SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                              --------------------

                                    FORM 10-Q

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

For the quarterly period ended September 28, 1997

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

     For the transition period from ______ to ________

                              --------------------

                         COMMISSION FILE NUMBER 0-17980

                              --------------------

                            RALLY'S HAMBURGERS, INC.
             (Exact name of registrant as specified in its charter)

        DELAWARE                                          62-1210077
(State or other jurisdiction of                     (IRS Employer ID Number)
incorporation or organization)

          10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223

        Registrant's telephone number, including area code: 502/245-8900

     Indicate  by check  mark  whether  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 such shorter  period that the Registrant
was  required  to file such  reports)  and (2) has been  subject to such  filing
requirements for the past 90 days.

                             Yes X              No

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock as of the latest practicable date.

                 CLASS - Common stock,  Par value $.10 per share  OUTSTANDING AT
               NOVEMBER 7, 1997 - 20,876,181 shares


<PAGE>







                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES


                                      INDEX



<TABLE>
<CAPTION>
PART I.     Financial Information                                                                           PAGE NO.
<S>         <C>           <C>                                                                                 <C>
            ITEM 1.       Consolidated Financial Statements

                          Consolidated Balance Sheets as of December 29, 1996 and September                   2
                          28, 1997 (Unaudited)

                          Consolidated  Statements of Operations (Unaudited) for
                          the Quarter 3 and Nine Months Ended September 29, 1996
                          and September 28, 1997

                          Consolidated Statements of Cash Flows (Unaudited) for the Nine                      4
                          Months Ended September 29, 1996 and September 28, 1997

                          Notes to Consolidated Financial Statements (Unaudited)                              5

            ITEM 2.       Management's Discussion and Analysis of Financial Condition and                    12
                          Results of Operations

PART II.    Other Information

            ITEM 1.       Legal Proceedings                                                                  19

            ITEM 4.       Submission of Matters to a Vote of Security Holders                                19

            ITEM 6.       Exhibits and Reports on Form 8-K                                                   19

SIGNATURES                                                                                                   20

</TABLE>


<PAGE>



PART I.           FINANCIAL INFORMATION

ITEM 1.           Consolidated Financial Statements

                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    AS  OF  DECEMBER  29,  1996  AND   SEPTEMBER  28,  1997  (In
               thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
                                                                                                                  (UNAUDITED)
                                                                                                DECEMBER 29,     SEPTEMBER 28,
                                                                                                    1996              1997
                                                                                               --------------   -----------------
<S>                                                                                            <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                                   $   2,285         $  3,180
   Restricted cash                                                                                 1,649            1,413
   Investments                                                                                     1,958            1,732
   Royalties receivable, net of reserve for doubtful accounts of $1,405 and $944 at
     December 29, 1996 and September 28, 1997, respectively                                          437              528
   Accounts and other receivables, including $565 and $789 from related parties at
     December 29, 1996 and September 28, 1997, respectively, net of reserve for doubtful
     accounts of $301 and $316 at December 29, 1996 and September 28, 1997, respectively           1,698            1,334
   Inventory, at lower of cost or market                                                             794              848
   Prepaid expenses and other current assets                                                         999            1,096
   Assets held for sale                                                                              596              244
                                                                                               --------------    ------------
         Total current assets                                                                     10,416           10,375
Assets held for sale                                                                               1,426            1,076
Property and equipment, at historical cost, less accumulated depreciation of $39,188 and
     $43,190 at December 29, 1996 and September 28, 1997, respectively                            69,806           68,861
Notes receivable, including $127 and $0  from related parties at December 29, 1996 and
     September 28, 1997, respectively, net of reserve for doubtful accounts of $853 and $654
     at December 29, 1996 and September 28, 1997, respectively                                       773            1,018
Goodwill, less accumulated amortization of $2,243 and $2,669 at December 29, 1996 and
     September 28, 1997, respectively                                                             10,482           10,055
Reacquired franchise and territory rights, less accumulated amortization of $1,984 and
     $2,711 at December 29, 1996 and September 28, 1997, respectively                             11,439           13,038
Other intangibles, less accumulated amortization of $2,459 and $2,822  at December 29, 1996
     and September 28, 1997, respectively                                                          4,769            4,406
Other assets, less accumulated amortization of $1,101 and $1,320 at December 29, 1996 and
     September 28, 1997, respectively                                                              3,147            2,688
                                                                                               -------------- --------------
         Total assets                                                                          $ 112,258      $   111,517
                                                                                               ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
   Accounts payable                                                                            $   4,884      $     5,842
   Accrued interest and other accrued liabilities                                                 13,600           14,839
   Current maturities of long-term debt and obligations under capital leases                       1,484            1,202
                                                                                               -------------- --------------
         Total current liabilities                                                                19,968           21,883
Senior notes, net of discount of $429 and $349 at December 29, 1996 and September 28, 1997,       57,897           57,977
  respectively
Long-term debt, less current maturities                                                            4,775            4,201
Obligations under capital leases, less current maturities                                          5,408            5,336
Other liabilities                                                                                  4,845            3,941
                                                                                               -------------- --------------
         Total liabilities                                                                        92,893           93,338
                                                                                               -------------- --------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized,  no shares issued                     --                --
Common stock, $.10 par value, 50,000,000 shares authorized, 20,788,000 and 20,847,000 shares
     issued at December 29, 1996 and September 28, 1997, respectively                              2,079            2,085
Additional paid-in capital                                                                        71,023           71,839
Less:  Treasury shares, 273,000 at December 29, 1996 and September 28, 1997                       (2,108)          (2,108)
Retained deficit                                                                                 (51,629)         (53,637)
                                                                                               -------------- --------------
         Total shareholders' equity                                                               19,365           18,179
                                                                                               -------------- --------------
         Total liabilities and shareholders' equity                                            $ 112,258      $   111,517
                                                                                               ============== ==============
</TABLE>

          The  accompanying  notes to consolidated  financial  statements are an
        integral part of these consolidated financial statements.

                                        2


<PAGE>


                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)

                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                   QUARTERS ENDED                         NINE MONTHS ENDED
                                                        -------------------------------------   ------------------------------------
                                                          SEPTEMBER 29,      SEPTEMBER 28,        SEPTEMBER 29,       SEPTEMBER 28,
                                                              1996                1997                1996                1997
                                                        ------------------  -----------------   ------------------  ----------------

<S>                                                     <C>                  <C>                 <C>                 <C>
REVENUES:
   Restaurant sales                                     $   37,081           $    37,146         $   123,360         $  104,957
   Franchise revenues and fees                               1,489                 1,199               4,479              3,680
   Owner fee income                                            211                   177                 211                570
                                                        ------------------  -----------------    -----------------  ----------------
         Total revenues                                     38,781                38,522             128,050            109,207
                                                        ------------------  -----------------    -----------------  ----------------

