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 28, 1997
       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                (IRS employer identification no.)
 of incorporation or organization)

                  8918 Tesoro Drive, Suite 200
                   San Antonio, Texas  78217
  (Address of principal executive offices, including ZIP Code)

                         (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 27, 1998, 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  Market  was  $77,427,725  (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 27, 1998 was 14,824,600.

                        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                  15

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA          25

ITEM 9.   CHANGES  IN  AND  DISAGREEMENTS WITH ACCOUNTANTS  ON
          ACCOUNTING AND FINANCIAL DISCLOSURE                  25

                            PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT   26

ITEM 11.  EXECUTIVE COMPENSATION                               29

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND
          MANAGEMENT                                           34

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS       35

                            PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND  REPORTS
          ON FORM 8-K                                          36



                             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 28, 1997, operates and franchises  a
total  of 109 such restaurants system-wide.  Of these, the  Company
owns and operates 96 Taco Cabana restaurants, and two mall-unit Two
Pesos restaurants.  Franchisees of the Company own and operate  the
remaining  11  Taco Cabana restaurants.  The Company's  restaurants
(including franchises) are located primarily in Texas, and are also
located in Georgia, Indiana, New Mexico, 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 other quick  service  competitors  by
utilizing   fresh,  high  quality  ingredients  as  well   as   the
preparation of most items "from scratch".  The Company is currently
testing   several  pre-prepared  items  to  simplify  the   kitchen
operations.

      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 quick service 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 quick service
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.

     The Company began constructing its new prototype restaurant in
1996. The prototype incorporates several new and different features
that   set   it  apart  from  Taco  Cabana  restaurants  previously
constructed.  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.

      During  1997,  the Company initiated a re-image  program  for
existing restaurants which incorporates many of the features of the
new prototype design. During 1997, eight restaurants were re-imaged
to  the new prototype design and the Company expects to re-image 20
to 25 restaurants during 1998.

      Restaurant  Locations.  The following table  sets  forth  the
number  of restaurants as of December 28, 1997 by area of  dominant
influence ("ADI") for television and radio advertising:




ADI*                   Company-OwnedFranchised(1)   Total

     San Antonio             32           0            32
     Houston                 26(2)        0            26
     Austin                  14           0            14
     Dallas/Fort Worth       14           0            14
     El Paso                  7           0             7
     Rio Grande Valley        2           0             2
     Lubbock                  2           0             2
     Atlanta, Georgia         0           1(3)          1
     Bryan/College Station    0           2             2
     Tulsa, Oklahoma          1           0             1
     Waco                     0           1             1
     Albuquerque, New Mexico  0           2             2
     Amarillo                 0           2             2
     Corpus Christi           0           1             1
     Ft. Wayne, Indiana       0           1             1
     Killeen                  0           1             1
                             ---         ---          ---
        Total                98          11           109
                             ===         ===          ===



___________________________________________________________________


*   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 two mall-unit Taco Cabana restaurants and  two  mall-
      unit Two Pesos restaurant.
(3)   Represents a joint-venture




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  40%  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  utilizes  an integrated, multi-level  marketing
approach  which  includes periodic company-wide promotions,  direct
mail,   in-store  promotions,  local  store  marketing,  and  other
strategies,  including the use of radio advertising  in  its  major
markets.   The Company will execute this plan utilizing a marketing
budget of approximately 3.75% of sales.

Expansion

      The Company's near-term strategy is to achieve a dominant  or
leading  position among Mexican food restaurants  in  each  of  its
targeted  principal  markets  in  order  to  obtain  marketing  and
operating  efficiencies.   The  Company  seeks  to  implement  this
strategy  by selectively adding restaurants in existing markets  in
order to expand its existing 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  1998  objective  is  to  open  eight  to  ten
freestanding restaurants, all of which will be in existing markets.

      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 which clear stringent hurdles with  regards
to  the  return  on initial investment.  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.   The
Company currently uses a software model to assist in the evaluation
of  potential locations.  The software model was developed  by  the
Company using the services of a consulting firm during 1996.

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 leaders participate.   Awards
under  the  incentive plan are tied to the achievement of specified
sales, profitability and qualitative performance goals.


Franchising Program

     At December 28, 1997, the Company had four franchisees and one
joint  venture  partner  operating  a  total  of   11  Taco  Cabana
restaurants.   The  Company did not enter into  any  new  franchise
agreements  during  1997  and  does not  currently  anticipate  new
franchisee signings during 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 28, 1997, the Company employed approximately 3,000
persons, of whom approximately 2,900 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. 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  further
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.

Geographic Concentration

     During  fiscal  1997, approximately 93% of the  Company's  net
sales  were derived from restaurants located in the State of Texas.
As  a result, the Company's results of operations may be materially
affected  by weather, economic or business conditions within  these
markets.     Also,   given   the   Company's   present   geographic
concentration,   adverse   publicity  relating   to   Taco   Cabana
restaurants  could  have a more pronounced adverse  effect  on  the
Company's  overall sales than might be the case  if  the  Company's
restaurants were more broadly dispersed.


ITEM 2.   PROPERTIES

      The Company currently owns 42 of its restaurant buildings, 31
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 120 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 95% of the Company's current leases
have  remaining terms or renewal options extending more  than  five
years from December 28, 1997.

ITEM 3.   LEGAL PROCEEDINGS

      The  Company  is a party to franchise, 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 28, 1997  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 28, 1997
    Quarter  Ended  December  28,  1997  $5 11/16     $4 1/16
    Quarter  Ended  September 28,  1997   5 3/4        4
    Quarter  Ended  June  29,  1997       5 1/2        3 15/16
    Quarter  Ended  March  30,  1997      7 3/8        4 3/4

  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

      As  of February 27, 1998, the last reported sale price of the
Common  Stock  on the NASDAQ National Market System was  $6.25  per
share.   As  of  February 27, 1998, 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 28, 1997 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.


                 January 1, January 1, December 31, December 29,December 28,
                   1994 (1)  1995 (2)   1995             1996     1997
                 ---------- --------- ------------- ----------- ------------
                          (in thousands, except per share data)
Income Statement Data:
REVENUES:
Restaurant sales   $95,290  $124,826    $137,191     $131,680  $131,857
Franchise fees
 and royalty income  1,582     2,424       1,342          516       346
                   -------  --------    --------     --------  --------
  Total revenues    96,872   127,250     138,533      132,196   132,203
COSTS AND EXPENSES:
Restaurant cost of
 sales and operating
 costs              77,871   102,236     115,195      107,703   110,440
General and
 administrative      3,393     4,818       6,068        6,445     6,964
Depreciation and
 amortization        4,705     7,112      10,301        9,245     9,659
Special charges (4)      -         -       8,100        2,497    78,738
Litigation
 settlement (3)          -         -           -        3,400         -
Reserve for notes
 and other
 receivables (5)         -        -          3,500          -         -
Total costs
 and expenses       85,969   114,166       143,164     129,290   205,801
                   -------   -------       -------     -------   -------
INCOME  (LOSS)
 FROM OPERATIONS    10,903    13,084        (4,631)      2,906   (73,598)
                   -------   -------       -------     -------   -------
NON-OPERATING
 INCOME (EXPENSE):       3       220        (1,397)     (1,348)   (1,137)
                   -------   -------       -------     -------   -------
INCOME  (LOSS) BEFORE
  INCOME TAXES      10,906   13,3040        (6,028)      1,558   (74,735)
BENEFIT (PROVISION
 FOR INCOME TAXES   (3,850)  (4,784)         2,230        (854)    1,537
                    ------   ------         ------      ------   -------
NET INCOME (LOSS)   $7,056   $8,520        $(3,798)      $ 704  $(73,198)
                    ======  =======        =======       =====  ========
BASIC EARNINGS (LOSS)
  PER SHARE (6)     $ 0.58   $ 0.56         $(0.24)     $ 0.04    $(4.78)
                    ======   ======         ======      ======   =======
DILUTED EARNINGS (LOSS)
  PER SHARE (6)     $ 0.55   $ 0.55         $(0.24)     $ 0.04    $(4.78)
                    ======   ======         ======      ======    ======
Balance Sheet Data:
Total assets      $118,747  $152,222       $148,578    $142,706  $76,260
Line of credit,
 long-term debt and capital
 leases, including
 current maturities  4,730    12,945         19,290      13,668   19,323
Stockholders'
 equity            100,964   115,652        112,327     113,172   36,413
Dividends per
 common share            -         -              -           -        -


(1)  Includes  results  of  operations of the  acquired  Two  Pesos
     restaurants  and  five acquired franchised  restaurants  since
     their respective dates of acquisition.
(2)  Includes  results  of  eight acquired  franchised  restaurants
     since their respective dates of acquisition.
(3)  Includes the 1996 litigation settlement for $3.4 million  pre-
     tax,  as  described  in Note 15 to the Consolidated  Financial
     Statements.
(4)  Includes  the charge related to the 1995 operations review  of
     $8.1   million,   the  1996  write-down   of   the   Company's
     investment  in  a  joint venture and the  accrual  of  related
     exit  costs of $2.5 million and the 1997 charge for the  write
     down   of   impaired  assets  and  the  closure  of  seventeen
     restaurants  as  described  in Note  2   to  the  Consolidated
     Financial Statements.
(5)  Reserve   resulted  from  the  1995  operations    review   as
     described   in   Note   3   to   the  Consolidated   Financial
     Statements.
(6)  The  earnings  per  share  amounts prior  to  1997  have  been
     restated  as  required to comply with Statement  of  Financial
     Standards   No.   128,   Earnings  Per  Share.   For   further
     discussion  of earnings per share and the impact of  Statement
     No.   128,   see   Note  12  to  the  consolidated   financial
     statements.


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
28,  1997,  the  Company had 98 company-owned restaurants,  and  11
franchised   restaurants   including  one   joint   venture   owned
restaurant.   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 1997 fiscal year.

