------
Notes receivable, net                  $  780,000        $  738,000
                                        =========         =========

    
   Notes receivable from franchisees approximate fair value because
   the   underlying  instrument  states  an  interest   rate   that
   approximates current market rates.  The Company's allowance  for
   doubtful accounts is reflected as a reduction of receivables  in
   the consolidated balance sheets.  The following table reconciles
   the change in the Company's allowance for doubtful accounts:

                                        December 31,     December 29,
                                            1995            1996
                                       
Balance at beginning of year            $         -      $  517,000
Reserve for doubtful accounts               517,000          78,000
                                         ----------       ---------
Balance at end of year                  $   517,000      $  595,000
                                         ==========       =========


6. PROPERTY AND EQUIPMENT, NET
   
   Property and equipment, net, consisted of the following:

                                           December 31,    December 29,
                                              1995             1996
Property and Equipment:
  Land                                   $20,731,000       $20,507,000
  Furniture, fixtures and equipment       42,805,000        48,504,000
  Leasehold improvements                  17,094,000        19,048,000
  Buildings                               15,569,000        16,587,000
  Construction in progress                   300,000           178,000
                                          ----------        ----------
  Total                                   96,499,000       104,824,000
Less accumulated depreciation and
  amortization                           (13,977,000)      (20,348,000)
                                          ----------       -----------

  Total                                   82,522,000        84,476,000
                                          ----------       -----------
Property and Equipment Held Under
  Capital Leases:
  Buildings                                6,178,000         5,780,000
  Less accumulated amortization           (1,005,000)       (1,293,000)
                                          ----------       -----------
  Total                                    5,173,000         4,487,000
                                          ----------       -----------

Property and Equipment, net              $87,695,000       $88,963,000
                                          ==========        ==========          
    

   At  December 29, 1996, the Company had three restaurants and one
   office  building  held for sale.  The total carrying  amount  of
   these  assets are $3.1 million which management estimates to  be
   the net proceeds from the disposition of these assets.  See Note
   3.
   
7. INTANGIBLE AND OTHER ASSETS
   
   Intangible and other assets consisted of the following:
   
                                          December 31,    December 29,
                                              1995            1996

Intangible assets:
  Goodwill                                $48,048,000     $48,048,000
  Noncompetition agreements                 2,500,000       2,500,000
  Trade name                                1,564,000       1,571,000
                                           ----------      ----------
  Total                                    52,112,000      52,119,000
Less accumulated amortization              (5,074,000)     (6,725,000)
                                           ----------      ----------
Intangible assets, net                    $47,038,000     $45,394,000
                                           ==========      ==========

Other assets:
  Deposits                                $   341,000     $   290,000
  Prepaid leases                              482,000         208,000
  Investment in joint venture                 686,000               -
  Other                                       111,000          43,000
                                           ----------      ----------
Other assets                              $ 1,620,000     $   541,000
                                           ==========      ==========

 


8. ACCRUED LIABILITIES
   
   Accrued liabilities consisted of the following:

                                            December 31,     December 29,
                                               1995              1996

Closed store lease obligations              $  579,000       $  845,000
Payroll related                              1,061,000          777,000
Severance                                      319,000          474,000
Property taxes                                 325,000          429,000
Employee injury                                307,000          200,000
Restaurant expenses                            127,000           91,000
Acquisition costs                              684,000           25,000
Other                                          462,000          330,000
                                             ---------        ---------
Total                                       $3,864,000       $3,171,000
                                             =========        =========

9. LEASES
   
   Operating  Leases  -  The Company leases  restaurant  facilities
   under non-cancelable operating leases with initial terms ranging
   from  three  to twenty years with options to renew.  The  future
   minimum   lease  commitments  under  all  non-cancelable   lease
   obligations as of December 29, 1996 were as follows:

         1997                     $ 8,283,000
         1998                       8,577,000
         1999                       8,754,000
         2000                       8,462,000
         2001                       7,960,000
         Thereafter                52,480,000
                                   ----------
         Total                    $94,516,000
                                   ==========
                   
    
   
   The total rental expense for operating leases for 1994, 1995 and
   1996  was  approximately $7.0 million,  $6.9  million  and  $8.4
   million,    respectively,   including   additional   rents    of
   approximately $458,000, $467,000 and $376,000, respectively.
   