COSTS AND EXPENSES:
   Restaurant cost of sales                                 12,188                12,326              43,053             34,334
   Restaurant operating expenses, exclusive of
     depreciation and amortization and advertising
     and promotion expenses shown separately below          16,405                15,857              55,489             44,688
   General and administrative expenses                       3,696                 4,149              13,001             11,306
   Advertising and promotion expenses                        1,465                 2,934               6,380              7,197
   Depreciation and amortization                             2,318                 2,357               7,620              6,881
   Owner expense                                               322                   279                 322                858
   Provision for restaurant closures and other charges        (245)                   77                 509                579
                                                        ------------------  -----------------    -----------------  ----------------
         Total costs and expenses                           36,149                37,979             126,374            105,843
                                                        ------------------  -----------------    -----------------  ----------------

   Income from operations                                    2,632                   543               1,676              3,364
                                                        ------------------  -----------------    -----------------  ----------------

OTHER INCOME (EXPENSE):
   Interest expense                                         (2,053)               (1,844)             (6,512)            (5,578)
   Interest income                                              23                   252                 402                619
   Other                                                        12                    16                 (21)                 2
                                                        ------------------  -----------------    -----------------  ----------------
         Total other (expense)                              (2,018)               (1,576)             (6,131)            (4,957)
                                                        ------------------  -----------------    -----------------  ----------------

Income (loss) before income taxes and extraordinary            614                (1,033)             (4,455)            (1,593)
items

PROVISION (BENEFIT) FOR INCOME TAXES                           502                   115                (994)               415
                                                        ------------------  -----------------    -----------------  ----------------

Income (loss) before extraordinary items                       112                (1,148)             (3,461)            (2,008)

EXTRAORDINARY ITEM (net of tax benefit of $302 and tax
expense of $1,515 for the 1996 quarter and nine months
ended, respectively)                                           302                  --                 4,824                 --
                                                        ------------------  -----------------    -----------------  ----------------

Net income (loss)                                       $      414           $    (1,148)        $     1,363         $   (2,008)
                                                        ==================  =================    =================  ================

Earnings (loss) per common share:
   Income (loss) before extraordinary item              $      0.01          $     (.06)         $     (0.22)        $     (0.10)
   Extraordinary item                                          0.02                 --                  0.31                 --
                                                        ------------------  -----------------    -----------------  ----------------

Earnings (loss) per common share                        $      0.03          $     (.06)         $      0.09         $     (0.10)
                                                        ==================  =================    =================  ================

Weighted average shares outstanding                         15,896                20,565              15,833             20,552
                                                        ==================  =================    =================  ================

</TABLE>

          The  accompanying  notes to consolidated  financial  statements are an
        integral part of these consolidated financial statements.

                                       3
<PAGE>


                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 5)
                                   (Unaudited)

                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                                   NINE MONTHS ENDED
                                                                                           SEPTEMBER 29,        SEPTEMBER 28,
                                                                                                1996                1997
                                                                                          -----------------    ----------------

<S>                                                                                       <C>                  <C>
CASH FLOWS PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
   Net income (loss)                                                                      $    1,363           $ (2,008)
   Adjustments to reconcile net income (loss) to net cash provided by (used in)
     operating activities:
        Depreciation and amortization                                                          7,940              7,808
        Provision for restaurant closures and other charges                                      509                579
        Provision (benefit) for losses (gains) on receivables                                    548               (440)
        Extraordinary items, before tax expense of $1,515                                     (6,339)               --
        Amortization of compensatory stock options and warrants                                  --                 725
        Other                                                                                    913               (283)
        Changes in assets and liabilities, net of effects from business combinations:
          (Increase) decrease in assets:
            Receivables                                                                         (597)              (210)
            Inventory                                                                            285                (51)
            Prepaid expenses and other current assets                                             69               (124)
            Other assets                                                                       (157)                221
          Increase (decrease) in liabilities:
            Accounts payable, accrued interest and other accrued liabilities                  (4,391)             1,675
            Accrued income taxes                                                                  57                (22)
            Other liabilities                                                                 (1,080)              (994)
                                                                                          -----------------    ----------------

              Net cash (used in)  provided by operating activities                              (880)             6,876
                                                                                          -----------------    ----------------

CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
   Decrease in investments                                                                     4,933                226
   Notes receivable                                                                              362                183
   Pre-opening costs                                                                             (74)              (196)
   Capital expenditures                                                                       (1,321)            (4,368)
   Proceeds from the sale of property and equipment and assets held for sale                   3,903              1,197
   Acquisition of a market, net of cash acquired                                                 --              (2,172)
                                                                                            ---------------      --------------

              Net cash provided by (used in) investing activities                              7,803             (5,130)
                                                                                          -----------------    ----------------

CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
   Decrease in restricted cash                                                                   14                 236
   Principal payments of debt                                                                 (5,436)              (882)
   Senior notes retirement                                                                   (11,053)               --
   Proceeds from the issuance of common stock, net of costs of issuance                       10,442                100
   Principal payments on capital lease obligations                                              (401)              (305)
                                                                                          -----------------    ----------------

              Net cash used in financing activities                                           (6,434)              (851)
                                                                                          -----------------    ----------------

              Net increase in cash                                                               489                895

CASH AND CASH EQUIVALENTS, beginning of period                                                 8,811              2,285
                                                                                          -----------------    ----------------

CASH AND CASH EQUIVALENTS, end of period                                                  $    9,300           $  3,180
                                                                                          =================    ================

</TABLE>

          The  accompanying  notes to consolidated  financial  statements are an
        integral part of these consolidated financial statements.

                                       4

<PAGE>



                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

            (Tabular dollars in thousands, except per share amounts)



1.   FINANCIAL STATEMENT PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in accordance with the rules and regulations of the Securities and
     Exchange Commission for interim financial information. Accordingly, they do
     not  include  all the  information  and  footnotes  required  by  generally
     accepted   accounting   principles  for  complete   financial   statements.
     Therefore,  it is suggested that the accompanying  financial  statements be
     read in  conjunction  with  the  financial  statements  and  notes  thereto
     included in the  Company's  annual  report on Form 10-K for the fiscal year
     ended December 29, 1996  ("10-K").  Except as disclosed  herein,  there has
     been no material  change in the  information  disclosed in the notes to the
     consolidated  financial  statements  included in the 10-K.  Forward looking
     statements  contained  herein  should  be  read  in  conjunction  with  the
     cautionary statements contained in the 10-K.

     The consolidated financial statements include Rally's Hamburgers,  Inc. and
     its wholly-owned  subsidiaries,  each of which is described below.  Rally's
     Hamburgers,  Inc. and its subsidiaries are collectively  referred to herein
     as the context  requires as "Rally's"  or the  "Company".  All  significant
     intercompany accounts and transactions have been eliminated.

     Rally's is one of the largest  chains of double  drive-thru  restaurants in
     the United States.  At September 28, 1997, the Rally's system  included 481
     restaurants  in 18  states,  primarily  in the  Midwest  and  the  Sunbelt,
     comprised of 229  Company-owned  and operated  restaurants,  226 franchised
     restaurants and 26  Company-owned  restaurants in Western markets which are
     operated  as  Rally's  restaurants  by CKE  Restaurants,  Inc.  ("CKE"),  a
     significant  shareholder of the Company, under an operating agreement which
     began  July  1996.  Two  additional  Company-owned  stores  covered  by the
     operating  agreement  have been  converted to the Carl's Jr. format and are
     not included in the above store count. The Company's restaurants offer high
     quality fast food. The Company primarily serves the drive-thru and take-out
     segments of the quick-service  restaurant industry.  The Company opened its
     first restaurant in January 1985 and began offering  franchises in November
     1986.