      Since  April  1992, the Company has acquired a  total  of  58
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.  In  conjunction  with  the
special  charge  that was recorded in the fourth quarter  of  1997,
goodwill  in  the  amount of $33.1 million  was  determined  to  be
impaired  in  accordance  with Statement  of  Financial  Accounting
Standards  No.  121  (FAS  121).  See  discussion  of  the  special
charge  hereunder in "Results of Operations - Fiscal 1997  Compared
to   Fiscal   1996"  and  Note  2  to  the  Consolidated  Financial
Statements.

      During  the fiscal year ended December 28, 1997, the  Company
opened   seven   restaurants,  acquired  one  restaurant   from   a
franchisee   and   closed   fourteen   restaurants.   Additionally,
franchisees of the Company closed five restaurants.




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
                            December 31, December 29, December 28,
                                 1995        1996         1997
Income Statement Data:
REVENUES:
Restaurant sales                 99.0%       99.6%        99.7%
Franchise fees and
 royalty income                   1.0         0.4          0.3
                                -----       -----        -----
Total revenues                  100.0       100.0        100.0
                                =====       =====        =====
COSTS AND EXPENSES:
Restaurant cost of sales (1)     32.1        31.4         30.8
Labor (1)                        26.4        26.3         27.4
Occupancy (1)                     6.0         6.2          6.2
Other restaurant
 operating costs (1)             19.4        17.9         19.3
General and
 administrative costs             4.4         4.9          5.3
Depreciation and amortization     7.4         7.0          7.3
Special charges                   5.8         1.9         59.6
Litigation settlement              -          2.6            -
Reserve for notes and
 other receivables                2.5           -            -
                                -----       -----        -----
INCOME  (LOSS) FROM OPERATIONS   (3.3)        2.2        (55.7)
INTEREST EXPENSE, NET            (1.0)       (1.0)        (0.9)
                                -----       -----        -----
INCOME (LOSS) BEFORE
 INCOME TAXES                    (4.3)        1.2        (56.5)
INCOME TAXES                      1.6        (0.6)         1.2
                                -----       -----        -----
NET INCOME (LOSS)                (2.7)%       0.5%       (55.4)%
                                =====       =====        =====
Restaurant Data:
COMPANY-OWNED RESTAURANTS:
Beginning of period             104         106          104
Opened                           12           1            8
Acquired                          1           -            -
Sold (Refranchised)             (3)           -            -
Closed                          (8)         (3)         (14)
                                ---         ---          ---
End of period                   106         104           98
FRANCHISED RESTAURANTS (2):      21          17           11
                                ---         ---          ---
TOTAL RESTAURANTS:              127         121          109
______________                  ===         ===          ===
     (1) As a percentage of restaurant sales.
     (2) Excludes Two Pesos licensed restaurants.


Fiscal 1997 Compared to Fiscal 1996

      Restaurant  Sales.  Restaurant sales increased  $177,000,  or
0.1%,  to  $131.9 million for fiscal 1997 from $131.7  million  for
fiscal  1996.  The increase in sales is due to an increase  in  the
number  of  store  operating weeks during 1997  compared  to  1996.
The  increase  was offset by a decrease in comparable  store  sales
in  1997  compared  to  1996.  In  the  aggregate,  the  number  of
operating   weeks  increased  1.6%  in  1997  compared   to   1996.
Comparable  store  sales, defined as Taco Cabana  restaurants  that
have  been  open  18  months  or more  at  the  beginning  of  each
quarter,  decreased  2.9% during 1997.   Much  of  the  decline  in
comparable  store  sales occurred during the first  six  months  of
the  year.   Comparable stores sales for the first  six  months  of
fiscal  1997 decreased 4.8%, while comparable store sales  for  the
last  six  months  of  the year decreased  only  0.8%.   Management
attributes  much  of  the decline during the first  six  months  to
unfavorable  weather  conditions,  significant  declines   in   the
Colorado  market  (which  was  closed  in  November  1997),  and  a
promotional  strategy  which  highlighted  higher  priced,  premium
products  in  an  intensely  price  competitive  landscape.    This
strategy  was  changed during the second half  of  the  year  to  a
promotional  strategy  which continually highlights  various  meals
at a competitive price.

      Franchise  Fees  and Royalty Income.  Franchise  and  royalty
fees  decreased  $170,000 to $346,000 for 1997, from  $516,000  for
1996,  due  primarily  to a decrease in the  number  of  franchises
open  during 1997 compared to 1996.

       Restaurant  Cost  of  Sales.   Restaurant  cost  of   sales,
calculated  as  a  percentage  of restaurant  sales,  decreased  to
30.8%  in  1997 from 31.4% in 1996.  The decrease was due primarily
to  continued improvements in the management of food costs  through
utilizing  increased  controls  and improved  purchasing  programs,
including   the   continued  negotiation  of  favorable   commodity
pricing.

      Labor.   Labor  costs, calculated as a percentage  of  sales,
increased  to  27.4% for the year ended December 28, 1997  compared
to  26.3%  in  1996.   The increase is due to  lower  average  unit
volumes  as  well  as management's commitment to increase  staffing
levels  at  the restaurant level in order to provide  a  consistent
guest   experience.   In  addition,  approximately  15%   of   this
increase  in  percentage of sales amount is due to increased  labor
costs  associated with the Colorado market.  During  January  1997,
the  Company  announced  its plans to commit additional  resources,
primarily  in  marketing  and  restaurant  level  staffing,  in  an
attempt  to reverse the negative sales trends and operating  losses
of  this market.  The restaurants in the market were closed  during
November 1997.

      Occupancy.   Occupancy costs increased slightly  during  1997
compared  to  1996.   The increase is due to  an  increase  in  the
number  of  restaurants open during fiscal 1997 compared to  fiscal
1996.

     Other  Restaurant Operating Costs. Other restaurant  operating
costs  increased  by $1.9 million for the year ended  December  28,
1997  compared  to  the same period of 1996.  As  a  percentage  of
restaurant  sales,  other restaurant operating costs  increased  to
19.3%  for  the year ended December 28, 1997 compared to  17.9%  in
the  same period of 1996, primarily due to decreased sales  at  the
restaurant  level and additional marketing expenditures during  the
year   ended  December  28,  1997.   Total  marketing  expenditures
accounted  for  4.7%  of  sales  in  1997  versus  3.8%  in   1996.
Approximately  $600,000, or 0.5% of sales,  of  this  increase  was
due  to  increased  marketing  in  the  Colorado  market.   It   is
currently  anticipated that marketing expenditures will  amount  to
3.75% of sales during 1998.

       General  and  Administrative.   General  and  administrative
expenses   increased  to  $7.0  million  from  $6.4  million,   and
increased  as a percentage of total revenues to 5.3% for  the  year
ended  December  28,  1997 from 4.9% for the comparable  period  in
1996.  This increase was primarily attributable to the addition  of
corporate  support  staff,  as  well  as  an  increased  level   of
expenditures to support the Company's operations, offset  by  lower
bonus accruals.

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

                                           Year Ended
                                           ----------
                                     December 29,  December 28,
                                         1996           1997
                                     ------------  -----------
    Depreciation of property
     and equipment                  $7,079,000      $7,942,000
    Amortization of intangible
     assets                          1,651,000       1,313,000
    Amortization of pre-opening
     costs                             515,000         404,000

     Depreciation expense increased by approximately $863,000 for
fiscal  1997  compared  to fiscal 1996.   The  increase  was  due
primarily to restaurant openings during 1997, as well as  capital
expenditures on existing restaurants during 1997 and  1996.   The
increase was partially offset by a reduction in depreciation  due
to  the  closure of 14 restaurants and the write-down of  certain
depreciable   assets   during  the  fourth   quarter   of   1997.
Amortization of intangible costs decreased by $338,000  primarily
due  to  the  write-off  of goodwill and other  intangible  costs
during  the  fourth quarter of 1997.  Amortization of pre-opening
costs  decreased  by  approximately $111,000 during  fiscal  1997
compared  to  fiscal 1996, due to the decrease in the  number  of
restaurants  opened  during the most recent  twelve-month  period
compared to the twelve-month period ended December 29, 1996.

      Special Charge.  During the fourth quarter of fiscal  1997,
management  made the decision to close the seven  restaurants  in
its  Colorado  market.   As  previously  announced,  the  Company
committed substantial resources to this market during 1997 in  an
attempt  to reverse trends of poor sales and losses.  The desired
results from the implementation of the plan were not achieved and
the   decision  to  close  the  market  was  made.   These  seven
restaurants  had  total sales of approximately $3.0  million  and
operating losses of $2.1 million during the approximately  eleven
months of 1997 that they were in operation.

     Additionally,   the   Company   continued   to    experience
unfavorable  sales trends during 1997, concluding the  year  with
comparable restaurant sales declining 2.9%.  However, during  the
first  six  months of 1997, comparable restaurant sales  declined
4.8%.  This trend compelled management to continue its evaluation
of  the  operating model of the Company.  During this evaluation,
management  concluded that certain volumes must  be  achieved  in
order  to  operate  individual  restaurants  in  accordance  with
Company   standards.   These  standards  include  food   quality,
cleanliness,  speed  of  service, and profitability.   Management
reviewed  all existing restaurants to determine which restaurants
could  not reasonably be expected to achieve these volume levels,
generally  annual revenues of at least $1 million.  This  led  to
the decision to close an additional ten restaurants.