   The  Company  remains  contingently liable  on  three  operating
   leases which were assigned to the purchasers of units previously
   sold  or  closed. Future minimum lease commitments  under  these
   contingent  obligations  approximate  $292,000  in   1997,   and
   $303,000  in  1998 through 2001.  Thereafter, the total  minimum
   lease  payments  are  approximately $3.2 million.   The  Company
   assesses  the  probability  of  its  having  to  assume  primary
   liability  under  these  assignments  as  part  of  its  ongoing
   assessment of franchisee relationships.
   
   Capital  Leases  -  The Company leases certain  buildings  under
   capital  lease agreements with third parties.  The  leases  have
   fifteen  and  twenty year terms.  Future minimum lease  payments
   under  the  capital  leases and the net  present  value  of  the
   minimum lease payments at December 29, 1996 were:

   Years ending:
   1997                                              $ 630,000
   1998                                                642,000
   1999                                                650,000
   2000                                                656,000
   2001                                                634,000
   Thereafter                                        2,934,000
                                                     ---------
   Total minimum lease payment                       6,146,000
   Less amount representing interest at 9% to 13%    1,906,000
                                                     ---------
   Net present value of minimum lease payments       4,240,000
   Less current portion                                199,000
                                                     ---------
   Long-term portion of capital leases              $4,041,000
                                                     =========   
    
   
   In addition to the minimum lease payments, several of the leases
   have a contingent rental based on 5% to 6% of gross sales, if
   such amounts exceed minimum rent.  No payments have been made
   under these agreements.  Furthermore, certain leases have been
   guaranteed by a stockholder of the Company.


10.LONG-TERM DEBT
   
   Long-term debt consisted of the following notes payable bearing
   interest at the prime rate of 8.25% at December 29, 1996:

                                                December 31,    December 29,
                                                    1995           1996

Note payable to a bank, collateralized by 
  certain restaurant assets, due in monthly
  installments of principal and interest 
  through January 2002                         $ 9,341,000      $  6,101,000

Note payable to a bank, unsecured, due in
  monthly installments of principal and
  interest through April 2000                    2,603,000         2,189,000

Note payable to a corporation, collateralized
  by certain restaurants, due in monthly 
  installments of principal and interest
  through September 1998                           742,000           513,000
                                               -----------       -----------
  Total                                         12,686,000         8,803,000

Less current maturities                          1,898,000         2,210,000
                                               -----------       -----------

Long-term debt, net                            $10,788,000       $ 6,593,000
                                               ===========       ===========

    

   The  future  minimum payments of long-term debt  outstanding  at
   December 29, 1996 were as follows:
   
   Years ending:
   1997                              $2,210,000
   1998                               2,341,000
   1999                               2,231,000
   2000                               2,021,000
                                      ---------
   Total                             $8,803,000
                                      =========
    

   The  amounts stated in the Company's consolidated balance sheets
   for long-term debt approximate fair value because the underlying
   note  payable balance fluctuates frequently or it is at a  fixed
   rate approximating current market rates.


11.LINE OF CREDIT
   
   During  1995,  the Company signed two secured credit  facilities
   totaling  $20.0 million including a $5.0 million revolving  line
   of  credit.   The commitments are due to expire on  January  31,
   1999.   Interest  on  funds borrowed under  the  facilities  are
   charged  at  the  New  York  prime  rate  which  was  8.25%   at
   December  29,  1996.  The credit facilities are secured  by  the
   stock  of a subsidiary company.  The facilities contain  certain
   covenants,  including cash flow to fixed charges ratio,  minimum
   net  worth,  debt  to tangible net worth ratio,  and  intangible
   assets  to net worth ratio requirements.  During the year  ended
   December  29, 1996, the Company was in compliance with all  such
   covenants.   At December 29, 1996, the Company had approximately
   $11.1  million available for cash borrowings under these  credit
   facilities.
   
