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

(Mark One)

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

For the quarterly period ended September 29, 1996

                             OR

[ ]  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)

                              
               Telephone Number (210) 804-0990
     --------------------------------------------------
    (Registrant's telephone number, including area code)

     
          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 the number of shares of each of the
     issuer's classes of common stock as of the latest
     practicable date:

          Class       Outstanding at November 1 , 1996
      ------------    --------------------------------
      Common Stock           15,706,537 shares
                              
                              
                              
                              
                      TACO CABANA, INC.
                            INDEX


                                                             Page
                                                            Number
                                                            ------
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Condensed Consolidated Balance Sheets at September 29,         2
  1996 and December 31, 1995
                                                            
Condensed Consolidated Statements of Operations for the        3
  Thirteen Weeks Ended September 29, 1996 and October 1,
  1995
                                                           
Condensed Consolidated Statements of Operations for the        4
  Thirty-Nine Weeks Ended September 29, 1996 and October
  1, 1995
                                                           
Condensed Consolidated Statements of Cash Flows for the        5
  Thirty-Nine Weeks Ended September 29, 1996 and October
  1, 1995
                                                           
Notes to Condensed Consolidated Financial Statements        6-10
                                                            
                                                            
Item 2.  Management's Discussion and Analysis of           11-20
  Financial Condition and Results of Operations


PART II.  OTHER INFORMATION

Item 1. Legal Proceedings                                    20
                                                           
Items 2 through 5 have been omitted since the registrant    
  has no reportable events in relation to the items

Item 4.  Submission of Matters to a vote of Security 
  Holders                                                    20 
                                                          
Item 6. Exhibits and Reports on Form 8-K                     20
                                                          
Signature                                                    21
                                                          
                              
                      TACO CABANA, INC.
            CONDENSED CONSOLIDATED BALANCE SHEETS
                         (UNAUDITED)
                              
                                         September 29,  December 31,
                                            1996           1995
                                        ------------   ------------             
ASSETS                                                      
CURRENT ASSETS:                                             
Cash and cash equivalents               $    791,000   $  2,749,000
Receivables, net                           1,451,000      1,376,000
Inventory                                  1,866,000      1,846,000
Prepaid expenses                           1,185,000      1,700,000
Pre-opening costs, net                        57,000        500,000
Federal income taxes receivable              491,000      2,777,000
Deferred income taxes                      1,766,000        497,000
                                         -----------    -----------
  Total current assets                     7,607,000     11,445,000
                                                            
PROPERTY AND EQUIPMENT, net               88,330,000     87,695,000
NOTES RECEIVABLE, net                        763,000        780,000
INTANGIBLE ASSETS, net                    45,807,000     47,038,000
OTHER ASSETS                                 827,000        934,000
INVESTMENT IN JOINT VENTURE                  936,000        686,000
                                         -----------    -----------             
TOTAL                                   $144,270,000   $148,578,000
                                         ===========    ===========
            
LIABILITIES AND STOCKHOLDERS' EQUITY                               
CURRENT LIABILITIES:                                               
Accounts payable                        $  3,475,000   $  5,409,000
Accrued liabilities                        2,945,000      3,864,000
Current maturities of long-term debt                               
  and capital leases                       2,372,000      2,074,000
Line of credit                             1,500,000      2,186,000
                                         -----------    -----------    
  Total current liabilities               10,292,000     13,533,000
                                                                   
LONG-TERM OBLIGATIONS, net of current                              
  maturities:                                                      
Capital leases                             4,094,000      4,242,000
Long-term debt                             7,154,000     10,788,000
                                         -----------    -----------
Total long-term obligations               11,248,000     15,030,000
                                                                   
ACQUISITION LIABILITIES                    4,356,000      4,888,000
DEFERRED LEASE PAYMENTS                      658,000        935,000
DEFERRED INCOME TAXES                      3,869,000      1,865,000
                                                                   
STOCKHOLDERS' EQUITY:                                              
Common stock                                 157,000        157,000
Additional paid-in capital                97,073,000     96,954,000
Retained earnings                         16,617,000     15,216,000
                                         -----------    -----------
  Total stockholders' equity             113,847,000    112,327,000
                                         -----------    -----------            
TOTAL                                   $144,270,000   $148,578,000
                                         ===========    ===========             
                                                                   
     See notes to Condensed Consolidated Financial Statements.
                              