     Rally's  Hamburgers,  Inc., Rally's of Ohio, Inc., Self Service Drive Thru,
     Inc. and Hampton Roads Foods,  Inc. own and operate Rally's  restaurants in
     various  states.   Additionally,   Rally's  Hamburgers,  Inc.  operates  as
     franchisor of the Rally's brand. Rally's Management,  Inc. provides overall
     corporate management of the Company's businesses. Rally's Finance, Inc. was
     organized for the purpose of making loans to Rally's franchisees to finance
     the acquisition of restaurant  equipment and modular  buildings.  RAR, Inc.
     was  organized  for the  purpose of  acquiring  and  operating  a corporate
     airplane and is currently inactive. The Company's wholly-owned  subsidiary,
     ZDT  Corporation,  was formed to own the Zipps brand and franchise  system.
     MAC I was organized for the purpose of acquiring a manufacturer  of modular
     buildings and is currently inactive. The manufacturing business was sold in
     January 1995.

                                       5
<PAGE>

     The  preparation of the 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 and
     disclosures  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  when  actual  transactions   anticipated  are  consummated.   In
     addition,  despite management  diligence,  changes in estimates do and will
     continue  to  occur  due  to  changes  in  available   relevant   data  and
     consummation of the events and transactions. The statements are prepared on
     a going concern basis.  Certain of the most significant  estimates include,
     among  other  things,  useful  lives  assigned  to  depreciable/amortizable
     assets,  fair value less costs to sell of long-lived  assets held for sale,
     fair value of long-lived  assets held for use,  future net occupancy  costs
     related  to  closed/disposable  properties,   accruals  for  the  Company's
     self-insured  and  high  deductible   insurance  programs  and  disclosures
     regarding commitments and contingencies.

     In the  opinion of  management,  the  accompanying  unaudited  consolidated
     financial  statements  include  all  adjustments  considered  necessary  to
     present  fairly,  when read in  conjunction  with the 10-K,  the  Company's
     financial  position  as of  September  28,  1997  and  the  results  of its
     operations  for the quarter and nine months  ended  September  29, 1996 and
     September 28, 1997, and cash flows for the nine months ended  September 29,
     1996 and  September 28, 1997.  The results of  operations  for such interim
     periods are not  necessarily  indicative  of the results to be expected for
     the full year.

     In March 1997, the Financial Accounting Standards Board issued Statement of
     Financial  Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128")
     which is  effective  for both  interim  and  annual  periods  ending  after
     December 15, 1997.  SFAS 128 replaces the standards for computing  earnings
     per share previously  found in Accounting  Principles Board Opinion No. 15,
     "Earnings  Per Share".  Due to the  Company's  reported  net income  (loss)
     positions in the periods  presented,  the inclusion of options and warrants
     as  required  by  SFAS  128  result  in  either  an   insignificant  or  an
     antidilutive  impact on all periods presented.  Therefore,  the adoption of
     SFAS 128 is  expected  to have no effect on  earnings  (loss)  per share as
     reported  for the quarters  and nine months  ended  September  29, 1996 and
     September 28, 1997.

     Certain  items  have been  reclassified  in the  accompanying  consolidated
     financial  statements for prior periods in order to be comparable  with the
     classification  adopted for the current period. Such  reclassifications had
     no effect on previously reported net income.

2.   ACQUISITION

     On July 9, 1997, the Company acquired from Arkansas  Investment Group, Inc.
     ("AIGI") (an Arkansas  corporation)  substantially all the operating assets
     employed in the  operation of AIGI's  franchised  Rally's  restaurants  for
     approximately  $2.8 million.  The cash disbursed in payment of the purchase
     price was reduced by certain  amounts owed by AIGI to the  Company.  Actual
     cash disbursed was  approximately  $2.2 million.  In addition,  the Company
     assumed five of AIGI's ground lease  obligations and five of its ground and
     building  lease  obligations,  and  entered  into three  additional  ground
     leases.  AIGI owned and operated a total of ten Rally's  restaurants in the
     Little Rock,  Arkansas market. The acquisition of the AIGI operating assets
     was accounted for as a purchase. The Company believes that the $2.8 million
     represents the fair value of the acquired assets.  The impact on operations
     of this  acquisition was not significant for any of the periods  presented,
     and  therefore,  proforma  amounts are not presented  giving effect to this
     acquisition.

                                       6
<PAGE>


3.   RESTRICTED CASH

     Restricted cash consists of amounts held in various Certificates of Deposit
     as collateral  for Letters of Credit and Automated  Clearing  House ("ACH")
     transactions.

4.   INVESTMENTS

     Excess  funds have been  invested in U.S.  Treasury  and  investment  grade
     corporate    debt    securities.    These    securities   are   deemed   as
     "available-for-sale"  under Statement of Financial Accounting Standards No.
     115, "Accounting for Certain Investments in Debt and Equity Securities" and
     are reported at fair value. Unrealized holding gains and losses,  excluding
     those losses  considered to be other than temporary,  are reported as a net
     amount in a  separate  component  of  shareholders'  equity.  There were no
     unrealized  holding  gains or losses at December 29, 1996 and September 28,
     1997.  Provisions  for  declines  in  market  value  are  made  for  losses
     considered to be other than temporary.  No such provision was necessary for
     any period  presented.  The market value of the  portfolio  was  determined
     based on quoted  market  prices for these  investments.  Realized  gains or
     losses   from  the  sale  of   investments   are  based  on  the   specific
     identification method.

     The carrying  value is equal to the market value of investments at December
     29, 1996 and September 28, 1997 and consists of the following:

     December 29, 1996
     United  States   government  and  its     $      500
       agencies
     Corporate debt instruments                     1,458
                                               =============
     Total                                     $    1,958
                                               =============

     September 28, 1997
     United  States   government  and  its     $      500
       agencies
     Corporate debt instruments                     1,232
                                               =============
     Total                                     $    1,732
                                               =============

     The  proceeds  from the sale of  investments  and  related  gross gains and
     losses for the quarters  ended  September  29, 1996 and  September 28, 1997
     were as follows:
<TABLE>
<CAPTION>
                                                 QUARTERS ENDED                               NINE MONTHS ENDED
                                   -------------------------------------------    ------------------------------------------
                                      SEPTEMBER 29,          SEPTEMBER 28,          SEPTEMBER 29,          SEPTEMBER 28,
                                          1996                    1997                   1996                   1997
                                   --------------------    -------------------    -------------------    -------------------
<S>                                <C>                     <C>                    <C>                    <C>
         Proceeds from the sale
            of investments         $         --            $        536           $      4,933           $        2,180
         Gross gains realized                --                      --                    --                      --
         Gross losses realized               --                      --                    --                      --
</TABLE>

                                       7
<PAGE>



5.   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                                NINE MONTHS ENDED
                                                  ------------------------------
                                                   SEPTEMBER 29,   SEPTEMBER 28,
                                                     1996              1997
                                                  ---------------  -------------

     Interest paid (net of amount capitalized)     $   5,052        $ 3,822
     Income taxes paid                                   463            401
     Capital lease obligations incurred                  111            386

     Interest  incurred during the construction of restaurants is capitalized as
     a  component  of  the  cost  of  the  restaurants  and  is  amortized  on a
     straight-line basis over the estimated useful lives of the restaurants. The
     amount of interest capitalized in all quarters was insignificant.