   
12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS
   
   Stock Options - The Company has stock option plans (the "Plans")
   for  employees, outside directors, and advisors of  the  Company
   covering  2,000,000  shares  of  the  Company's  common   stock.
   Options  under such plans principally are exercisable  beginning
   one  to  ten years from the grant date.  The Plans terminate  in
   2000 and in 2004.  The Plans are administered by a committee  of
   outside members of the Board of Directors.  In addition, certain
   directors  were awarded non-qualified stock options pursuant  to
   the  terms of separate compensation agreements.  At December 29,
   1996,  there  were  23,658 shares available  for  issuance  upon
   exercise of options that may be granted in the future.   Options
   outstanding are as follows:
   
                                                         Weighted
                                                          Average
                                        Total Options    Exercise
                                          Outstanding      Price

Options outstanding, January 1, 1994       946,819       $ 6.03
  Granted                                  712,431        13.60
  Exercised                               (574,467)        1.91
  Expired or canceled                     (184,783)       13.53
                                          --------
Options outstanding, January 1, 1995       927,000       $11.80
  Granted                                  938,125         5.41
  Exercised                               (120,000)        3.14
  Expired or canceled                     (692,000)       13.20
                                          --------
Options outstanding, December 31, 1995   1,053,125       $ 6.40
  Granted                                  231,250         6.30
  Exercised                                (25,375)        4.85
  Expired or canceled                     (147,500)        5.36
                                          --------
Options outstanding, December 29, 1996   1,111,500       $ 6.18
                                         =========
Options exersisable, December 29, 1996     427,881       $ 5.39
                                         =========

      



   For  the  options outstanding at December 29, 1996, the weighted
   average  remaining life and exercise price of these  outstanding
   options  were  18 months and $6.33, respectively.  In  addition,
   the  weighted  average exercise price of options granted  during
   1996 was $6.38.
   
   SFAS  No.  123, Accounting for Stock-Based Compensation,  allows
   for  the election to continue to use Accounting Principles Board
   ("APB")   Opinion  No.  25,  Accounting  for  Stock  Issued   to
   Employees. The Company has evaluated SFAS No. 123 and intends to
   continue  following  APB Opinion No. 25 for expense  recognition
   purposes.   The pro-forma compensation expense, net  income  and
   earnings per share which were calculated as if SFAS No. 123  had
   been applied are as follows:

                                 January 1,   December 31,   December 29,
                                    1995         1995           1996
   Pro Forma

   Compensation expense          $  433,000   $  669,000     $  741,000
   Net income                     8,247,000   (4,220,000)       237,000
   Income (loss) per share       $     0.53   $    (0.27)    $     0.01 

    

   The Black-Scholes option pricing model was used to determine the
   above  pro-forma  information.  The  calculations  relied   upon
   estimates of the volatility of the Company's stock and  expected
   dividends,  as  well  as determinations of a risk-free  interest
   rate  and  expected life of the options.  A volatility  rate  of
   49.0% was used for options issued prior to 1994, 37.5% was  used
   for  options  issued during 1994 and 36.0% was used for  options
   issued  during 1995 through 1996.  Dividends were  estimated  at
   zero.    The  discount  rate  charged  on  loans  to  depository
   institutions by the Federal Reserve Bank was used as  the  risk-
   free interest rate.  The discount rate was 5.0% throughout 1996,
   and  varied  from a low of 3.0% to a high of 6.5% for  the  time
   periods  which affected the calculations above.  In some  cases,
   the life of the Company's options was specifically stated as two
   years, otherwise, the life is expected to be three years.
   
   Preferred  Stock Purchase Rights - In June 1995,  the  Company's
   Board  of  Directors declared a distribution  of  one  preferred
   stock  purchase  right  for each share of the  Company's  common
   stock.   The  rights  were  distributed  on  June  20,  1995  to
   stockholders of record as of the close of business on that  day.
   Each right will entitle the holder to buy 1/100 of a share of  a
   newly  authorized Series A preferred stock at an exercise  price
   of $37.50 per right.  The rights become exercisable on the tenth
   day  after  public  announcement that  a  person  or  group  has
   acquired 15% or more of the Company's common stock.  The  rights
   may be redeemed by the Company prior to becoming exercisable  by
   action of the Board of Directors at a redemption price of  $0.01
   per  right.   If  the Company is acquired in a merger  or  other
   business  combination  transaction  in  which  it  is  not   the
   surviving  corporation, each right will entitle  its  holder  to
   purchase stock of the acquiring company having a market value of
   twice the exercise price.  In the event that the Company is  the
   surviving  corporation, each right will entitle  its  holder  to
   purchase  the  Company's common stock having a market  value  of
   twice  the exercise price of each right.  At December 29,  1996,
   there were 15,706,537 rights outstanding.
   