                              
                                                          
                                                        
                              
                      TACO CABANA, INC.
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         (UNAUDITED)
                              
                                   For the Thirteen Weeks Ended
                                   ----------------------------
                                   September 29,     October 1,
                                       1996             1995
                                   -------------     ----------             
REVENUES:                                                     
Restaurant sales                     $33,676,000   $35,454,000
Franchise fees and royalty income        134,000       214,000
                                      ----------    ----------                 
  Total revenues                      33,810,000    35,668,000
                                      ----------    ----------                 
COSTS AND EXPENSES:                                           
Restaurant cost of sales              10,770,000    11,454,000
Labor                                  8,843,000     9,426,000
Occupancy                              2,038,000     2,091,000
Other restaurant operating costs       6,013,000     6,996,000
General and administrative             1,616,000     1,448,000
Depreciation and amortization          2,285,000     2,653,000
                                                              
  Total costs and expenses            31,565,000    34,068,000
                                      ----------    ----------                
INCOME FROM OPERATIONS                 2,245,000     1,600,000
                                      ----------    ----------                 
INTEREST EXPENSE, NET                   (308,000)     (409,000)
                                      ----------    ----------                  
INCOME BEFORE PROVISION FOR 
 INCOME TAXES                          1,937,000     1,191,000
                                                               
PROVISION FOR INCOME TAXES              (717,000)     (440,000)
                                      ----------    ----------                  
NET INCOME                           $ 1,220,000   $   751,000
                                      ==========    ==========                
NET INCOME PER SHARE                 $      0.08   $      0.05
                                      ==========    ==========                 
WEIGHTED AVERAGE SHARES OUTSTANDING   16,014,352    15,723,263
                                      ==========    ==========                 

                              
   See notes to Condensed Consolidated Financial Statements.
                              




                      TACO CABANA, INC.
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         (UNAUDITED)
                              
                                For the Thirty-Nine Weeks Ended
                                -------------------------------
                                 September 29,      October 1,
                                     1996              1995
                                 -------------      -----------                 
REVENUES:                                                     
Restaurant sales                    $ 99,969,000  $104,274,000
Franchise fees and royalty income        413,000     1,166,000
                                     -----------   -----------                  
  Total revenues                     100,382,000   105,440,000
                                     -----------   -----------                 
COSTS AND EXPENSES:                                           
Restaurant cost of sales              31,546,000    33,649,000
Labor                                 26,082,000    27,418,000
Occupancy                              6,134,000     6,178,000
Other restaurant operating costs      17,956,000    20,227,000
General and administrative             4,933,000     4,349,000
Depreciation and amortization          6,868,000     7,730,000
Litigation settlement                  3,400,000             -
Special charge                                 -     8,100,000
Reserve for notes and 
  other receivables                            -     3,500,000
                                     -----------   -----------                 
  Total costs and expenses            96,919,000   111,151,000
                                     -----------   -----------                
INCOME (LOSS) FROM OPERATIONS          3,463,000    (5,711,000)
                                     -----------   -----------                 
INTEREST EXPENSE, NET                 (1,076,000)   (1,018,000)
                                     -----------   -----------                 
INCOME (LOSS) BEFORE INCOME TAXES      2,387,000    (6,729,000)
                                                              
BENEFIT (PROVISION) FOR INCOME
  TAXES                                (986,000)     2,490,000
                                     ----------    -----------
                                                              
NET INCOME (LOSS)                   $  1,401,000  $ (4,239,000)
                                     ===========   ===========                 
NET INCOME (LOSS) PER SHARE         $       0.09  $      (0.27)
                                     ===========   ===========                
WEIGHTED AVERAGE SHARES
  OUTSTANDING                         15,952,239    15,564,162
                                     ===========   ===========
                                                                               
    See notes to Condensed Consolidated Financial Statements.