     For purposes of the  statement  of cash flows,  the Company  considers  all
     highly liquid debt instruments with an original maturity of three months or
     less at the date of purchase to be cash equivalents.

6.   COMMITMENTS AND CONTINGENCIES

     Litigation

     In January and February  1994,  two putative  class  action  lawsuits  were
     filed,  on behalf of the  shareholders  of  Rally's  in the  United  States
     District Court for the Western District of Kentucky,  against Rally's, Burt
     Sugarman and GIANT GROUP, LTD. ("GIANT") and certain of Rally's present and
     former  officers and  directors  and its auditors.  The  complaints  allege
     defendants violated the Securities Exchange Act of 1934, as amended,  among
     other claims, by issuing  inaccurate public statements about the Company in
     order to arbitrarily  inflate the price of Rally's  Common Stock,  and seek
     unspecified damages, including punitive damages. On April 15, 1994, Rally's
     filed a motion to  dismiss  and a motion to strike.  On April 5, 1995,  the
     Court struck  certain  provisions of the  complaint  but  otherwise  denied
     Rally's  motion to  dismiss.  Subsequently,  the  defendants  have filed an
     answer  which  denies  all  of  the  plaintiffs  material  allegations.  In
     addition, the Court denied plaintiffs' motion for class certification;  the
     plaintiffs  renewed this motion, and the Court certified the class on April
     16, 1996.  In October  1995,  the  plaintiffs  filed a motion to disqualify
     Christensen,   Miller,   Fink,  Jacobs,   Glaser,   Weil  &  Shapiro,   LLP
     ("Christensen,  Miller")  as counsel  for  defendants  based on a purported
     conflict of interest  allegedly arising from the representation of multiple
     defendants,  as well as Ms. Glaser's association with Christensen,  Miller.
     That motion was denied on September 19, 1996.  Two  settlement  conferences
     have been conducted;  and no settlement  conferences have been scheduled in
     the near  future.  The  parties  are  completing  the final  phase of facts
     discovery  which should be completed by the end of the year.  No trial date
     has been scheduled yet. Management is unable to predict the outcome of this
     matter at the present  time or whether or not certain  available  insurance
     coverages  will apply.  However,  the  defendants  deny all  wrongdoing and
     intend to defend  themselves  vigorously  in this  matter.  The  Company is
     unable to determine whether a resolution adverse to the Company will have a
     material  effect on its  results  of  operations  or  financial  condition.
     Accordingly,  no  provisions  for any  liabilities  that  may  result  upon
     adjudication have been made in the accompanying  financial  statements.  An
     estimate of defense costs reimbursable  under the Company's  directors' and
     officers'  insurance  is  included  in "Other  Assets" in the  accompanying
     consolidated financial statements.

                                       8
<PAGE>

     In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
     action,  purportedly on behalf of Rally's,  against  GIANT,  Burt Sugarman,
     David Gotterer and certain of Rally's other  officers and directors  before
     the Delaware Chancery Court.  Harbor named Rally's as a nominal  defendant.
     Harbor  claims that the  directors  and officers of both Rally's and GIANT,
     along  with  GIANT,   breached  their   fiduciary   duties  to  the  public
     shareholders  of Rally's by causing  Rally's to repurchase  certain Rally's
     Senior Notes at an inflated  price.  Harbor seeks  "millions of dollars" in
     damages, along with rescission of the repurchase  transaction.  In the fall
     of 1996, all defendants moved to dismiss the action.  On April 3, 1997, the
     Chancery  Court  denied  defendants'  motions.  The parties  are  presently
     engaged in discovery.  GIANT and the other  defendants  deny all wrongdoing
     and intend to vigorously  defend the action.  It is not possible to predict
     the outcome of this action at this time.

     In December 1994, Rally's entered into two franchise  agreements with Kader
     Investments,  Inc.  ("Kader") for the  development and operation of Rally's
     Hamburgers  restaurants  in Anaheim,  California  and  Tustin,  California.
     Rally's  assisted the franchisee in developing and opening the restaurants.
     On November 27, 1996, Kader filed a six-count  Complaint against Rally's in
     the California  Superior Court for Orange County (Case No. 772257) alleging
     among other things,  breach of contract,  breach of the implied covenant of
     good faith and fair dealing, fraud and unfair competition. Rally's filed an
     Answer  denying  all  material  allegations,  and  filed a  Cross-Complaint
     alleging breach of contract. The parties are presently engaged in mediation
     in an attempt to resolve  their  dispute.  Because of such  mediation,  the
     trial date may be delayed  beyond its presently  scheduled  December  date.
     While the Company believes it has meritorious defenses against the suit, it
     is unable to determine  whether a resolution  adverse to the Company  would
     have a material effect on its results of operations or financial condition.
     Accordingly,  no  provisions  for any  liabilities  have  been  made in the
     accompanying  financial  statements.  

     The Company is  involved  in other  litigation  matters  incidental  to its
     business. With respect to such other suits, management does not believe the
     litigation  in which it is  involved  will have a material  effect upon its
     results of operations or financial condition.

     Other Commitments

     The  Company  is  contingently  liable  on  certain  franchisee  lease/loan
     commitments totaling approximately $311,000.

     The Company,  from time to time,  negotiates purchase contracts for certain
     items used in its  restaurants  in the normal course of business.  Although
     some  of  these  contracts  contain  minimum  purchase   quantities,   such
     quantities do not exceed expected usage over the term of such agreements.

7.   ASSETS HELD FOR SALE

     Assets held for sale include land and modular  buildings idled by the prior
     years' slowdowns in the Company's  expansion plans and land associated with
     the  closure  of  stores.  The  Company  has  recorded,   in  prior  years,
     significant  charges  resulting  from   restructurings,   other  restaurant
     closings and certain other charges more fully discussed in the 10-K.

                                       9
<PAGE>


8.   IMPAIRMENT OF LONG-LIVED ASSETS

     The Company adopted  Statement of Financial  Accounting  Standards No. 121,
     "Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets
     to Be Disposed of " (SFAS 121),  at the  beginning  of the fourth  quarter,
     1995. This Statement establishes accounting standards for the impairment of
     long-lived assets, certain identifiable intangibles and goodwill related to
     those  assets to be held and used,  and for  long-lived  assets and certain
     identifiable  intangibles  to  be  disposed  of.  SFAS  121  requires  that
     impairment for long-lived  assets and  identifiable  intangibles to be held
     and used,  if any,  be based on the fair  value of the  assets.  Long-lived
     assets and  certain  identifiable  intangibles  to be disposed of are to be
     reported at the lower of  carrying  amount or fair value less cost to sell.
     For purposes of applying this Statement,  the Company determines fair value
     utilizing the present value of expected  future cash flows using a discount
     rate commensurate with the risks involved.