     Due  to  the  significance of the closures described  above,
management performed an evaluation of the recoverability  of  all
remaining   assets  as  described  in  Statement   of   Financial
Accounting  Standards  No. 121 (FAS 121).   Management  concluded
from the results of this evaluation that a significant impairment
of  intangible  as well as long-lived assets was required  to  be
recognized.   The  impairment was reflective of  a  market  value
determined to be less than the carrying value of approximately 40
restaurants, 31 of which were acquired.  The assets  were  tested
for   impairment   by  projecting  cash  flows   for   individual
restaurants based on recent results and trends specific  to  that
restaurant.   The  undiscounted projected  cash  flows  for  each
restaurant  were  compared  to  the  carrying  value   for   that
restaurant,  including allocated goodwill, where applicable.   If
the undiscounted cash flows were less than the carrying value, an
impairment  was  deemed  to have occurred.   The  amount  of  the
impairment  was determined by calculating the difference  between
the  present  value of the projected cash flows and the  carrying
value  attributable to the specific restaurant.  The  cash  flows
were discounted using the rate of return the Company utilizes for
approving  new  restaurant construction.   Such  discounted  cash
flows  are,  in  management's opinion, the best estimate  of  the
assets  current  value.   Considerable  management  judgment   is
necessary to estimate future discounted cash flows.  Accordingly,
actual   results  could  vary  significantly  from   management's
estimates.

     The  process  described  above  resulted  in  the  Company's
recording a special charge during the fourth quarter of  1997  of
$78.7  million  pre-tax, $75.7 million after-tax,  or  $4.94  per
share.  This amount had the following components:

       Impairment  of  intangible  assets  of  $33.1  million  and
     impairment of long-lived assets of $22.1 million for restaurants
     that  will continue in operation, based on the FAS 121 analysis
     described above;
       A provision of $23.3 million for the closure of seventeen
     restaurants, including all of the restaurants in the Colorado
     market.  The amount was determined in accordance with FAS 121 and
     is comprised of:
         $13.3 million for the carrying value of the assets, net of
       estimated proceeds of $1.5 million for the sale of restaurant
       properties;
         $9.0  million  to record the estimated  lease  related
       obligations for closed restaurants.  This amount was determined
       as  the  lesser of the present value of the monthly  lease
       commitments, net of expected sublease receipts,  or  lease
       termination provisions;
         $500,000 for severance and relocation benefits paid to
       employees displaced by the restaurant closures;
         $500,000 for the probable settlement of a franchisee lawsuit
       related to the Colorado market
        The write-off of other assets totaling $200,000.

     During  1997, the seventeen restaurants contributed a  total
of  $9.6 million in sales, and had operating losses totaling $2.5
million.   In  addition,  the  total amount  of  depreciation  an
amortization recorded during 1997 relating to assets  which  were
impaired was approximately $3.2 million.

     A total of approximately $473,000 of the amounts accrued had
been   paid   prior  to  December  28,  1997.   It  is  currently
anticipated that payments of approximately $1.5 million  will  be
made  under  the  lease  obligations during  1998.   It  is  also
anticipated that proceeds of approximately $1.5 million  will  be
realized  due  to the sale of closed restaurants, although  there
can  be no assurance of the particular price at which any of such
properties will be sold.


     Interest  Expense, net.  Interest expense, net  of  interest
income  and interest capitalized on construction costs, decreased
to  $1.1 million in fiscal 1997 from $1.3 million in fiscal 1996.
The difference is due to lower interest expense due to a decrease
in  the average debt outstanding during 1997 compared to 1996,  a
reduction  in  interest  income  and  an  increase  in   interest
capitalized on construction cost.  The Company earned $76,000  of
interest  income  during 1997, compared to $201,000  of  interest
income  earned  during  the  1996. The  decrease  was  due  to  a
reduction  in  short-term investments.  In addition  the  Company
capitalized  $147,000 of interest during 1997.  No  interest  was
capitalized during 1996.

      Net  Income  (Loss) and Net Income (Loss) Per  Share.   The
Company  recorded a net loss of $73,198,000 for 1997 compared  to
net  income of $704,000 for 1996.  Net loss per share  was  $4.78
for  1997 compared to net income per share of $0.04 in 1996.  The
loss  recorded  in 1997 includes special charges  totaling  $78.7
million  pretax  ($75.7 million after-tax, or $4.94  per  share).
Excluding  these  charges, the Company would  have  reported  net
income  of $2.5 million equal to $0.16 per share in fiscal  1997.
Net  income in 1996 included charges totaling $5.9 million pretax
($4.0 million after-tax, or 26 cents per share).  Excluding these
charges,  the  Company would have reported  net  income  of  $4.7
million  equal to $0.30 per share for fiscal 1996.   Disregarding
these charges, management believes that the decrease in income is
largely due to declining sales, and increased labor and marketing
expenditures.  Management has taken steps to address these issues
as outlined in the description of the special charge.

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  was  due  to  a
decrease  in the number of restaurants open during 1996  compared
to  1995 and due to a decrease in comparable store sales 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.

      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 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 was  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
was 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  was  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 fiscal
1996 compared to fiscal 1995.

      Litigation  Settlement.   On July  24,  1996,  the  Company
approved the 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 received a total of  $6.0
million  of  which  the Company's insurance  carrier  paid  $3.05
million.    Additionally,  the  Company  has  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

Two of the three restaurants in the Atlanta market were closed
during the first quarter of 1997.  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% as a percentage of total revenues 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 was largely due to better cost controls at the
restaurant   level   as  well  as  a  substantial   decrease   in
amortization of pre-opening costs.


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 $30 million, including a $5 million unsecured
revolving line of credit.  As of February 27, 1998, approximately
$16.4 million had been used under these commitments.

     Net  cash provided by operating activities was $12.9 million
for  1997, compared to $12.2 million for 1996.  Net cash used  in
investing  activities  was $15.4 million for  1997,  representing
primarily  capital  expenditures  for  improvements  to  existing
restaurants, the construction of five free-standing and two  non-
traditional restaurants, and the conversion of two Sombrero  Rosa
and  two Two Pesos restaurants to the Taco Cabana concept.   This
compared to $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.  Net cash provided  by  financing
activities  was $2.1 million for 1997 representing primarily  net
borrowings under the Company's credit facilities, offset in  part
by  the purchase of $3.6 million of the Company's stock in market
transactions, which is held as treasury stock.  This compared  to
net  cash  used by financing activities of $5.5 million  in  1996
representing primarily repayment of the Company's line of  credit
and long term debt.

     On April 16, 1997, the Company's Board of Directors approved
a  plan  to  repurchase up to 1,500,000 shares of  the  Company's
Common Stock. As of December 28, 1997 the Company had repurchased
871,937  shares  at  an  average cost of $4.08  per  share.   The
timing,  price,  quantity and manner of remaining  purchases,  if
any,  will  be made at the discretion of management and  will  be
dependent  upon  market conditions. The Company  has  funded  the
repurchases through available bank credit facilities, as well  as
the liquidation of the Company's short term investment portfolio.
Remaining purchases, if any, will be funded through a combination
of   cash  provided  by  operations  and  available  bank  credit
facilities.

     The  special charge recorded in the fourth quarter  of  1997
included  an  accrual of approximately $9.0  million  for  closed
restaurant liabilities.  A total of approximately $473,000 of the
amounts accrued had been paid prior to December 28, 1997.  It  is
currently anticipated that payments of approximately $1.5 million
will  be made under lease and other obligations during 1998.   It
is  also  anticipated that proceeds of approximately $1.5 million
will  be realized due to the sale of closed restaurants, although
there can be no assurance of the particular price at which any of
such properties will be sold.

    The special charge recorded during the fourth quarter of 1996
included  an  accrual  of  approximately  $1.0  million  for  the
estimated  lease  obligations, legal and professional  costs  and
other  costs  associated with the closing of  two  of  the  three
restaurants operated by a joint venture in which the Company  has
a   50%  interest.  Cash  requirements  for  this  accrual   were
approximately $35,000 for the year ended December 28, 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
$333,000  in  1997.   During 1997, the  Company  sold  properties
relating to the 1995 special charge which resulted in proceeds of
$603,000,  which approximated the carrying value  of  the  assets
sold.   Subsequent  to  December  28,  1997,  the  company   sold
properties  relating  to  the special charge  which  resulted  in
proceeds  of $1.3 million, which approximated the carrying  value
of  the  assets  sold.   The  Company currently  has  one  closed
restaurant  property  for  sale which was  covered  by  the  1995
special  charge.   Although there can  be  no  assurance  of  the
particular  price  at  which  such property  will  be  sold,  the
Company  expects to receive funds equal to or in  excess  of  the
carrying value upon the actual disposition of this property.   In
addition, certain acquisition and accrued liabilities related  to
the   Two   Pesos  acquisition  were  reduced  by   payments   of
approximately $900,000 during  1997.

     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  1998,  including   the
planned opening of eight to ten restaurants and the reimaging  of
20  to 25 restaurants.  Total capital expenditures related to new
restaurants  are  estimated to be $12.0 to  $15.0  million.   The
total  for other capital expenditures, including the cost of  the
reimagings,  is  estimated to be $7.5  to  $8.5  million.   Total
capital  expenditures for 1998 are expected to approximate  $19.5
to $23.5 million.

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.

Year 2000 Issue

      The Company relies to a large extent on computer technology
to  carry  out its day-to-day operations.  Many software products
in  the  marketplace are only able to recognize a two digit  year
date  and therefore will recognize a date using "00" as the  year
1900  instead  of  the year 2000 (the "Year  2000  Issue").  This
problem  could  result  in  a system failure  or  miscalculations
causing disruptions of operations, including, among other things,
a  temporary  inability  to  process transactions  or  engage  in
similar normal business activities.

      Based  on  a recent assessment, the Company has  determined
that  it  will  be  required  to modify  or  replace  significant
portions  of  its  software  so that its  systems  will  properly
utilize  dates  beyond December 31, 1999.  The Company  presently
believes  that  with  modifications  to  existing  software   and
conversions to new software, the effects of the Year  2000  Issue
upon   its  operations  can  be  mitigated.   However,  if   such
modifications and conversions are not made, or are not  completed
timely, the Year 2000 Issue could have a material impact  on  the
operations of the Company.