                      TACO CABANA, INC.
       CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                         (UNAUDITED)


                                     For the Thirty-Nine Weeks Ended
                                     -------------------------------
                                        September 29,     October 1,
                                            1996             1995
                                         -------------     ----------          
CASH FLOWS FROM OPERATING ACTIVITIES:                               
Net income (loss)                          $ 1,401,000  $ (4,239,000)
Adjustments to reconcile net income                                 
  (loss) to net cash provided by                                    
  operating activities:
    Depreciation and amortization            6,868,000     7,730,000
    Deferred income taxes                      735,000    (1,652,000)
    Special charge                                   -     8,100,000
    Reserve for notes and other
      receivables                                    -     3,500,000
    Changes in operating working capital    
      items                                   (850,000)   (7,899,000)
                                           -----------   -----------            
Net cash provided by operating activities    8,154,000     5,540,000
                                           -----------   ----------- 
                                                                    
CASH FLOWS FROM INVESTING ACTIVITIES:                               
Purchase of property and equipment          (5,811,000)  (16,170,000)
Investment in joint venture                   (250,000)     (250,000)
                                           -----------   -----------            
Net cash used for investing activities      (6,061,000)  (16,420,000)
                                           -----------   -----------           
CASH FLOWS FROM FINANCING ACTIVITIES:                               
Principal payments under long-term debt                             
  and line of credit                        (4,006,000)   (2,273,000)
Principal payments under capital leases       (164,000)     (110,000)
Exercise of stock options                      119,000         9,000
Proceeds from issuance of notes payable              -    10,369,000
                                           -----------   -----------            
Net cash provided (used) by financing 
  activities                                (4,051,000)    7,995,000
                                           -----------   ------------  
                                                                    
NET DECREASE IN CASH                        (1,958,000)   (2,885,000)
                                                                    
CASH AND CASH EQUIVALENTS, beginning of
  period                                     2,749,000     7,275,000
                                           -----------   -----------
                                                                    
CASH AND CASH EQUIVALENTS, end of period  $    791,000  $  4,390,000
                                           ===========   ===========           
                                                                    
     See notes to Condensed Consolidated Financial Statements.


                              
                      TACO CABANA, INC.
    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              
                              
1.  Basis of Presentation

Principles  of  Consolidation - The  consolidated  financial
statements include all accounts of Taco Cabana, Inc. and its
wholly-owned  subsidiaries (the "Company"). All  significant
intercompany balances and transactions have been eliminated.

The  unaudited  Condensed Consolidated Financial  Statements
include  all  adjustments, consisting of  normal,  recurring
adjustments  and  accruals,  which  the  Company   considers
necessary  for fair presentation of financial  position  and
the results of operations for the periods presented. Certain
information  and footnote disclosures normally  included  in
financial  statements prepared in accordance with  generally
accepted  accounting  principles  have  been  condensed   or
omitted. The interim financial statements should be read  in
conjunction  with the Company's Annual Report on  Form  10-K
for the year ended December 31, 1995.

2.  Litigation Settlement

On  July  24,  1996,  the Company entered  into  a  proposed
settlement,  subject  to court approval  and  certain  other
conditions, (the "Settlement"), of A.L. Park, et al. v. Taco
Cabana,  Inc.,  et al., (the "Lawsuit"), a  suit  originally
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.

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
$450,000  for  the  payment of legal  and  related  expenses
incurred  and anticipated to be incurred in connection  with
the  Settlement. As of September 29, 1996, the  Company  had
paid  approximately $220,000 in legal expenses  relating  to
the lawsuit.

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  is  contingent  upon  final  approval  by   U.S.
District  Court. A hearing upon such settlement is scheduled
for December 20, 1996.

3.  Special Charge

A  review of all operations 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  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 during the second quarter of  1995  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.