     Long-lived  assets considered for impairment under SFAS 121 are required to
     be grouped at the "lowest level for which there are identifiable cash flows
     that are  largely  independent  of the cash  flows  of other  groups."  The
     Company believes the most correct  application of this standard is obtained
     by examining  individual  restaurants where circumstances  indicate that an
     impairment  issue may exist.  In  addition,  if an asset  being  tested for
     recoverability was acquired in a business  combination  accounted for using
     the  purchase  method,  the  goodwill  that  arose in that  transaction  is
     included as part of the asset being evaluated and in determining the amount
     of any impairment.

     The $509,000  charge for the nine months ended  September 29, 1996 included
     in the caption,  "Provision  for  restaurant  closures and other  charges,"
     includes  $754,000 relating  primarily to two additional  restaurants which
     were  determined to be impaired in 1996. No  additional  long-lived  assets
     have been  determined  to be impaired in 1997. As required by the Standard,
     the Company will continue to periodically  review its assets for impairment
     where circumstances indicate that such impairment may exist.

9.   REPURCHASE OF SENIOR NOTES

     On January 29, 1996, the Company  repurchased,  in two  transactions,  at a
     price of $678.75 per $1,000 principal amount, $22 million face value of its
     9 7/8% Senior Notes due in the year 2000 from GIANT. The price paid in each
     transaction  represented  the market closing price on January 26, 1996. The
     first transaction  involved the repurchase of $16 million face value of the
     Notes for $11.1  million  in cash.  The  second  transaction  involved  the
     purchase of $6 million  face value of Notes in exchange  for a $4.1 million
     short-term  note,  due in three  installments  of principal  and  interest,
     issued by Rally's.  The Company  paid the final  installment  on this note,
     together  with  accrued  interest  thereon,  on  September  27,  1996.  The
     repurchase  resulted in an extraordinary  gain, net of tax, of $4.8 million
     or $.31 per share.  An  additional  $4.7  million face amount of the Senior
     Notes were retired during the fourth quarter,  1996 at an aggregate gain of
     $200,000.  The  remaining  outstanding  Notes are  publicly  traded  and at
     September  28, 1997 had a market value of $55.1 million based on the quoted
     market price for such notes.

     These purchases  reduced total interest expense by  approximately  $537,000
     and $1.4 million for the quarter and nine months ended  September 29, 1996,
     respectively, and $705,000 and $2.1 million for the quarter and nine months
     ended September 28, 1997, respectively.

                                       10
<PAGE>



10.  PROPOSED EXCHANGE OFFER

     On September  21,  1997, a letter of intent was signed  whereby the Company
     agreed in principle  to acquire  approximately  19.0 million  shares of the
     Common Stock of Checkers Drive-In Restaurants,  Inc. (Checkers) in exchange
     for Rally's Common Stock and a new series of Rally's  Preferred Stock which
     will be  convertible  into Rally's Common Stock if such approval is granted
     by  Rally's   stockholders.   These  shares  are  held  of  record  by  CKE
     Restaurants,  Inc., Fidelity National Financial, Inc. and GIANT GROUP, LTD.
     and certain of its  affiliates  and related  parties.  Rally's would become
     Checkers  largest  stockholder  with  approximately  27% of the outstanding
     Checkers  Common  Stock.  The  acquisition  is  subject to  negotiation  of
     definitive  agreements,  receipt of fairness  opinions  and other  required
     approvals and customary  conditions.  Due diligence is proceeding,  and the
     transaction is expected to close in the fourth quarter.

11.  SUBSEQUENT EVENT

     Effective  in  early  November,  the  Company  entered  into an  employment
     agreement with James J.  Gilllespie  where he will serve as Chief Executive
     Officer. Additionally,  William P. Foley, Il has been appointed Chairman of
     the  Board  of  Rally's.  Mr.  Foley  is also  Chairman  of  Checkers,  CKE
     Restaurants, Inc. and Fidelity National Financial, Inc.



                                       11
<PAGE>


ITEM 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

For the quarter  ended  September 28, 1997,  the Company  reported a net loss of
$1.1 million or $.06 per share  compared with net income of $414,000 or $.03 per
share for the same period of the prior year.  Total revenues  decreased to $38.5
million from $38.8  million in the prior year due  primarily to same store sales
declines in both  Company-owned  and franchised  units,  partially  offset by an
increase in  equivalent  Company-owned  units in operation  as discussed  below.
Income from  operations  was  $543,000  compared  to $2.6  million for the third
quarter  of  1996.  The  majority  of  this  decrease  in  operating  income  is
attributable  to a $1.5  million  increase in  advertising  expenses  during the
quarter. The Company has continued the favorable trend in labor costs during the
quarter.  Sales did not correspondingly  increase as expected from the Company's
increased advertising spending as advertising expenses increased from 4% to 7.9%
of sales.

For the nine months ended September 28, 1997, the Company reported a net loss of
$2.0 million or $.10 per share  compared with net income of $1.4 million or $.09
per share for the prior year. Total revenues decreased to $109.2 million in 1997
compared with $128.1  million in 1996 due primarily to same store sales declines
and fewer stores in operation  as discussed in the nine months  analysis  below.
Income from  operations was $3.4 million  compared to $1.7 million for the prior
year. The Company  attributes this  improvement in operating income to favorable
store level cost  performance.  Food,  paper and labor costs improved 4.6%, as a
percentage of sales, versus prior year.

Sales continue to be the major  challenge  confronting  the Company in improving
bottom line  results.  Incremental  advertising  dollars did not increase  sales
during the quarter and year to date ended  September 28, 1997.  The Company will
be revamping its marketing  strategy  during the fourth  quarter,  including the
selection of a new  advertising  agency and  evaluation of additional  near term
promotional opportunities. The Company also plans to expand the testing of a new
image  design and the  adding of inside  dining  areas to certain  stores in the
fourth quarter.


During the quarter, the Company opened thirteen units, including the acquisition
of the  ten-store  Arkansas  market  from a  franchisee,  and sold one unit to a
franchisee.  Franchisees  opened nine units,  including the  acquisition  of one
store from the Company, and closed thirteen units, ten of which were sold to the
Company.

Results of Operations

Rally's  revenues  are  derived   primarily  from   Company-owned  and  operated
restaurant  sales and royalty fees from  franchisees.  The Company also receives
revenues from the award of exclusive  rights to develop  Rally's  restaurants in
certain  geographic areas (area  development  fees) and the award of licenses to
use the  Rally's  brand and  confidential  operating  system  (franchise  fees).
Systemwide sales consist of aggregate  revenues of Company-owned  and franchised
restaurants  (including  CKE-operated).  Company revenue also includes  payments
resulting from an operating  agreement with CKE, referred to as Owner fee income
in the accompanying consolidated financial statements. Restaurant cost of sales,
restaurant  operating expenses,  depreciation and amortization,  and advertising
and promotion relate directly to Company-owned and operated restaurants. General
and   administrative   expenses  relate  to  both   Company-owned  and  operated
restaurants  and franchise  operations.  Owner expenses  relate to  CKE-operated
restaurants and consist primarily of depreciation and amortization.