      The  Company has initiated formal communications  with  all
significant  suppliers  to determine  the  extent  to  which  the
Company  is  vulnerable  to  those  third  parties'  failure   to
remediate  Year  2000  Issue effects upon their  own  operations,
products or services. The Company's total Year 2000 Issue project
cost  and estimates to complete include estimated costs and  time
associated  with the impact of a third party's Year  2000  Issue,
and are based on presently available information.  However, there
can  be no guarantee that the systems of other companies on which
the  Company's systems rely will be timely converted, or  that  a
failure  to convert by another company, or a conversion  that  is
incompatible  with  the  Company's  systems,  would  not  have  a
material adverse effect on the Company.

     The Company will use both internal and external resources to
reprogram,  or  replace, and test software for  Year  2000  Issue
modifications.  The Company plans to complete the Year 2000 Issue
project  by December 31, 1998.  The total cost of the  Year  2000
Issue  project is estimated to be $600,000, of which the  Company
has  incurred $400,000 relating to the purchase of new  software.
The  costs  relating  to the Year 2000 Issue are  being  financed
through  operating cash flows and borrowings from  the  Company's
available  credit  facilities.  Of the total  project  cost,  the
majority  is  attributable to the purchase of new software  which
will  be  capitalized.   The  remaining  amount,  which  will  be
expensed as incurred over the next two years, is not expected  to
have  a  material effect on the results of operations.  To  date,
the  costs the Company has incurred and expensed relating to  the
assessment  of, and preliminary efforts in connection  with,  its
Year  2000  Issue and the development of a remediation plan  have
not had a material effect on the results of operations.

      The  costs of the project and the date on which the Company
plans  to  complete  the Year 2000 Issue  project  are  based  on
management's   best  estimates,  which  were  derived   utilizing
numerous  assumptions  of future events including  the  continued
availability of certain resources, third party modification plans
and other factors.  However, there can be no guarantee that these
estimates  will be achieved and actual results could differ  from
those  plans.   Specific  factors  that  that  might  cause  such
material  differences  include,  but  are  not  limited  to,  the
availability  and  cost of personnel trained in  this  area,  the
ability  to  locate and correct all relevant computer  code,  and
similar uncertainties.
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,  costs and expenses 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          44       Chief Executive Officer,
                                        President and Director
     James A. Eliasberg        40       Executive Vice President
                                        and General Counsel
     David G. Lloyd            34       Senior Vice President -
                                        Finance, Chief Financial
                                        Officer, Secretary
                                        and Treasurer
     Douglas Gammon            51       Senior Vice President  -
                                        Human Resources and People
                                        Development
     William J. Nimmo          43       Director
     Richard Sherman           54       Director
     Cecil Schenker            55       Director
     Lionel Sosa               58       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.  Gammon joined the Company in March 1997 as Senior Vice
President, Human Resources and People Development.  From December
1989  to March 1997, Mr. Gammon served as Vice President of Human
Resources  at  Marriott  International  which  has  over   15,000
employees  in  50  states.   Mr. Gammon  has  over  18  years  of
experience in the human resources field as well as over six years
experience  in restaurant operations.  He was the past  President
for the Council of Hotel and Restaurant Trainers.

      Mr.  Nimmo  has served as a director of the  Company  since
November 1991.  Since May 1997, Mr. Nimmo has been a Partner with
Halpern,   Denny  &  Co.,  a  venture  capital  firm  in   Boston
Massachusetts.   Prior  to  that, Mr. Nimmo  served  as  Managing
Director   of  Cornerstone  Equity  Investors,  Inc.,   and   its
predecessor  firm,  Prudential  Equity  Investors,  Inc.,   since
September 1989.

      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.  Mr.  Schenker is  also  a  director  of  LOT$OFF
Corporation, formerly 50-Off Stores, Inc.

      Mr.  Sosa has been a director of the Company since  August,
1997.  Mr. Sosa has served as the Chief Executive Officer of  KJS
Marketing Agency since January 1996. From 1994 to 1996 he  served
as  Chairman of DMB&B/Americas, a network of advertising agencies
in  the  U.S.  and  Latin America. In 1980 Mr. Sosa  founded  the
agency  of  Sosa,  Bromley,  Aguilar,  Noble  &  Associates,   an
advertising agency specializing in Hispanic marketing in the U.S.
Mr. Sosa sold Sosa, Bromley, Aguilar, Noble & Associates in 1994.
Mr.  Sosa  is  currently a Director of the Children's  Television
Workshop Network.

      The  Board of Directors has a compensation and stock option
committee  which currently consists of William J. Nimmo,  Richard
Sherman and Lionel Sosa. The Board of Directors also has an audit
committee  which currently consists of William J. Nimmo,  Richard
Sherman,  Lionel Sosa 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 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, except for one late  filing
as to a Form 3 for Douglas Gammon.

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 other  executive  officers
(collectively the "named executive officers"):

                   Summary Compensation Table

                    Annual Compensation         Long-Term Compensation
                    --------------------       ------------------------
                                                                 Pay-
                                                  Awards         outs
                                            ------------------- ------
                                   Other               Securites       All
                                  Annual   Restricted  Underlying LTIP Other
  Name and                        Compen-  Stock       Options/   Pay- Compen-
  Principal Fiscal  Salary  Bonus sation   Award(s)     SARs      outs sation
  Position   Year      ($)    ($)  ($)(1)    ($)         (#)      ($)   ($)

Stephen V.   1997  255,420         -      -       -           -        -     -
Clark,
Chief        1996  233,404         -      -       -           -        -     -
Executive
Officer,     1995  152,455(2) 50,000      -       -     200,000        -     -
President ,
Chief
Operating
Officer
James A.     1997  191,877         -      -       -           -        -     -
Eliasberg,
Executive    1996  189,235         -      -       -           -        -     -
Vice
President    1995  175,025         -      -       -     200,000        -     -
and General
Counsel
David G.     1997  143,528         -      -       -           -        -     -
Lloyd,
Senior Vice  1996  135,138         -      -       -           -        -     -
President,
Chief        1995  117,605         -      -       -      75,000        -     -
Financial
Officer,
Secretary
and
Treasurer
Douglas      1997  113,820(3)      - 55,135(4)    -      75,000        -     -
Gammon
Senior Vice
President -
Human
Resources
and
People
Development

__________________

(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. Gammon joined the Company in March 1997.
(4)  Represents relocation expense reimbursements.








      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"), amended in  August  1997,
options  to  purchase  up  to  1,500,000  and  1,250,000  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, Lionel Sosa, 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  20,000
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  28, 1997, 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 $6.11  per
share, and no additional shares were available for issuance  upon
exercise  of options which may be granted in the future.   As  of
December 28, 1997, options for 864,842 shares had been exercised.

      As  of  December  28, 1997, options for 715,717  shares  of
common stock had been granted under the 1994 Option Plan and were
outstanding, with a weighted average exercise price of $5.23  per
share,  and 534,283 additional shares were available for issuance
upon exercise of options which may be granted in the future.   As
of December 28, 1997, 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 28, 1997:
                  Option Grants in Last Fiscal Year

                                                     Potential Realizable
                      Percent of                       Value at Assumed
                     Total Options                     Annual Rates of
                      Granted to                         Stock Price
                      Employees  Excercise               Appreciation
            Options      in       or Base  Expir-      for Option Term(2)
            Granted    Fiscal      Price   ation     -------------------
   Name       #(1)      Year      ($/Sh)    Date        5%($)   10%($)
-----------------------------------------------------------------------
Stephen V.
Clark            -         -          -        -           -         -
James A.
Eliasberg        -         -          -        -           -         -
David G.
Lloyd            -         -          -        -           -         -
Douglas
Gammon      50,000(3)     13%     $5.25    3/10/07   $165,085  $418,357
            25,000(3)      7%      4.5    11/17/07     74,681   189,257
-----------------------------------------------------------------------

(1)   All  such stock options were granted for the number of shares
   indicated at an exercise price equal to the fair market value of
   the  Common  Stock  on the date of grant as  determined  by  the
   Company's  Board  of Directors.   All such stock  options  noted
   above  were granted 10 years prior to the noted expiration date.
   The  options  become exercisable  beginning one year  after  the
   date  of grant in five equal annual installments.  The Company's
   current  Option  Plans do not make provision for  the  award  of
   stock  appreciation rights ("SARs") and the Company has no  SARs
   currently outstanding.

(2)  As required by rules of the Securities and Exchange Commission
   ("SEC"),  potential values stated are based  on  the  assumption
   that  the  Company's Common Stock will appreciate in value  from
   the  date of grant to the end of the option term (ten years from
   the  date  of  grant) at annualized rates of 5% and  10%  (total
   appreciation  of approximately 63% and 159%), respectively,  and
   therefore   are   not  intended  to  forecast  possible   future
   appreciation, if any, in the price of the Common Stock.

(3)   Upon   occurrence of a change of control of Taco  Cabana,  as
   defined  in the related Stock Option Agreements, all outstanding
   options, to the extent not exercisable, will immediately  become
   exercisable.









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 28, 1997:

          Aggregated Option Exercises in Last Fiscal Year
                 and Fiscal Year-End Option Values


                Shares
               Aquired   Value
                  on     Real-  Number of Unexercised   Value of Unexercised
               Exercise  ized         Options           In-the-Money Options
                 (#)      ($)  at Fiscal Year End(#)  at Fiscal Year End($)(1)
-----------------------------------------------------------------------------
                                Exercis-  Unexercis-     Exercis-  Unexercis-
                                  able        able         able       able
-----------------------------------------------------------------------------
Stephen V. Clark    -       -    80,000     120,000           -        -
James A. Elisaberg  -       -   104,000     120,000     $35,640        -
David G. Lloyd      -       -    45,000      55,000           -        -
Douglas Gammon      -       -         -      75,000           -        -


(1)   Values  stated are based on the last sale price of $4.63  per
   share  of  the  Company's Common Stock on  the  NASDAQ  National
   Market System on December 26, 1997, 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

      None.