The  reserve  for notes and other receivables included  $2.0
million  for  notes  receivable which  were  outstanding  in
connection with the sale 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 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 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  franchisee amounts, employee  receivables,
and other miscellaneous receivables.

4.  Earnings per Share

Net  income  per  share has been computed  by  dividing  net
income  by  the  weighted average number  of  common  shares
outstanding  during  each  period. Common  stock  equivalent
shares, which relate to stock options, are included  in  the
weighted average when the effect is dilutive.

5.  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
purchased  in  1986  and  1987,  are  amortized  using   the
straight-line   method  over  forty  years.   Noncompetition
agreements are amortized using the straight-line method over
their  estimated useful lives, ranging from two  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.

6.  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  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.

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 $290,000  in
1997, and $303,000 in 1998 thru 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.

7.  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 store closure  costs,  if
any.

The   reserve  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. At December  31,  1995,  the  total
amount  of this reserve was $2.0 million. During the thirty-
nine  weeks ended September 29, 1996, approximately $154,000
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.  At
December 31, 1995, the total amount of this reserve was $2.9
million.  During the thirty-nine weeks ended  September  29,
1996, approximately $378,000 of this reserve was utilized in
the closure of two restaurants. No gain or loss was recorded
on any of these transactions.

8.   Supplemental Disclosure of Cash Flow Information

                                        Thirty-Nine Weeks Ended
                                      --------------------------- 
                                      September 29,    October 1,
                                          1996            1995
                                      -------------    ----------             
Cash paid for interest                   $  901,000    $  869,000
Interest capitalized on construction
  costs                                           -       109,000
Cash paid (received) for income  
  taxes                                  (2,074,000)      400,000
Notes receivable acquired in                                   
  exchange for property, plant
  and equipment                                    -    1,286,000




           MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                              
                              
Introduction
------------
The Company commenced operations in 1978 with the opening of
the  first  Taco  Cabana restaurant in San  Antonio.  As  of
November  1,  1996 the Company had 104 company-owned,  three
joint-venture  owned  and  17  franchised  restaurants.  The
Company's  revenues  are  derived primarily  from  sales  by
company-owned restaurants, with franchise fees  and  royalty
income currently contributing less than 1% of total revenues
for the first nine months of the 1996 fiscal year.

During  the thirty-nine weeks ended September 29, 1996,  the
Company closed two Company-owned restaurants, 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.

Special Charge and Reserve for Notes and Other Receivables
----------------------------------------------------------
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.

The  reserve  for notes and other receivables included  $2.0
million  for  notes  receivable which  were  outstanding  in
connection with the sale 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 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 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  franchisee amounts, employee  receivables,
and other miscellaneous receivables.

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 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
$450,000  for  the  payment of legal  and  related  expenses
incurred  and anticipated to be incurred in connection  with
the  Settlement. As of September 29, 1996, the  Company  had
paid  approximately $220,000 in legal expenses  relating  to
the lawsuit.

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

<TABLE>
                               13 Weeks Ended               39 Weeks Ended
                          -------------------------    -------------------------- 
                          September 29,   October 1,   September 29,   October 1,
                               1996          1995           1996          1995
                          ------------    ----------   ------------    ----------
<S>                       <C>             <C>          <C>             <C>    
  
Operating Statement Data:                                      
REVENUES:                                                  
Restaurant sales               99.6%         99.4%          99.6%          98.9%
Franchise fees and royalty
  income                        0.4           0.6            0.4            1.1
                               ----          ----           ----           ----       
Total revenues                100.0%        100.0%         100.0%         100.0%
                              =====         =====          =====          =====
COSTS AND EXPENSES:                                        
Restaurant cost of sales (1)   32.0%         32.3%          31.6%          32.3%
Labor (1)                      26.3          26.6           26.1           26.3
Occupancy (1)                   6.1           5.9            6.1            5.9
Other restaurant operating
  costs (1)                    17.9          19.7           18.0           19.4
General and administrative
  costs                         4.8           4.1            4.9            4.1
Depreciation and
  amortization                  6.8           7.4            6.8            7.3
Litigation settlement            -             -             3.4             -
Special charge                   -             -              -             7.7
Reserve for notes and other
  receivables                    -             -              -             3.3
                                                               