                                       12
<PAGE>


The table below sets forth the percentage relationship to total revenues, unless
otherwise  indicated,  of certain items  included in the Company's  consolidated
statements of operations and operating data for the periods indicated:
<TABLE>
<CAPTION>
                                                          QUARTERS ENDED                         NINE MONTHS ENDED
                                             ----------------------------------------- ---------------------------------------
                                               SEPTEMBER 29,         SEPTEMBER 28,       SEPTEMBER 29,       SEPTEMBER 28,
                                                    1996                  1997                1996                1997
                                             -------------------   ------------------- ------------------- -------------------
<S>                                                 <C>                   <C>                 <C>                 <C>
Revenues
     Restaurant sales                               95.6%                 96.4%               96.3%               96.1%
     Franchise revenues and fees                     3.8                   3.1                 3.5                 3.4
     Owner fee income                                 .6                    .5                  .2                  .5
                                             -------------------   ------------------  ------------------- -------------------
                                                   100.0%                100.0%              100.0%              100.0%
                                             ===================   =================== =================== ===================
Costs and expenses
  Restaurant cost of sales (1)                      32.9%                 33.2%               34.9%               32.7%
  Restaurant operating expenses (1)                 44.2                  42.7                45.0                42.6
  General and administrative expenses                9.5                  10.8                10.2                10.4
  Advertising and promotion expenses (1)             4.0                   7.9                 5.2                 6.9
  Depreciation and amortization (1)                  6.3                   6.4                 6.2                 6.6
  Owner expense (2)                                152.6                 157.6               152.6               150.5
  Provision for restaurant closures and
     other                                           (.6)                   .2                  .4                  .5
  Income from operations                             6.8                   1.4                 1.3                 3.1
  Total other (expense)                             (5.2)                 (4.1)               (4.8)               (4.5)
                                             -------------------   ------------------- ------------------- -------------------

  Net income (loss) before income taxes
    and extraordinary items                          1.6%                 (2.7)%              (3.5)%              (1.5)%
                                             ===================   =================== =================== ===================

Number of restaurants:
  Restaurants open at the beginning of
     period                                        485                   473                 481                 467
                                             -------------------   ------------------- ------------------- -------------------

  Company restaurants opened (closed or
     transferred), net during period                (4)                   12                  (4)                 20
  Franchised restaurants opened (closed or
     transferred), net during period                (4)                   (4)                  0                  (6)
                                             -------------------   ------------------- ------------------- -------------------

  Total restaurants opened (closed or
     transferred), net during period                (8)                    8                  (4)                 14
                                             -------------------   ------------------- ------------------- -------------------

  Total restaurants open at end of period          477                   481                 477                 481
                                             ===================   =================== =================== ===================
</TABLE>
(1)      As a percentage of restaurant sales.
(2)      As a percentage of owner fee income.


                                       13
<PAGE>


Three Months Ended September 29, 1996 Compared with Three Months Ended September
28, 1997

Systemwide  sales  decreased 7% to $75.3  million for the quarter  compared with
$81.3 million a year ago. This decrease is primarily  attributable to systemwide
same store  sales  declines  of 9%.  Company  same store  sales  declined 7% and
franchise  same store sales were down 10% for the quarter.  Management  plans to
revamp its marketing  strategy  during the fourth quarter in order to boost same
store sales.

Total Company  revenues  decreased 1% to $38.5 million for the quarter  compared
with $38.8  million a year ago.  Company-owned  and  operated  restaurant  sales
increased  slightly to $37.2  million for the current  year  quarter  from $37.1
million  primarily  due to  approximately  14  additional  equivalent  units  in
operation during the current year quarter,  partially offset by same store sales
declines of 7%. The increase in equivalent  units is primarily  attributable  to
the Company's acquisition of ten Arkansas stores from a franchisee in July 1997.
Franchise  revenues  and fees  declined  20%  primarily  due to same store sales
declines of 10% and the sale of the ten-store  Arkansas market to the Company in
1997.

Restaurant cost of sales, as a percentage of sales,  increased to 33.2% for 1997
compared with 32.9% for the comparable  quarter of the prior year. This increase
as a percentage of sales is primarily due to lower vendor rebates as a result of
reduced usage.

Restaurant  operating  expenses were 42.7% of sales  compared with 44.2% for the
comparable  quarter  of the  prior  year.  This  decrease  is  primarily  due to
management's  cost reduction actions in the labor area and to a favorable change
in estimated  workers  compensation  insurance  costs during the quarter.  Also,
previously  identified  and  implemented  changes in  staffing  levels and labor
deployment in certain  stores are  continuing to yield savings in management and
crew  labor.  Management  believes  that these  cost  reduction  actions  should
continue to favorably influence ongoing operating expense performance.

General  and  administrative  expenses in the third  quarter of 1997,  on both a
dollar and percentage of revenues basis, were higher than 1996. This increase is
primarily  attributable to higher training and legal costs and the  amortization
of warrants granted to CKE in December 1996,  partially offset by a reduction in
non-restaurant staffing levels and in bonuses payable for the quarter.

Advertising  expenses  were  higher,  on both a dollar and  percentage  of sales
basis,  for the third  quarter of 1997 versus 1996.  Advertising  spending  rose
during  the  quarter  to  7.9% of  sales  as a  result  of the  acceleration  of
television spending for product promotions versus limited spending of only 4% in
1996. Incremental  advertising was not absorbed by the revenue results discussed
above.

Depreciation  and  amortization,  on both a dollar and a percentage  of revenues
basis, was essentially flat between quarters.

Owner  expenses  of  approximately  $300,000  for the  third  quarter  of  1997,
essentially flat versus 1996,  represent the Company's segregated ownership cost
related to the 28 units  operated by CKE. These  expenses  consist  primarily of
depreciation and amortization associated with the properties.

Provision for  restaurant  closures and other consists of expenses of $77,000 in
the third  quarter of 1997 and income of $245,000 in the prior year period.  The
current year charges relate primarily to surplus property writedowns. The income
for the prior year quarter is  primarily  attributable  to a $232,000  favorable
change in  estimate  associated  with the sale of the  assets  of the  Company's
five-store Montgomery, Alabama market during the quarter.

                                       14
<PAGE>

Interest  expense  decreased  10% in the third  quarter of 1997 to $1.8  million
compared to $2.0 million in 1996  primarily due to the early  extinguishment  of
debt in the fourth quarter of 1996. See Note 9 to the accompanying  consolidated
financial statements for further discussion.

Interest income  increased by $229,000 in the third quarter of 1997 to $252,000,
due primarily to increases in the average daily invested amounts and to interest
on an Internal Revenue Service refund related to prior tax years.

In total,  excluding the third quarter 1996 tax provision of $302,000 associated
with the  extraordinary  gain, the Company's net tax provision for the prior and
current year  quarters  were  $200,000  and  $115,000,  respectively.  These net
provisions  represent  state taxes  expected  to be payable for both years.  The
Company's  tax status  regarding  non-recognition  of the  benefit of  currently
recordable  book  losses due to  uncertainty  of ultimate  realization  remained
unchanged.

The  extraordinary  item in the  third  quarter  of 1996  is  related  to a gain
recognized,  net of taxes,  on the early  retirement of debt.  See Note 9 to the
accompanying consolidated financial statements for further discussion.