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, 1998, 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)        88,063            *

     James A. Eliasberg  (2)     188,750           1.2%

     David G. Lloyd  (3)          52,800            *

     Douglas Gammon  (4)          10,000            *

     William J. Nimmo  (5)         3,817            *

     Richard Sherman  (6)         77,003            *

     Cecil Schenker  (7)          97,503            *

     Lionel Sosa  (8)             20,000            *

     Massachusetts Financial
     Services Co.  (9)         1,310,970           8.6%

     Dimensional Fund
     Advisors, Inc. (10)       1,000,764           6.6%

     All directors and
     officers as
     a group (8 persons(11)      537,936           3.5%
___________________________
*    Less than 1%.

(1)  Includes  80,000  shares  subject to  presently  exercisable
     options  (or  those  exercisable within 60  days).  Excludes
     120,000  shares issuable pursuant to options which  are  not
     currently exercisable (or exercisable within 60 days).
(2)  Includes  104,000  shares subject to  presently  exercisable
     options  (or  those  exercisable within 60  days).  Excludes
     120,000  shares issuable pursuant to options which  are  not
     currently exercisable (or exercisable within 60 days).
(3)  Includes   45,000  shares  issuable  pursuant  to  presently
     exercisable options (or those exercisable within  60  days).
     Excludes  55,000 shares issuable pursuant to  options  which
     are  not  currently  exercisable (or exercisable  within  60
     days).
(4)  Represents shares issuable pursuant to presently exercisable
     options  (or  those exercisable within 60  days).   Excludes
     65,000  shares  issuable pursuant to options which  are  not
     currently exercisable (or exercisable within 60 days).
(5)  Excludes  23,000 shares issuable pursuant to  options  which
     are  not  currently  exercisable (or exercisable  within  60
     days).
(6)  Represents  shares subject to presently exercisable  options
     (or  those  exercisable  within 60 days).   Excludes  13,000
     shares  issuable pursuant to options which are not currently
     exercisable (or exercisable within 60 days).
(7)  Represents  shares subject to presently exercisable  options
     (or  those  exercisable  within 60 days).   Excludes  13,000
     shares  issuable pursuant to options which are not currently
     exercisable (or exercisable within 60 days).
(8)  Excludes  23,000 shares issuable pursuant to  options  which
     are  not  currently  exercisable (or exercisable  within  60
     days).
(9)  Based upon Schedule 13G, filed jointly in February 1996, and
     amended in February 1998, 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 1,310,970 shares and sole dispositive
     power  as to 1,310,970 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.
(10) Based  on  Schedule 13G, filed in February  1997,  and
     amended in February 1998, 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.
(11) Includes  413,506  shares subject to  presently  exercisable
     options  (or  those  exercisable within 60  days).  Excludes
     432,000  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.


                            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 29, 1996 and December 28,1997
Consolidated  Statements  of  Operations  for  the  years   ended
 December 31, 1995, December 29, 1996 and December 28, 1997
Consolidated  Statements of Stockholders' Equity  for  the  years
 ended December 31, 1995, December 29, 1996 and December 28, 1997
Consolidated  Statements  of  Cash  Flows  for  the  years  ended
 December 31, 1995, December 29, 1996 and December 28, 1997
Notes to Consolidated Financial Statements

Financial Statement Schedules

No  financial  statement schedules are submitted because  of  the
absence  of  the  conditions under which  they  are  required  or
because  the required information is included in the Consolidated
Financial Statements or notes thereto.

Exhibits

3.1       Restated Certificate of Incorporation,  filed  on
          December 29, 1993.  (b)

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.   (d)

10.1*     Employment Agreement dated April 24, 1995 between
          the Registrant and Stephen V. Clark.  (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)

10.14*    1994 Stock Option Plan.  (b)

10.15     Employment  Agreement dated April 24, 1995 between  the
          Registrant and James Eliasberg.  (e)

10.16     Second  Amended Loan Agreement with International
          Bank of Commerce.  (e)

21.       Subsidiaries of the Registrant.  (f)

23.       Consent of Deloitte & Touche LLP.  (f)

24.       Powers  of  attorney  to  sign amendments  to  this  report.
          Reference is made to the signature page of this report.

27.       Financial Data Schedule. (f)
________________________

*         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 10-K for the fiscal  year
          ended January 1, 1995.
(c)       Filed  as an exhibit to Form 10-K for the fiscal  year
          ended December 31, 1995.
(d)       Filed   as  an   exhibit to   Form  8-A   Registration
          Statement   No.   0-20716,  effective June 9,   1995.
(e)       Filed  as an exhibit to Form 10-K for the fiscal  year
          ended December 29, 1996.
(f)       Filed herewith.

          (b)      Reports on Form 8-K
                   Press  release relating to the closure of Colorado
                   market and Special Charge filed December 24, 1997.


                           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 27, 1998

     Each person whose signature appears below authorizes Stephen
V.  Clark and David G. Lloyd or either of them, each of whom  may
act  without joinder 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 Officer,    March 27, 1998
    ----------------   President and Direcor
    Stephen V. Clark   (Principal Executive Officer)



    DAVID G. LLOYD     Senior Vice President -      March 27, 1998
    --------------     Finance, Chief Financial
    David G. Lloyd     Officer, Secretary and Treasurer
                       (Principal Financial and
                       Accounting Officer)


    WILLIAM J. NIMMO   Director                      March 27, 1998
    ----------------
    William J. Nimmo





    RICHARD SHERMAN    Director                      March  27, 1998
    ---------------
    Richard Sherman


    CECIL SCHENKER     Director                      March  27, 1998
    --------------
    Cecil Schenker


    LIONEL SOSA        Director                      March  27, 1998
    -----------
    Lionel Sosa


TACO CABANA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                               Page

Consolidated Financial Statements:
 Independent Auditors' Report                                  F-2
 Consolidated Balance Sheets at December 29, 1996 and
  December 28, 1997                                            F-3
 Consolidated Statements of Operations for the Years Ended
  December 31, 1995, December 29, 1996 and December 28, 1997   F-4
 Consolidated Statements of Stockholders' Equity for the Years
  Ended December 31, 1995, December 29, 1996 and
  December 28, 1997                                            F-5
 Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1995, December 29, 1996 and December 28, 1997   F-6
 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 28, 1997 and
December 29, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 28, 1997.  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 28, 1997 and December
29, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December
28, 1997 in conformity with generally accepted accounting
principles.


DELOITTE & TOUCHE LLP


San Antonio, Texas
February 2, 1998


TACO CABANA, INC.

CONSOLIDATED BALANCE SHEETS

                                      December 29,   December 28,
ASSETS                                    1996           1997

CURRENT ASSETS:
Cash and cash equivalents              $     748,000   $     339,000
Receivables, net                             792,000         502,000
Inventory                                  1,858,000       2,105,000
Prepaid expenses                           1,482,000       1,704,000
Federal income taxes receivable              363,000         200,000
Deferred income taxes                      1,827,000               -
                                       -------------   -------------
  Total current assets                     7,070,000       4,850,000

PROPERTY AND EQUIPMENT, net               88,963,000      59,540,000
NOTES RECEIVABLE, net                        738,000         344,000
INTANGIBLE ASSETS, net                    45,394,000      11,293,000
OTHER ASSETS                                 541,000         233,000
                                       -------------   -------------
TOTAL ASSETS                           $ 142,706,000   $  76,260,000
                                       =============   =============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable                       $   4,181,000   $   4,430,000
Accrued liabilities                        3,171,000       6,266,000
Current maturities of long-term debt       2,409,000       1,573,000
and capital leases
Line of credit                               625,000       4,223,000
                                       -------------   -------------
  Total current liabilities               10,386,000      16,492,000

LONG-TERM OBLIGATIONS, net of current
maturities:
Capital leases                             4,041,000       2,357,000
Long-term debt                             6,593,000      11,170,000
                                       -------------   -------------
  Total long-term obligations             10,634,000      13,527,000

ACQUISITION AND CLOSED RESTAURANT          4,212,000       9,126,000
LIABILITIES
DEFERRED LEASE PAYMENTS                      657,000         702,000
DEFERRED INCOME TAXES                      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
authorized15,706,537 and 14,834,600
shares issued and outstanding at
December 29, 1996 and December 28,
1997, respectively -
                                            157,000         157,000
Additional paid-in capital                97,095,000      97,095,000
Retained earnings (deficit)               15,920,000    (57,278,000)
Treasury stock, at cost - 871,937
shares                                             -     (3,561,000)
                                       -------------   -------------
  Total stockholders' equity             113,172,000      36,413,000
                                       -------------   -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                               $ 142,706,000   $  76,260,000
                                       =============   =============

See notes to consolidated financial statements.


TACO CABANA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

                                       Year Ended
                                       ----------
                        December 31,  December 29, December 28,
                            1995          1996         1997

REVENUES:
Restaurant sales         $137,191,000 $131,680,000    $131,857,000
Franchise fees and
royalty income              1,342,000      516,000         346,000
                         ------------ ------------    ------------
  Total revenues          138,533,000  132,196,000     132,203,000
                         ------------ ------------    ------------
COSTS AND EXPENSES:
Restaurant cost of sales   44,083,000  41,336,000      40,668,000
Labor                      36,262,000  34,653,000      36,169,000
Occupancy                   8,192,000   8,161,000       8,185,000
Other restaurant
operating costs            26,658,000  23,553,000      25,418,000
General and
administrative              6,068,000   6,445,000       6,964,000
Depreciation and
amortization               10,301,000   9,245,000       9,659,000
Special charges             8,100,000   2,497,000      78,738,000
Litigation settlement               -   3,400,000               -
Reserve for notes and
other receivables           3,500,000           -               -
                         ------------ -----------    ------------
Total costs and
  expenses                143,164,000 129,290,000     205,801,000
                         ------------ -----------    ------------
INCOME  (LOSS) FROM
OPERATIONS                (4,631,000)   2,906,000     (73,598,000)

INTEREST EXPENSE, NET     (1,397,000)  (1,348,000)     (1,137,000)
                         ------------ ------------    -----------
INCOME  (LOSS) BEFORE
INCOME TAXES              (6,028,000)   1,558,000     (74,735,000)

BENEFIT (PROVISION) FOR
INCOME TAXES                2,230,000    (854,000)       1,537,000
                         ------------ ------------    ------------
NET INCOME (LOSS)         $(3,798,000)  $  704,000    $(73,198,000)
                         ============ ============    ============
BASIC AND DILUTED
EARNINGS PER SHARE        $     (0.24)  $     0.04    $      (4.78)
                         ============ ============    ============
See notes to consolidated financial statements.