INCOME (LOSS) FROM OPERATIONS   6.6           4.5            3.4           (5.4)
                                                               
INTEREST EXPENSE, net          (0.9)         (1.1)          (1.1)          (1.0)
                              -----         -----          -----          -----                                                
INCOME (LOSS) BEFORE INCOME
  TAXES                         5.7           3.3            2.4           (6.4)

BENEFIT (PROVISION) FOR
  INCOME TAXES                  2.1          (1.2)          (1.0)           2.4
                              -----         -----          -----          -----
NET INCOME (LOSS)               3.6%          2.1%           1.4%         (4.0)%
                              =====         =====          =====          =====                                 
Restaurant Data:                                               
Company-owned restaurants:                                     
  Beginning of period           104           109            106            104
  Opened                         -             -              -              10
  Sold (refranchised)            -             -              -              (3)
  Closed                         -             (1)            (2)            (3)
                              -----         -----          -----          ----- 
  End of period                 104           108            104            108
                                                               
Franchised and joint-venture                                    
owned restaurants:
    End of period                20            27             20             27
                              -----         -----          -----          -----
Total restaurants:                                             
    End of period               124           135            124            135
                              =====         =====          =====          =====                                 

(1)  Percentage is calculated based upon restaurant sales.
</TABLE>


The Thirteen Weeks Ended September 29, 1996 Compared to the
Thirteen Weeks Ended October 1, 1995

Revenues.   Restaurant sales decreased by $1.8  million,  or
5.0  %, to $33.7 million for the third quarter of 1996  from
$35.5  million  for the third quarter in  1995.  Sales  from
restaurants  opened  after July 2,  1995  accounted  for  an
increase  of  $600,000.  Sales from restaurants  which  were
closed after July 2, 1995 accounted for $1.2 million of  the
decrease. Sales from restaurants opened or acquired prior to
January  1,  1995 accounted for a decrease of  approximately
$1.2 million. Comparable store sales, defined as Taco Cabana
restaurants  that have been open 18 months or  more  at  the
beginning  of the quarter, decreased 2.5% during  the  third
quarter  of  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, were
flat  for  the third quarter of 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 the third quarter of 1996.

Costs and Expenses.  Restaurant cost of sales, calculated as
a  percentage of restaurant sales, decreased to 32.0% in the
third  quarter of 1996 from 32.3% for the third  quarter  of
1995.  The decrease was due primarily to the negotiation  of
favorable  commodity pricing at the beginning of  1996.  The
decrease  was  partially offset by an  increase  in  certain
commodity  costs,  primarily cheese and  bacon,  during  the
third  quarter  of  1996 compared to the prior  quarters  of
1996.

Labor  costs calculated as a percentage of restaurant  sales
improved  slightly during the third quarter of 1996 compared
to  the same period in 1995. The labor costs were negatively
impacted  due  to  a  relatively  high  rate  of  restaurant
management  turnover  during  third  quarter  of  1996.  The
turnover  is  part  of the Company's continuing  process  of
raising   the  standards  and  accountability   within   the
management ranks of the Company.

Occupancy costs decreased during the third quarter  of  1996
compared to the same period in 1995. The decrease is due  to
a  decrease  in the number of restaurants opened during  the
thirteen  weeks  ended September 29, 1996  compared  to  the
thirteen weeks ended October 1, 1995.

Other   restaurant  operating  costs  as  a  percentage   of
restaurant sales decreased to 17.9% in the third quarter  of
1996  from 19.7% for the same period of 1995. This  decrease
is  due  primarily to management's increased focus  on  unit
level operations.