   Preferred  Stock - In June 1995, the Company authorized  100,000
   shares  of Series A, preferred stock with a par value of   $0.01
   per  share.   As  of  December 29, 1996, there  were  no  shares
   outstanding.
   
   
13.INCOME TAXES
   
   The provision (benefit) for income taxes differs from the amount
   computed using statutory rates as shown below:

                                                Year Ended
                                    ---------------------------------------
                                    January 1,   December 31,   December 29,
                                       1995        1995            1996

Federal income tax at statutory
  rate                              $4,656,000   $(2,049,000)   $530,000
State income taxes                     285,000       (87,000)     39,000
Other                                 (157,000)      (94,000)    285,000
                                     ---------    ----------     -------
  Total                             $4,784,000   $(2,230,000)   $854,000
                                     =========    ===========    =======

   
   

The provision (benefit) for income taxes is comprised of the following:
   
                                                 Year Ended
                                    ---------------------------------------
                                    January 1,   December 31,   December 29,
                                       1995         1995           1996

    Current                         $3,564,000   $(1,844,000)   $404,000
    Deferred                         1,220,000      (386,000)    450,000
                                     ---------    ----------     -------
      Total                         $4,784,000   $(2,230,000)   $854,000
                                     =========    ==========     =======    

   Deferred  income taxes and benefits are provided for differences
   between  the  financial statement carrying  amount  of  existing
   assets   and   liabilities  and  their  respective  tax   bases.
   Significant deferred tax assets and liabilities are as follows:

                                                    Year Ended

                                           December 31,       December 29,
                                              1995                1996

Current:
Deferred Federal Tax Assets:
  Workmen's compensation claims            $  165,000         $  194,000
  Investment in joint venture                       -            879,000
  Accounts receivable                         178,000            211,000
  Charitable contributions                          -             32,000
  Net operating loss carryforward             324,000            558,000
                                            ---------          ---------
Total                                         667,000          1,874,000
                                            ---------          ---------
Deferred Federal Tax Liabilities -
  Pre-opening costs                          (170,000)           (46,000)
  State taxes                                       -             (1,000)
                                            ---------          ---------
Total                                        (170,000)           (47,000)
                                            ---------          ---------
Net Current Deferred Tax Asset             $  497,000         $1,827,000
                                            =========          =========

Noncurrent:
Deferred Federal Tax Assets:                
  Net operating loss carryforward          $1,517,000         $1,598,000
  Tax credit carryforward                     178,000            627,000
  Notes receivable                            464,000            261,000
  Media and production                        208,000            202,000
  Closed stores                                81,000            (83,000)
  State taxes                                 (11,000)           160,000
  Alternative minimum tax                           -          1,056,000
                                            ---------          ---------
Total                                       2,437,000          3,821,000
                                            ---------          ---------
Deferred Federal Tax Liabilities:
  Franchise/start-up costs                     (9,000)                 -
  Deferred rent                              (975,000)        (1,505,000)
  Fixed and intangible assets              (3,318,000)        (5,961,000)
                                            ---------          ---------
Total                                      (4,302,000)        (7,466,000) 
                                            ---------          ---------
Net Noncurrent Deferred Tax Liability     $(1,865,000)       $(3,645,000)
                                           ==========         ==========
Net Deferred Tax Liability                $(1,368,000)       $(1,818,000)
                                           ==========         ========== 

    