TACO CABANA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

        Preferred                 Additional
          Stock   Common Stock    Additional                  Treasury Stock
       --------- ---------------   Paid-in      Retained     -----------------
         Amount  Shares   Amount    Capital     Earnings       Shares   Amount

BALANCE,
January 2,
1995       $- 15,561,162$156,000 $96,482,000  $19,014,000       - $         -
Options
exercised   -    120,000   1,000     375,000            -       -           -
Tax
benefit
from stock
options     -          -       -      97,000            -       -           -
Net loss    -          -       -           -   (3,798,000)      -           -
          --- ---------- --------  ----------  -----------  ------- ----------
BALANCE,
December 31,
1995        - 15,681,162 157,000  96,954,000   15,216,000        -          -
Options
exercised   -     25,375       -     119,000             -       -          -
Tax
benefit
from stock
options     -          -       -      22,000             -       -          -
Net income  -          -       -           -       704,000       -          -
          --- ---------- -------   ---------   -----------   ------- ---------
BALANCE,
December 29,
1996        - 15,706,537 157,000  97,095,000    15,920,000       -          -
Purchase
of stock    -          -       -           -             - 871,937 (3,561,000)
Net loss    -          -       -           -   (73,198,000)      -          -
          --- ---------- -------  ----------    ---------- -------- ----------
BALANCE,
December 28,
1997       $- 15,706,537$157,000 $97,095,000  $(57,278,000)871,937$(3,561,000)
          === ========== =======  ==========   =========== ======= ===========
See notes to consolidated financial statements.

TACO CABANA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


                                             Year Ended
                                             ----------
                                December 31, December 29, December 28,
                                    1995         1996         1997

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)               $(3,798,000)   $  704,000 $(73,198,000)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
  Depreciation and amortization   10,301,000    9,245,000    9,659,000
  Deferred income taxes              386,000      450,000  (1,818,000)
  Special charges                  8,100,000    2,497,000   78,738,000
  Reserve for notes and other
  receivables                      3,500,000            -            -
  Capitalized interest             (117,000)     (12,000)    (147,000)
  Deferred income and lease
  payments                         (687,000)    (278,000)    (157,000)
  (Increase) decrease in assets:
    Receivables                    (953,000)      291,000      634,000
    Inventory                         2,000       (12,000)    (656,000)
    Prepaid expenses and other
    assets                          (780,000)      203,000  (1,018,000)
    Federal income taxes receivable
                                 (2,415,000)    2,414,000      163,000
    Other assets                    526,000       393,000       58,000
  Increase (decrease) in
  liabilities:
    Accounts payable and accrued
    liabilities                  (5,237,000)  (3,009,000)    2,328,000
    Acquisition and closed
restaurant liabilities           (3,052,000)    (676,000)  (1,656,000)
                                ------------  -----------  -----------
Net cash provided by operating
activities                         5,776,000   12,210,000   12,930,000
                                ------------  -----------  -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment                       (18,738,000)  (9,188,000) (16,812,000)
Proceeds from sales of property
and equipment                      1,179,000      846,000    1,379,000
Investment in joint venture        (186,000)    (388,000)            -
                                ------------  -----------  -----------
Net cash used by investing
activities                      (17,745,000)  (8,730,000) (15,433,000)
                                ------------  -----------  -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-
term debt and draws on line of
credit                            19,038,000            -   18,423,000
Principal payments under long-
term debt and line of credit    (11,823,000)  (5,398,000) (11,074,000)
Principal payments under capital
leases                             (148,000)    (224,000)  (1,694,000)
Purchase of treasury stock                 -            -  (3,561,000)
Exercise of stock options            376,000      141,000            -
                                ------------  -----------  -----------
Net cash provided (used) by
financing activities               7,443,000  (5,481,000)    2,094,000
                                ------------  -----------  -----------
NET DECREASE IN CASH             (4,526,000)  (2,001,000)    (409,000)

CASH AND CASH EQUIVALENTS,
beginning of period                7,275,000    2,749,000      748,000
                                ------------  -----------   ----------
CASH AND CASH EQUIVALENTS, end
of period                         $2,749,000   $  748,000   $  339,000
                                ============  ===========   ==========
                                                           (Continued)


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 and closed restaurant
liabilities.

During  1995,  the  Company closed four restaurants  and  charged
their  net  book value of $2.1 million to acquisition and  closed
restaurant 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.


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:


                                            Year Ended
                                            ----------
                              December 31, December 29, December 28,
                                  1995         1996         1997

Cash paid for interest, net
of interest capitalized        $ 1,672,000   $ 1,144,000   $1,171,000
Cash received for income
taxes                            1,126,000     2,504,000        4,000
Cash paid for income taxes         580,000       477,000       74,000
                                                         (Concluded)


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  28, 1997, the Company owned and operated a total  of
   98  units,  96 under the "Taco Cabana" name and two under  the
   "Two  Pesos"  name.  There were also 11 Taco Cabana  franchise
   units.

   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 1995,  1996  and  1997  were
   comprised  of the 52 weeks ending December 31, 1995,  December
   29, 1996, and December 28, 1997, 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,  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.


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
   OPERATIONS (Continued)

   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 over 25 to 40 years.  The trade name and the rights  to
   the  Taco  Cabana  name are amortized using the  straight-line
   method  over  40 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 utilizes either  a  discounted
   cash  flow basis or other determination of current fair value,
   in order to determine the amount of the impairment.

   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.

   Earnings  (Loss) Per Share - In February 1997,  the  Financial
   Accounting  Standards  Board  issued  Statement  of  Financial
   Accounting  Standards No. 128 ("SFAS No. 128"), "Earnings  Per
   Share",  which  requires presentation  of  basic  and  diluted
   earning  per  share.  Basic earnings per share is computed  by
   dividing  income  available  to  common  shareholders  by  the
   weighted average number of common shares outstanding  for  the
   reporting  period.   Diluted earnings per share  reflects  the
   potential  dilution  that could occur if securities  or  other
   contracts  to  issue common stock were exercised or  converted
   into  common  stock.   As required, the  Company  adopted  the
   provisions  of  SFAS  No. 128 in the year ended  December  28,
   1997.    All  prior  year  weighted  average  and  per   share
   information  has  been restated in accordance  with  SFAS  No.
   128.    Outstanding  stock  options  issued  by  the   Company
   represent  the  only  dilutive  effect  reflected  in  diluted
   weighted average shares.

   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.

TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
   OPERATIONS (Continued)

   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 13.

   Reclassifications - Certain reclassifications have  been  made
   to  the  prior  year's  consolidated financial  statements  to
   conform to the presentation and classification used in  fiscal
   1997.


2. SPECIAL CHARGES

   During fiscal 1995, 1996 and 1997, the following special
   charges are included in the Company's  consolidated financial
   statements:
                                       Year Ended
                                       ----------
                         December 31, December 29, December 28,
                             1995         1996         1997

   Special charge         $8,100,000   $2,497,000  $78,738,000
   Income tax benefit     (3,000,000)    (747,000)  (3,018,000)
   Impact on net income
    (loss)                 5,100,000    1,750,000   75,720,000
   Impact on net income
    (loss) per share       $    0.33     $   0.11     $   4.94

   Fiscal  1997  -  During  the fourth quarter  of  fiscal  1997,
   management  made  the decision to close the seven  restaurants
   in  its Colorado market.  As previously announced, the Company
   committed substantial resources to this market during 1997  in
   an  attempt  to reverse trends of poor sales and losses.   The
   desired  results from the implementation of the plan were  not
   achieved  and  the  decision to close  the  market  was  made.
   These seven restaurants had total sales of approximately  $3.0
   million  and  operating  losses of  $2.1  million  during  the
   approximately  eleven  months  of  1997  that  they  were   in
   operation.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SPECIAL CHARGES (Continued)

   Additionally, the Company continued to experience  unfavorable
   sales  trends during 1997, concluding the year with comparable
   restaurant  sales declining 2.9%.  However, during  the  first
   six  months  of  1997,  comparable restaurant  sales  declined
   4.8%.   This  trend  compelled  management  to  continue   its
   evaluation  of  the  operating model of the  Company.   During
   this  evaluation,  management concluded that  certain  volumes
   must  be  achieved in order to operate individual  restaurants
   in   accordance  with  Company  standards.   These   standards
   include  food  quality,  cleanliness, speed  of  service,  and
   profitability.   Management reviewed all existing  restaurants
   to   determine  which  restaurants  could  not  reasonably  be
   expected  to  achieve  these volume levels,  generally  annual
   revenues of at least $1 million.  This led to the decision  to
   close an additional ten restaurants.

   Due  to  the  significance  of the closures  described  above,
   management  performed an evaluation of the  recoverability  of
   all  remaining assets as described in Statement  of  Financial
   Accounting Standards No. 121 (SFAS 121), "Accounting  for  the
   Impairment of Long-Lived Assets and for Long-Lived  Assets  to
   Be  Disposed  Of".  Management concluded from the  results  of
   this  evaluation that a significant impairment  of  intangible
   as  well  as  long-lived assets was required to be recognized.
   The impairment was reflective of a market value determined  to
   be   less   than  the  carrying  value  of  approximately   40
   restaurants,  31  of  which were acquired.   The  assets  were
   tested  for impairment by projecting cash flows for individual
   restaurants  based  on recent results and trends  specific  to
   that  restaurant.  The undiscounted projected cash  flows  for
   each  restaurant were compared to the carrying value for  that
   restaurant,  including allocated goodwill,  where  applicable.
   If  the  undiscounted cash flows were less than  the  carrying
   value,  an impairment was deemed to have occurred.  The amount
   of   the   impairment  was  determined  by   calculating   the
   difference  between  the present value of the  projected  cash
   flows  and  the  carrying value attributable to  the  specific
   restaurant.  The cash flows were discounted using the rate  of
   return  the  Company  utilizes for  approving  new  restaurant
   construction.    Such   discounted   cash   flows   are,    in
   management's opinion, the best estimate of the assets  current
   value.   Considerable  management  judgment  is  necessary  to
   estimate  future  discounted cash flows.  Accordingly,  actual
   results could vary significantly from management's estimates.