General  and  administrative  expenses  increased  to   $1.6
million from $1.4 million, and increased as a percentage  of
total  revenues to 4.8% for the third quarter of  1996  from
4.1%  for  the comparable period in 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  expense  consisted  of  the
following:

                                       Thirteen Weeks Ended
                                   ---------------------------- 
                                   September 29,    October 1,
                                       1996            1995
                                   ------------     ----------
                                                       
Depreciation of property and
  equipment                         $ 1,822,000      $1,640,000
Amortization of intangible assets       416,000         423,000
Amortization of pre-opening costs        47,000         590,000

Depreciation expense increased by approximately $182,000 for
the quarter ended September 29, 1996 compared to the quarter
ended  October  1, 1995. The increase was due  primarily  to
restaurant   openings  during  1995,  as  well  as   capital
expenditures on existing restaurants during the  first  nine
months  of 1996. Amortization of pre-opening costs decreased
by  approximately  $543,000 in the  third  quarter  of  1996
compared  to the third quarter of 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
October 1, 1995.

Interest  Expense, net.  Interest expense, net  of  interest
capitalized on construction costs, decreased to $361,000  in
the third quarter of 1996 from $499,000 in the third quarter
of  1995  as  a  result of the repayment  of  a  substantial
portion  of  the  Company's line of credit during  1996.  No
interest  was capitalized during the third quarter of  1996.
The  Company  earned $53,000 of interest income  during  the
third  quarter of 1996 on cash balances compared to  $90,000
of interest income earned during the third quarter of 1995.

Net  Income and Net Income Per Share.  The Company  recorded
net  income  of  $1,220,000 for the third  quarter  of  1996
compared to net income of $751,000 for the comparable period
of 1995. The recorded net income was 3.6% as a percentage of
total revenues for the third quarter of 1996 compared to net
income  equal to 2.1% of total revenues in the third quarter
of  1995.  The net income per share was $0.08 for the  third
quarter of 1996 compared to net income per share of $0.05 in
the  comparable period of 1995. Management believes that the
increase in net income  and net income per share are largely
due to improved operating margins at the restaurant level.

The  Thirty-Nine Weeks Ended September 29, 1996 Compared  to
the Thirty-Nine Weeks Ended October 1, 1995

Revenues.   Restaurant sales decreased by $4.3  million,  or
4.1%,  to  $100.0  million for the thirty-nine  weeks  ended
September  29,  1996 from $104.3 million for the  comparable
period  in 1995. Sales from restaurants opened after January
1,  1995 accounted for an increase of $2.8 million. This was
offset  by  sales from restaurants which were  closed  after
January  1,  1995 of $4.2 million, as well as a decrease  in
sales  of approximately $2.9 million for restaurants  opened
or  acquired  prior  to  January 1, 1995.  Comparable  store
sales,  defined  as Taco Cabana restaurants that  have  been
open  18  months  or  more  at the beginning  of  the  year,
decreased  2.1% during the thirty-nine weeks ended September
29,  1996.  Management attributes much of  this  decline  in
sales  to a decrease in sales from the Company's restaurants
in the Texas - Mexico border market, due to adverse economic
conditions  in that market, increased levels of  competition
in  the  Company's core markets and inclement weather during
the  first  quarter of 1996. The Company also experienced  a
decrease  in sales in its Colorado market during  the  first
three quarters of 1996.

Franchise and royalty fees decreased by $753,000 to $413,000
for  the thirty-nine weeks ended September 29, 1996 compared
to  the  same  period  of 1995, due primarily  to  decreased
revenues related to new franchise development agreements.

Costs and Expenses.  Restaurant cost of sales, calculated as
a  percentage of restaurant sales, decreased to 31.6% in the
thirty-nine  weeks ended September 29, 1996 from  32.3%  for
the  thirty-nine weeks ended October 1, 1995.  The  decrease
was  due primarily to the negotiation of favorable commodity
pricing at the beginning of 1996. The decrease was partially
offset  by  increases in certain commodity costs,  primarily
cheese  and bacon, during the third quarter of 1996 compared
to the prior quarters of 1996.

Labor  costs calculated as a percentage of restaurant  sales
improved   slightly  during  the  thirty-nine  weeks   ended
September 29, 1996 compared to the same period in 1995.  The
labor  costs  were negatively impacted due to  a  relatively
high  rate  of  restaurant management turnover during  third
quarter  of  1996.  The turnover is part  of  the  Company's
continuing   process   of   raising   the   standards    and
accountability within the management ranks of the Company.