   At  December  29,  1996,  the Company had  net  operating  loss,
   alternative  minimum tax and general business tax credit  carry-
   forwards  of  approximately  $6.1  million,  $1.1  million   and
   $627,000,  respectively.  A portion of the above  carry-forwards
   resulted  from  the acquisition of Two Pesos;  the  Company  was
   allowed  to  utilize the net operating loss of $5.4 million  and
   tax  credit carry-forwards of $178,000 of Two Pesos that existed
   at  the date of acquisition.  However, these carry-forwards  may
   only   offset  the  post-acquisition  taxable  income  and   tax
   liability  of the Company's subsidiary that acquired Two  Pesos.
   In  addition,  because  of  the change  in  ownership,  the  net
   operating  loss carry-forward utilization is further limited  to
   approximately  $953,000  per year, and  the  tax  credit  carry-
   forward acquired from Two Pesos is limited each year to the  tax
   equivalent  of  any remaining portion of the net operating  loss
   limitation.   The  net  operating loss  and  tax  credit  carry-
   forwards begin to expire in 2003 and 2000, respectively.
   
   The  alternative minimum tax credit carry-over and the remaining
   general  business  credit  carry-over resulted  from  prior-year
   losses which were carried back three preceding tax years.  These
   credits  are  available to offset future  taxable  income.   The
   general   business  credit  begins  to  expire  in  2007.    The
   alternative minimum tax credit has no expiration date.
   
   
14.ACQUISITION LIABILITIES
   
   The  Company establishes acquisition liabilities, as  necessary,
   in  connection  with  the  purchase  method  of  accounting  for
   restaurants and other assets it acquires.  Such liabilities  are
   primarily  related to leases that were at terms  less  favorable
   than  market  rates  prevailing  at  the  acquisition  date  and
   anticipated restaurant closure costs, if any.
   
   The liability established for leases in excess of the prevailing
   market were based on current market rental rates at the date  of
   acquisition  as  compared to the terms of the  leases  acquired.
   This  liability is being amortized as a reduction  of  occupancy
   expense  over the remaining term of the applicable  leases.  The
   total  amount of this reserve was $2.0 million and $1.8 million,
   at  December  31,  1995  and December  29,  1996,  respectively.
   During 1996, approximately $157,000 of the balance was amortized
   in this manner.
   
   The  remaining balance relates to reserves established  for  the
   closure of certain acquired restaurants.  These restaurants were
   anticipated  to  be  closed  at the time  of  acquisition.   The
   amounts  reserved  were  equal to  the  value  assigned  to  the
   building  and  equipment acquired, less any anticipated  salvage
   value, plus an amount estimated to terminate the lease prior  to
   its  expiration date.  The total amount of this reserve was $4.5
   million and $2.8 million, at December 31, 1995 and December  29,
   1996,  respectively.  During 1995 and 1996,  approximately  $2.4
   million  and  $1.7  million, respectively, of this  reserve  was
   utilized  in  the closure of restaurants.  No gain or  loss  was
   recorded on any of these transactions.
   
15.QUARTERLY FINANCIAL DATA (Unaudited)
   
                                        Quarter Ended
                     ---------------------------------------------------
                       April 2,     July 2,      Octoer 1,   December 31,
                        1995        1995(1)        1995         1995

Total revenues       $32,837,000  $36,935,000   $35,668,000   $33,093,000
Gross profit          22,463,000   25,113,000    24,214,000    22,660,000

Net income (loss)
  applicable to
  common stock         1,038,000   (6,028,000)      751,000       441,000

Net income (loss)
  per share of
  common stock      $       0.07  $     (0.39)  $      0.05   $      0.03  

Average common and
  common equivalent
  shares outstanding  15,746,087   15,564,162    15,723,263    15,730,854


                                      Quarter Ended
                      ---------------------------------------------------
                        March 31,    June 30,     September 29,  December 29,
                          1996       1996 (2)         1996         1996 (1) 

Total revenues        $31,264,000  $35,308,000    $33,810,000    $31,814,000
Gross profit           21,562,000   24,234,000     23,040,000     22,024,000

Net income (loss)
  applicable to 
  common stock            734,000     (533,000)     1,220,000       (698,000)

Net income (loss)
  per share of
  common stock        $     0.05   $     (0.04)    $     0.08    $     (0.04)

Average common and
  common equivalent
  shares outstanding   15,867,382   15,687,689      16,014,352    15,703,412

                                 
(1)  See Notes 3 and 4 for discussion of charges recorded in these quarters.
(2)  See Note 2 for discussion of charge recorded in this quarter.