   The   process  described  above  resulted  in  the   Company's
   recording a special charge during the fourth quarter  of  1997
   of  $78.7  million pre-tax, $75.7 million after-tax, or  $4.94
   per share.  This amount had the following components:

       Impairment of intangible assets of $33.1 million and
     impairment of long-lived assets of $22.1 million for restaurants
     that will continue in operation, based on the SFAS 121 analysis
     described above;
       A provision of $23.3 million for the closure of seventeen
     restaurants, including all of the restaurants in the Colorado
     market.  The amount was determined in accordance with SFAS 121
     and is comprised of:
            $13.3 million for the carrying value of the assets, net of
          estimated proceeds of $1.5 million for the sale of restaurant
          properties;
            $9.0 million to record the estimated lease related
          obligations for closed restaurants.  This amount was determined
          as the lesser of the present value of the monthly lease
          commitments, net of expected sublease receipts, or lease
          termination provisions;


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SPECIAL CHARGES (Continued)

           $500,000 for severance and relocation benefits paid to
         employees displaced by the restaurant closures;
           $500,000 for the probable settlement of a franchisee lawsuit
         related to the Colorado market.
       The write-off of other assets totaling $200,000.

   During 1997, the seventeen restaurants contributed a total  of
   $9.6  million in sales, and had operating losses totaling $2.5
   million.   In  addition,  the  total  amount  of  depreciation
   recorded  during 1997 relating to assets which  were  impaired
   was approximately $2.5 million.

   A  total of approximately $473,000 of the amounts accrued  had
   been  paid  prior  to  December 28,  1997.   It  is  currently
   anticipated  that payments of approximately $1.5 million  will
   be  made under the lease obligations during 1998.  It is  also
   anticipated  that proceeds of approximately $1.5 million  will
   be  realized  due to the sale of closed restaurants,  although
   there  can  be no assurance of the particular price  at  which
   any of such properties will be sold.

   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 costs                                              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.


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SPECIAL CHARGES (Continued)

   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;


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SPECIAL CHARGES (Continued)

          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 28, 1997, the Company had closed all  of  the
   six  restaurants identified in the review above and paid costs
   of  approximately $1.3 million and $283,000  during  1996  and
   1997,  respectively, 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
   a  loss  of  approximately $752,000 in  1996  to  the  related
   accrual  and generating cash of $788,000 and $603,000 in  1996
   and 1997, respectively.


3. 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 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,  include  various  types  of  receivables  including
   other   franchise  amounts,  employee  receivables  and  other
   miscellaneous receivables.


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4. ACCOUNTS AND NOTES RECEIVABLE

   Accounts and notes receivable consisted of the following:


                                 December 29,    December 28,
                                     1996            1997
   Trade receivables:
     Royalties                    $     668,000   $    84,000
     Other                              451,000       356,000
   Notes receivable - current
     portion                            250,000       109,000
   Employees                             18,000         2,000
                                  -------------   -----------
       Total                          1,387,000       551,000
   Less allowance for doubtful
     accounts                          (595,000)      (49,000)
                                  -------------   -----------
   Receivables, net               $     792,000   $   502,000
                                  =============   ===========
   Notes receivable - noncurrent:
     Franchisees                  $   1,470,000   $   344,000
     Other                                4,000             -
                                  -------------   -----------
       Total                          1,474,000       344,000
   Less allowance for
     uncollectible notes               (736,000)            -
                                  -------------   -----------
   Notes receivable, net          $     738,000   $   344,000
                                  =============   ===========


   Notes  receivable  from  franchisees  approximate  fair  value
   because the underlying instruments have 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.


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5. PROPERTY AND EQUIPMENT, NET

   Property and equipment, net, consisted of the following:


                                   December 29,  December 28,
                                       1996          1997
   Property and equipment:
     Land                            $20,507,000  $18,759,000
     Furniture, fixtures and
       equipment                      48,504,000   39,627,000
     Leasehold improvements           19,048,000    8,335,000
     Buildings                        16,587,000   13,159,000
     Construction in progress            178,000    1,195,000
                                     -----------  -----------
                                     104,824,000   81,075,000
   Less accumulated depreciation
     and amortization                (20,348,000) (24,525,000)
                                     -----------   ----------
       Total                          84,476,000   56,550,000
                                     -----------   ----------
   Property and equipment held
     under capital leases:
     Buildings                         5,780,000    4,254,000
     Less accumulated amortization   (1,293,000)  (1,264,000)
                                     -----------  -----------
       Total                           4,487,000    2,990,000
                                     -----------  -----------
   Property and equipment, net       $88,963,000  $59,540,000
                                     ===========  ===========


   At  December  28,  1997, the Company had five restaurants  and
   one  office building held for sale.  The total carrying amount
   of  these  assets are $2.2 million which management  estimates
   to  be  the net proceeds from the disposition of these assets.
   See Note 2.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6. INTANGIBLE AND OTHER ASSETS

   Intangible and other assets consisted of the following:



                                December 29,   December 28,
                                    1996           1997
   Intangible assets:
     Goodwill                     $48,048,000   $ 16,270,000
     Noncompetition agreements      2,500,000      1,421,000
     Trade name                     1,571,000      1,580,000
                                  -----------   ------------
                                   52,119,000     19,271,000
   Less accumulated
     amortization                  (6,725,000)    (7,978,000)
                                  ------------  ------------
   Intangible assets, net         $45,394,000   $ 11,293,000
                                  ===========   ============
   Other assets:
     Deposits                     $   290,000   $    214,000
     Prepaid leases                   208,000              -
     Other                             43,000         19,000
                                  -----------   ------------
   Other assets                   $   541,000   $    233,000
                                  ===========   ============


7. ACCRUED LIABILITIES

   Accrued liabilities consisted of the following:


                                     December 29, December 28,
                                         1996         1997

   Closed restaurant obligations     $  845,000   $2,827,000
   Payroll related                    1,251,000
                                                   1,468,000
   Property taxes                       429,000      627,000
   Employee injury                      200,000      138,000
   Restaurant expenses                   91,000      297,000
   Legal                                188,000      332,000
   Other                                167,000      577,000
                                     ----------   ----------
   Total                             $3,171,000   $6,266,000
                                     ==========   ==========



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8. LEASES

   Operating  Leases  - The Company leases restaurant  facilities
   under  non-cancelable  operating  leases  with  initial  terms
   ranging  from ten to twenty years with options to  renew.  The
   future  minimum  lease  commitments under  all  non-cancelable
   lease obligations as of December 28, 1997 were as follows:



   Years ending:
     1998                                     $     7,973,000
     1999                                           7,753,000
     2000                                           7,787,000
     2001                                           7,763,000
     2002                                           7,286,000
     Thereafter                                    44,289,000
                                               --------------
     Total                                     $   82,851,000
                                               ==============
   The   total   rental   expense  for   operating   leases   was
   approximately $6.9 million for 1995, 1996 and 1997,  including
   additional  rents  of  approximately  $467,000,  $376,000  and
   $354,000 for 1995, 1996 and 1997, respectively.

   The  Company  remains  contingently liable  on  two  operating
   leases  which  were  assigned  to  the  purchasers  of   units
   previously  sold  or closed. Future minimum lease  commitments
   under  these  contingent obligations approximate  $216,000  in
   1998,  and  $936,000  in 1999 through 2002.   Thereafter,  the
   total  minimum lease payments are approximately $2.2  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.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8. LEASES (Continued)

   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 28, 1997 were:


   Years ending:
     1998                                      $      441,000
     1999                                             445,000
     2000                                             445,000
     2001                                             446,000
     2002                                             446,000
     Thereafter                                     1,660,000
                                                -------------
   Total minimum lease payments                     3,883,000
   Less amount representing interest at 9% to 13%   1,337,000
                                                -------------
   Net present value of minimum lease payments      2,546,000
   Less current portion                               189,000
                                                -------------
   Long-term portion of capital leases          $   2,357,000
                                                =============

   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.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. LONG-TERM DEBT

   Long-term debt consisted of the following notes payable
   bearing interest at the prime rate of 8.50% at December 28,
   1997:





                                  December 29,  December 28,
                                      1996          1997

   Notes payable to a bank,
   collateralized by certain
   restaurant assets, due in
   monthly installments of
   principal and interest
   through August 2004             $ 6,101,000   $ 10,521,000

   Note payable to a bank,
   unsecured, due in monthly
   installments of principal
   and interest through April
   2000                              2,189,000      1,777,000

   Note payable to a
   corporation, collateralized
   by certain restaurants, due
   in monthly installments of
   principal and interest
   through September 1998              513,000        256,000
                                   -----------   ------------
       Total                         8,803,000     12,554,000
   Less current maturities           2,210,000      1,384,000
                                   -----------   ------------
   Long-term debt, net             $ 6,593,000   $ 11,170,000
                                   ===========   ============


   The  future minimum payments of long-term debt outstanding  at
   December 28, 1997 were as follows:



   Years ending:
     1998                                          $1,384,000
     1999                                           1,188,000
     2000                                           1,798,000
     2001                                             922,000
     2002                                           1,004,000
     Thereafter                                     6,258,000
                                                  -----------
     Total                                        $12,554,000
                                                  ===========
   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 rate approximating current market rates.




TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.  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 were initially due to  expire
   on  January  31, 1999.  Interest on funds borrowed  under  the
   facilities  are charged at the New York prime rate  which  was
   8.50%  at  December  28,  1997.   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 28, 1997, the Company  was  in
   compliance  with  all such covenants.  At December  28,  1997,
   the  Company had approximately $5.1 million available for cash
   borrowings under these credit facilities.