Occupancy  costs  decreased slightly during the  thirty-nine
weeks  ended September 29, 1996 compared to the same  period
in 1995.

Other   restaurant  operating  costs  as  a  percentage   of
restaurant sales decreased to 18.0% in the thirty-nine weeks
ended September 29, 1996 from 19.4% for same period of 1995.
This  decrease  is  due primarily to management's  increased
focus on unit level operations.

General  and  administrative  expenses  increased  to   $4.9
million from $4.3 million, and increased as a percentage  of
total  revenues to 4.9% for the third quarter of  1996  from
4.1%  for  the comparable period in 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  expense  consisted  of  the
following:

                                     Thirty-Nine Weeks Ended
                                    ------------------------- 
                                    September 29,   October 1,
                                        1996           1995
                                    ------------    ----------
                  
Depreciation of property and
  equipment                         $ 5,158,000    $ 4,552,000
Amortization of intangible
  assets                              1,236,000      1,237,000
Amortization of pre-opening 
  costs                                 474,000      1,941,000

Depreciation expense increased by approximately $606,000 for
the  thirty-nine weeks ended September 29, 1996 compared  to
the  thirty-nine weeks ended October 1, 1995.  The  increase
was  due  primarily to restaurant openings during  1995,  as
well as capital expenditures during the first nine months of
1996.   Amortization  of  pre-opening  costs  decreased   by
approximately  $1,467,000  in the  thirty-nine  weeks  ended
September  29, 1996 compared to the thirty-nine weeks  ended
October 1, 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 October 1, 1995.

As a result of the litigation settlement recorded during the
second  quarter of 1996, the Company recorded  a  charge  of
$3.4  million pretax ($2.2 million after tax).  The  Company
deposited  $2.95  million in cash  into  an  escrow  account
during  the third quarter of 1996. Additionally, the  amount
recorded  included  $450,000 for the payment  of  legal  and
related expenses incurred and anticipated to be incurred  in
connection  with the litigation settlement. As of  September
29,  1996,  the Company has paid approximately  $220,000  in
legal expenses relating to the lawsuit. See Part II, Item 1.
"Legal  Proceedings" and Note 2. "Litigation Settlement"  to
the Condensed Consolidated Financial Statements.

Interest  Expense, net.  Interest expense, net  of  interest
capitalized on construction costs, decreased slightly in the
thirty-nine weeks ended September 29, 1996 compared  to  the
same period in 1995. No interest was capitalized during  the
thirty-nine  weeks  ended September 29,  1996.  The  Company
earned  $155,000  of interest income during the  thirty-nine
weeks  ended  September 29, 1996, compared  to  $241,000  of
interest  income earned during the thirty-nine  weeks  ended
October  1,  1995.  The  decrease can  be  attributed  to  a
decrease  in  the level of short-term investments  that  the
Company maintains.

Net Income (Loss)  and  Net Income (Loss)  Per  Share.   Net
income  increased  to $1,401,000 for the  thirty-nine  weeks
ended  September 29, 1996 from a net loss of $4,239,000  for
the  same  period  in 1995. Net income  was  1.4%  of  total
revenues for the thirty-nine weeks ended September 29,  1996
compared  to  a  net loss of 4.0% for the thirty-nine  weeks
ended October 1, 1995. Earnings per share was $0.09 for  the
thirty-nine  weeks ended September 29, 1996  compared  to  a
loss  per  share  of  $0.27  in the  same  period  of  1995.
Disregarding  the  litigation settlement,  recorded  in  the
second quarter of 1996, the Company would have reported  net
income  of  $3,645,000  for  the  thirty-nine  weeks   ended
September  29, 1996, equal to $0.23 per share.  Disregarding
the  reserve for receivables and the special charge recorded
in  the  second  quarter  of 1995, the  Company  would  have
reported  net income of $3,069,000 equal to $0.20 per  share
during the thirty-nine weeks ended October 1, 1995.