Nine Months Ended  September 29, 1996 Compared with Nine Months Ended  September
28, 1997

Systemwide  sales  declined  13% for the  first  nine  months  of 1997 to $220.6
million  compared  with $254.7  million a year ago.  This  decrease is primarily
attributable to systemwide same store sales declines of 10%.

Total Company  revenues  decreased  15% to $109.2  million in 1997 compared with
$128.1 million in 1996.  Company-owned  and operated  restaurant sales decreased
$18.4  million to $105  million  primarily  due to an 11%  decline in same store
sales  during  the first nine  months of 1997 and to a decline of  approximately
$10.5 million due to the Company's operating agreement with CKE, as discussed in
Note 1 to the accompanying consolidated financial statements, somewhat offset by
an increase of $1.4 million due to the  Company's  acquisition  of the ten-store
Arkansas market as previously  discussed.  Franchise revenues and fees decreased
by 18% for the year primarily due to  approximately 11 fewer equivalent units in
operation during the period and to franchise same store sales declines of 8%.

Restaurant cost of sales, as a percentage of sales,  decreased to 32.7% for 1997
compared  with 34.9% for 1996.  This decline is  primarily  due to the impact of
implemented cost reduction strategies, partially offset by lower vendor rebates,
as discussed above in the quarterly comparison.

Restaurant operating expenses, as a percentage of sales,  decreased to 42.6% for
1997 compared with 45% for 1996.  This decrease is primarily due to management's
cost  reduction  actions  in the labor area and better  fixed cost  coverage  in
stores operated by the Company during the current year,  primarily the result of
the CKE operating  agreement  covering  certain high fixed cost  restaurants  in
Western markets.

General and administrative  expenses,  as a percentage of revenues,  were higher
than 1996 primarily due to reduced sales  leverage.  On a dollar basis,  general
and administrative  expenses decreased 13% to $11.3 million in 1997. This dollar
decrease   was   primarily   attributable   to  the   transfer  of   operational
responsibility for certain restaurants in Western markets to CKE, a reduction in
non-restaurant  staffing  levels,  a reduction in bonuses  payable and lower bad
debt expense for the first nine months,  partially offset by the amortization of
warrants  granted  to CKE and higher  training  and legal  related  costs in the
current year quarter, as discussed above.

                                       15
<PAGE>

Advertising  expenses  were  higher,  on both a dollar and  percentage  of sales
basis,  for 1997 compared to the same period of 1996. See earlier  discussion as
the increase is consistent with the quarterly results.

Depreciation and amortization on a year-to-date  basis decreased to $6.9 million
compared with $7.6 million for the same period of the prior year.  This decrease
is  primarily  due to a  segregation  into  Owner  expense of  depreciation  and
amortization associated with the CKE-operated properties.

Owner  expenses  of  approximately  $900,000  in 1997  represent  the  Company's
segregated  ownership  cost related to the 28 units operated by CKE. These units
were  operated  by CKE for only the last  three  months of the prior  nine-month
period  resulting in Owner expenses of  approximately  $300,000 for 1996.  These
expenses consist primarily of depreciation and amortization  associated with the
properties.

The Provision for  restaurant  closures and other of $579,000 for the first nine
months  of 1997  resulted  primarily  from  charges  for  expenses  of  matching
incremental  franchisee  advertising  during the second  quarter,  for  expenses
associated  with the  terminated  merger  negotiations  with  Checkers  Drive-In
Restaurants,  Inc. and for surplus asset  writedowns.  The Provision of $509,000
for the  comparable  period in the prior year  relates  primarily  to a $754,000
charge for the estimated impairment of two restaurants under SFAS 121, partially
offset by a $232,000  favorable  change in estimate  associated with the sale of
the  assets of the  Company's  five-store  Montgomery  market  during  the third
quarter of 1996.  No  additional  long-lived  assets have been  determined to be
impaired under SFAS 121 in the first nine months of 1997.

Interest expense decreased 14% on a year-to-date  basis to $5.6 million compared
to $6.5 million for the same period in the prior year primarily due to the early
extinguishment  of debt in  1996.  See Note 9 to the  accompanying  consolidated
financial statements for further discussion.

Interest income increased from $402,000 in 1996 to $619,000 in 1997. See earlier
discussion as the increase is consistent with the quarterly results.

In total, excluding the tax benefit of $1.5 million for the first nine months of
1996 associated with the extraordinary gain, the Company's net tax provision for
the  prior  year  and  current  year  periods   were   $521,000  and   $415,000,
respectively.  These net provisions represent state taxes expected to be payable
for both  years.  The  Company's  tax status  regarding  non-recognition  of the
benefit of  currently  recordable  book  losses due to  uncertainty  of ultimate
realization remained unchanged.

The  extraordinary  item in the first nine  months of 1996  represents  the gain
recognized,  net of taxes,  on the early  retirement of debt.  See Note 9 to the
accompanying consolidated financial statements for further discussion.

Liquidity and Capital Resources

The Company's cash flow provided by operating  activities was approximately $6.9
million  for the  first  nine  months  of 1997  compared  with cash flow used in
operating activities of approximately  $880,000 for the same period in the prior
year. This increase resulted primarily from higher net income from operations in
1997 and favorable  changes in working capital related  primarily to differences
in the timing of  accounts  payable  and  higher  advertising  accruals  for the
current year period.

Capital  expenditures of approximately $4.4 million for the first nine months of
1997 were  funded  primarily  through  operating  activities,  sales of  surplus
properties  and  existing  cash  balances.  Approximately  $2.8 million of these
expenditures were for the construction or conversion of new stores

                                       16
<PAGE>

and for the reopening of three units previously  closed.  Eleven of these stores
opened in the first nine months of the year,  including  three units  re-opened.
Remaining  capital  expenditures  were for the testing of a new image design and
the  addition of  side-dining  areas for  selected  units and the  purchase  and
installation of certain replacement equipment.

The Company had no new units under  construction  at September 28, 1997. Two new
units are expected to open by the end of the fourth quarter,  for a total of ten
new units for the year in addition to eleven units acquired from franchisees and
the three units  re-opened which had been previously  closed.  In addition,  the
Company plans to further expand testing of image  enhancement and side-dining in
selected stores during the fourth quarter.  Full year capital  expenditures  are
expected  to be in the range of  approximately  $6 to $7 million,  inclusive  of
replacement capital.

Principal payments of debt and capital leases totaled approximately $1.2 million
during  the first  nine  months  of 1997.  The  Company  is  required  to make a
mandatory  sinking fund payment on June 15, 1999 calculated to retire 33 1/3% in
aggregate  principal amount of the Senior Notes issued with the balance maturing
on June 15, 2000. Such sinking fund requirement,  due to debt repurchases in the
prior year, is now approximately $1.6 million.

The Company is actively  marketing  the assets  included in the caption  "Assets
Held for Sale" in the  accompanying  consolidated  balance  sheets  and  expects
realization in cash over the next 3 to 24 months, although actual timing of such
cash  flows  cannot be  predicted.  The assets  contained  in this  caption  are
recorded at management's  current estimate of net realizable value. There can be
no assurances that these values will be realized. Approximately $1.2 million was
generated during the first nine months of 1997 from the sale of such assets.