   On December 30, 1997, the credit facilities were amended and
   increased to a total of $30.0 million.  As part of the
   amendment, the commitments were extended until December 31,
   1999.

11.  ACQUISITION AND CLOSED RESTAURANT 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  $1.8
   million  and  $1.4 million, at December 29, 1996 and  December
   28,  1997,  respectively.  During 1996 and 1997, approximately
   $157,000  and  $203,000,  respectively,  of  the  balance  was
   amortized in this manner.

   Acquisition liabilities includes 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
   $2.4  million  and  $1.5  million at  December  29,  1996  and
   December  28,  1997,  respectively.   During  1996  and  1997,
   approximately  $1.7  million  and $900,000,  respectively,  of
   this  reserve was utilized in the closure of restaurants.   No
   gain or loss was recorded in any of these transactions.

   In  1997,  as part of the special charge, the Company reserved
   approximately $9.0 million for closed restaurant  liabilities.
   The  amounts reserved were equal to the lesser of the  present
   value  of  the  monthly  lease commitments,  net  of  expected
   sublease  receipts, or lease termination  provisions.   It  is
   currently  anticipated  that payments  of  approximately  $1.5
   million will be made under lease and other obligations  during
   1998.   During  1997, approximately $473,000 of  this  reserve
   was  utilized  in the closure of restaurants.   No  additional
   gain  or  loss was recorded in connection with these  closures
   beyond amounts previously reserved.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  EARNINGS PER SHARE

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

                                        Year Ended
                                        ----------
                          December 31, December 29,   December 28,
                               1995         1996          1997
   Numerator for basic
   and diluted earnings
   per share - net income
   (loss)                  $(3,798,000)   $   704,000 $(73,198,000)

   Denominator:
   Denominator for basic
   earnings per share -
   weighted-average
   shares                   15,648,624    15,694,757    15,314,665
   Effect of dilutive
   securities -
     Employee stock
     options                         -       251,923             -
                            ----------    ----------    ----------
   Denominator for
   diluted earnings per
   share - adjusted
   weighted-average and
   assumed conversions      15,648,624    15,946,680    15,314,665
                            ==========    ==========    ==========
   Basic and diluted
   earnings per share       $    (0.24)   $     0.04    $    (4.78)
                            ==========    ==========    ==========

   For additional disclosures regarding outstanding employee
   stock options, see Note 13.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.  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 2,750,000 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 28, 1997, there were 534,283  shares
   available  for issuance upon exercise of options that  may  be
   granted in the future.  Options outstanding are as follows:





                                                        Weighted
                                             Total      Average
                                            Options     Exercise
                                          Outstanding    Price

   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
     Granted                                   379,750       4.63
     Exercised                                       -          -
     Expired or canceled                     (140,375)       8.57
                                             ---------
   Options outstanding, December 28,1997     1,350,875   $   5.64
                                             =========
   Options exercisable, December 28, 1997      979,756   $   5.69
                                             =========

TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.  STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)

   For   the  options  outstanding  at  December  28,  1997,  the
   weighted  average remaining life and exercise price  of  these
   outstanding  options  were 14 months and $5.51,  respectively.
   In  addition, the weighted average exercise price  of  options
   granted during 1997 was $4.63.

   SFAS  No. 123, Accounting for Stock-Based Compensation, allows
   entities  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.   The  pro-forma
   compensation  expense, net income (loss) and  earnings  (loss)
   per  share which were calculated as if SFAS No. 123  had  been
   applied are as follows:



                                          Year Ended
                                          ----------
                            December 31,  December 29,December 28,
   Pro Forma                    1995          1996        1997

   Compensation expense        $  669,000   $  741,000   $  555,000
   Net income (loss)          (4,220,000)      237,000 (73,548,000)
   Income (loss) per share     $   (0.27)   $     0.01   $   (4.80)



   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 granted prior  to  1994,
   37.5%  was  used  for options granted during 1994,  36.0%  was
   used  for  options granted during 1995 through 1996 and  34.0%
   was  used  for  options granted during 1997.   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%
   for  all  of  1997.  The life of the Company's  options  range
   from two to five years.


TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.  STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)

   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 28,  1997,  there
   were 14,834,600 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 28, 1997, there were  no
   shares outstanding.

   Treasury  Stock  -  In  April 1997,  the  Board  of  Directors
   authorized the purchase in the open market of up to  1,500,000
   shares  of  the  Company's outstanding common  stock.   During
   1997  the Company purchased 871,937 shares of its common stock
   at  a  cost  of $3,561,000, which are being held  as  treasury
   stock.




TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  INCOME TAXES

   The  provision  (benefit) for income taxes  differs  from  the
   amount computed using statutory rates as shown below:


                                     Year Ended
                                     ----------
                         December 31, December 29, December 28,
                             1995         1996         1997

   Federal income tax at
   statutory rate        $(2,049,000)   $  530,000  $(25,410,000)
   State income taxes        (87,000)       39,000         48,000
   Goodwill and other        (94,000)      285,000      4,819,000
   Valuation allowance
   on net deferred tax
   asset                            -           -      19,006,000
                         ------------   ----------    -----------
     Total               $(2,230,000)   $  854,000    $(1,537,000)
                         ============   ==========    ===========

   The provision (benefit) for income taxes is comprised of the
   following:

                                       Year Ended
                                       ----------
                         December 31, December 29, December 28,
                             1995         1996         1997

   Current               $(1,844,000)   $  404,000   $   281,000
   Deferred                 (386,000)      450,000    (1,818,000)
                         -----------    ----------   -----------
     Total               $(2,230,000)   $  854,000   $(1,537,000)
                         ===========    ==========   ===========

      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:



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  INCOME TAXES (Continued)


                                     December 29, December 28,
                                         1996         1997
   Current:
   Deferred Federal Tax Assets:
     Workmen's compensation claims    $   194,000   $  494,000
     Investment in joint venture          879,000      718,000
     Accounts receivable                  211,000       17,000
     Charitable contributions              32,000       34,000
     Net operating loss carryforward      558,000            -
     Accrued vacation                           -       38,000
                                   --------------  -----------
   Total                                1,874,000    1,301,000
                                   --------------  -----------
   Deferred Federal Tax Liabilities-
     Pre-opening costs                   (46,000)    (119,000)
     State taxes                          (1,000)            -
                                   --------------  -----------
   Total                                 (47,000)    (119,000)
                                   --------------  -----------
   Net Current Deferred Tax Asset     $ 1,827,000   $1,182,000
                                   ==============  ===========
   Noncurrent:
   Deferred Federal Tax Assets:
     Net operating loss carryforward  $ 1,598,000   $5,601,000
     Tax credit carryforward              627,000      627,000
     Notes receivable                     261,000            -
     Media and production                 202,000      194,000
     Closed stores                       (83,000)      916,000
     State taxes                          160,000            -
     Alternative minimum tax            1,056,000    1,258,000
     Production costs                           -       79,000
     Deferred rent                    (1,505,000)      791,000
     Other - Special charge                     -   12,713,000
                                    -------------  -----------
   Total                                2,316,000   22,179,000
                                    -------------  -----------
   Deferred Federal Tax
   Liabilities:
     Fixed and intangible assets      (5,961,000)  (4,312,000)
     Other reserves                             -     (43,000)
                                    -------------  ----------
   Total                              (5,961,000)  (4,355,000)
                                    ------------   ----------
   Net Noncurrent Deferred Tax
   Asset (Liability)                  (3,645,000)   17,824,000
   Valuation Allowance                          -  (19,006,000)
                                    -------------   ----------
   Net Deferred Tax Liability        $(1,818,000)   $        -
                                    =============   ==========

TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  INCOME TAXES (Continued)


   At  December  28,  1997, the Company had net  operating  loss,
   alternative minimum tax and general business tax credit carry-
   forwards  of  approximately  $16  million,  $1.3  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.

   The above amounts are included as deferred tax assets within
   this footnote and have been fully reserved in accordance with
   Statement of Financial Accounting Standards No. 109,
   "Accounting for Income Taxes".

15.  LITIGATION SETTLEMENT AND LEGAL PROCEEDINGS

   On  July 24, 1996, the Company approved the 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 received  a  total  of  $6.0
   million  of  which the Company's insurance carrier paid  $3.05
   million.   Additionally,  the Company has  paid  approximately
   $450,000   for   legal  and  related  expenses   incurred   in
   connection with the settlement

   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.



TACO CABANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16.  QUARTERLY FINANCIAL DATA (Unaudited)





                                  Quarter Ended
                                  -------------
                  March 31,     June 30,  September 29, December 29,
                     1996       1996 (1)      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   (553,000)     1,220,000    (698,000)

   Basic and
   diluted
   earnings per
   share (2)             0.05      (0.04)          0.08       (0.04)

                                   Quarter Ended
                                   -------------
                  March 30,     June 29,  September 28, December 28.
                     1997         1997        1997        1997 (1)

   Total
   revenues       $30,186,000 $34,200,000   $35,051,000  $32,765,000
   Gross profit    21,024,000  23,628,000    24,178,000   22,704,000

   Net income
   (loss)
   applicable
   to common
   stock              556,000     876,000       562,000 (75,193,000)

   Basic and
   diluted
   earnings per
   share (2)         $   0.04    $   0.06   $      0.04   $   (5.07)

   (1) See Notes ,2, 3 and 15 for discussion of charges recorded in these
       quarters.
   (2) The earnings per share amounts have been restated as required to
       comply with Statment of Financial Standards No. 128 (SFAS 128),
       "Earnings Per Share".  For further discussion of earnings per share
       and the impact of SFAS 128, see Note 12.

                         EXHIBIT INDEX


Exhibit
  No.

21.   Subsidiaries of the Registrant

23.   Consent of Deloitte & Touche LLP

27.   Financial Data Schedule