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,  long-
term  debt  and  capital leases. The Company maintains  loan
facilities  totaling  $20 million, including  a  $5  million
unsecured  revolving  line  of credit  for  construction  or
operating  funds. As of October 31, 1996, $7.6  million  had
been used under these facilities.

Net  cash provided by operating activities was $8.2  million
for the thirty-nine weeks ended September 29, 1996, and $5.5
million  for  the thirty-nine weeks ended October  1,  1995.
Management attributes much of the increase to the receipt of
$2.1  million of federal income tax refunds during the third
quarter of 1996 as well as an increase in net income.

Net  cash used in investing activities was $6.1 million  for
the thirty-nine weeks ended September 29, 1996, representing
primarily capital expenditures for improvements to  existing
restaurants. This compares to $16.4 million for the  thirty-
nine  weeks  ended  October 1, 1995, representing  primarily
capital  expenditures for the construction of  ten  Company-
owned restaurants.

Net  cash used in financing activities was $4.1 million  for
the  thirty-nine weeks ended September 29, 1996 representing
primarily repayment of the Company's line of credit and long-
term  debt  compared  to  net cash provided  from  financing
activities  of  $8.0  million in the  same  period  of  1995
representing borrowings from the Company's debt facilities.

As  discussed  in "Legal Proceeding" in Item 1  and  note  2
"Litigation   Settlement"  to  the  Condensed   Consolidated
Financial  Statements,  the  Company  approved  a   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.

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,  while  the
Company  has deposited $2.95 million in cash into an  escrow
account  for  such purposes. Additionally, the  Company  has
accrued  $450,000  for  the payment  of  legal  and  related
expenses   incurred  and  anticipated  to  be  incurred   in
connection  with the Settlement. As of September  29,  1996,
the   Company  had  paid  approximately  $220,000  in  legal
expenses relating to the lawsuit.

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  $250,000  in  the  thirty-nine  weeks   ended
September  29, 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 will receive funds upon
the  actual  disposition of these properties.  In  addition,
certain acquisition and accrued liabilities related  to  the
Two   Pesos   acquisition  were  reduced  by   payments   of
approximately  $275,000 during the thirty-nine  weeks  ended
September 29, 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.

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  and  closing  of  stores.
Therefore,  quarterly  results cannot  be  used  to  predict
results for the entire year.

ITEM 1. LEGAL PROCEEDINGS

On  July  24,  1996,  the Company entered  into  a  proposed
settlement,  subject  to court approval  and  certain  other
conditions,  of A.L. Park, et al. v. Taco Cabana,  Inc.,  et
al.,  a  suit originally 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.

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
$450,000  for  the  payment of legal  and  related  expenses
incurred  and anticipated to be incurred in connection  with
the  Settlement. As of September 29, 1996, the  Company  had
paid  approximately $220,000 in legal expenses  relating  to
the lawsuit.

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  is  contingent  upon  final  approval  by   U.S.
District  Court. A hearing upon such settlement is scheduled
for December 20, 1996.

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

At the annual meeting of stockholders held August 14, 1996, 
the Company's stockholders elected four directors.  There were
no broker non-votes.  With regard to the election of these
directors, the votes were as follows:

                              For              Withheld
                          ----------           --------
    Stephen V. Clark      12,516,867           201,568
    William J. Nimmo      12,537,588           180,100
    Richard Sherman       12,538,335           180,847
    Cecil Schenker        12,512,345           206,090


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit 11     Statement re Computation of Per Share
               Earnings.

No reports on Form 8-K were filed during the period covered
by this report.




Signature

Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.

Dated:  December 19, 1996          Taco Cabana, Inc.

                         
                         
                         
                         
                                   /s/  David G. Lloyd
                                   -------------------          
                                   David G. Lloyd
                                   Vice President, Chief Financial
                                   Officer, Secretary and Treasurer
                         
                         
                         
                         
                                   Signing on behalf of the registrant
                                   and as the principal financial and
                                   accounting officer