In July 1997, the Company  completed the  acquisition of  substantially  all the
operating assets employed in the operation of ten franchised Rally's restaurants
in the Little Rock,  Arkansas market. The total purchase price was approximately
$2.8  million,  of which  approximately  $2.2  million was paid in cash with the
remainder paid in consideration of certain amounts owed by the franchisee to the
Company.  See Note 2 to the accompanying  consolidated  financial statements for
further discussion.

During the first nine months of the year, the Company received funds of $532,000
completing the  sale/leaseback  financing on three fee properties  which are the
subject of an aggregate amount of $1.4 million of sale/leaseback  financing. The
interest rate on such facility is approximately 12.5%.

The Company completed its Shareholder Rights Offering on September 20, 1996. The
Offering raised over $10.8 million in gross proceeds,  offset by legal and other
issuance costs of approximately  $437,000.  In addition to the approximate $10.8
million of gross proceeds provided by the Offering,  the Warrants issued as part
of the Offering, exercisable at $2.25, could provide approximately $10.8 million
for the Company's future growth, if all warrants are exercised.  As of September
28, 1997,  4,816,835 Warrants were outstanding.  Any proceeds generated from the
exercise of such warrants may be used for new store construction,  refurbishment
of some existing restaurants and for other general corporate purposes, including
possible further debt reduction.

On December 20, 1996,  the Company  issued  warrants to purchase an aggregate of
1,500,000  restricted  shares of its Common Stock to CKE and  Fidelity  National
Financial,  Inc. These warrants have a three-year  term and are not  exercisable
until  December 20, 1997.  The exercise  price is $4.375 per share,  the closing
price of the Common Stock on December 20, 1996. The underlying  shares of Common
Stock have not been  registered  with the Securities  Exchange  Commission  and,
therefore, are not freely

                                       17
<PAGE>

tradable.   If  these   warrants  are   exercised,   the  Company  will  receive
approximately $6.6 million in additional capital.

On September 21, 1997, a letter of intent was signed  whereby the Company agreed
in principle to acquire approximately 19.0 million shares of the Common Stock of
Checkers Drive-In Restaurants,  Inc. ("Checkers") in exchange for Rally's Common
Stock and a new series of Rally's Preferred Stock which will be convertible into
Rally's Common Stock if such approval is granted by Rally's  stockholders.  Upon
consummation  of  the  transaction,   Rally's  would  become  Checkers'  largest
stockholder with  approximately  27% of the outstanding  Checkers' Common Stock.
The acquisition is subject to negotiation of definitive  agreements,  receipt of
fairness opinions and other required  approvals and other customary  conditions.
Due diligence is  proceeding,  and the  transaction  is expected to close in the
fourth quarter.

The Company believes existing cash balances and cash flow from operations should
be sufficient to fund its current operations and obligations. The ability of the
Company to satisfy its obligations under the Senior Notes, however, continues to
be dependent  upon,  among other factors,  the Company  successfully  increasing
revenues and profits.





                                       18
<PAGE>


PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings - See Note 6 to Part I, Item 1 which is incorporated
          herein by reference.

ITEM 4.   Submission of Matters to a Vote of Security Holders

          The Company's  annual  meeting of  stockholders  was held on August 7,
          1997. At the meeting,  stockholders elected a board of eight directors
          and ratified the  appointment of Arthur  Andersen LLP as the Company's
          independent auditors.

          Results of the voting in connection with each item were as follows:


             Election of Directors              For             Withheld
          ---------------------------    ------------------   ---------------

          Burt Sugarman                      13,867,360          130,946
          Donald E. Doyle                    13,871,841          126,465
          Terry N. Christensen               13,872,040          126,266
          Willie D. Davis                    13,871,525          126,781
          William P. Foley, II               13,875,691          122,615
          David Gotterer                     13,874,675          123,631
          Ronald B. Maggard                  13,875,841          122,465
          C. Thomas Thompson                 13,874,923          123,383

                                            For         Against     Abstain
                                        ------------  ----------  --------------

          Ratification of accountants    13,905,591     62,416       30,299

ITEM 6.   Exhibits and Reports on Form 8-K.

          (a)  Exhibits:

          EXHIBIT NUMBER          DESCRIPTION OF DOCUMENT
          ----------------       -----------------------------------------------

               4.5                Other Debt Instruments - Copies of debt
                                  instruments for which the related debt is less
                                  than 10% of the Company's total assets will
                                  be furnished to the Commission upon request.

              10.17               Employment  Agreement  between the Company and
                                  Anthony Lavely dated August 25, 1997.

              10.18               Employment  Agreement  between the Company and
                                  James J. Gillespie dated, November 10, 1997.

          (b) Reports on Form 8-K:

               There were no Form 8-K reports  filed during the third quarter of
               1997.



                                       19
<PAGE>


                                   SIGNATURES



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


                   RALLY'S HAMBURGERS, INC.





   Date: November 5, 1997            By:     /s/ William P. Foley, II
                                             -----------------------------------
                                             William P. Foley, II
                                             Chairman of the Board




                                       20
<PAGE>


                                                                   EXHIBIT 10.17



                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into and effective as of
25th day of August,  1997, by and between RALLY'S  HAMBURGERS,  INC., a Delaware
corporation (the "Company") and ANTHONY M. LAVELY ("Lavely").


     RECITALS:

A.   Lavely has  considerable  expertise and  experience in marketing  goods and
     services.  The  Company  desires to employ  Lavely,  and Lavely  desires to
     accept such employment,  as the Company's Senior Vice President,  Sales and
     Marketing.

B.   The parties  hereto  desire to enter into this  Agreement to establish  the
     terms and conditions of the such employment relationship between Lavely and
     the Company and to provide that Lavely will not engage in  activities  that
     are  detrimental to the Company or any of its  "Affiliates"  (as defined in
     Section 12.1).

     AGREEMENT:

     NOW, THEREFORE, Lavely and the Company hereby agree as follows:

1.   EMPLOYMENT.  The Company  hereby employs  Lavely,  effective as of the date
     hereof,  and Lavely  accepts  employment by the Company and agrees to serve
     the Company upon the terms and conditions hereinafter set forth.

2.   TERM. The term of Lavely's  employment  under this  Agreement  shall be the
     two-year period commencing on the date hereof (the "Term"), unless Lavely's
     employment is terminated prior to the expiration as provided in Section 6.

3.   TITLE.  Lavely's  position  with the Company  shall be designated as Senior
     Vice President, Sales and Marketing.

4.   SERVICES.  So long as he is employed by the Company,  Lavely  agrees (a) to
     devote his full business time and energy to the business and affairs of the
     Company,  (b) to perform  his duties as Senior  Vice  President,  Sales and
     Marketing  diligently  and to the best of his ability,  and not do anything
     that would be detrimental to the best interests of the Company,  (c) to use
     his best  efforts,  skill and  ability  to  promote  the  interests  of the
     Company,  and (d) to perform  such  duties as may be assigned to him by the
     President or Board of Directors of the Company ("Board").


<PAGE>

5.   COMPENSATION AND BENEFITS. For all services to be rendered by Lavely during
     the Term, the Company shall pay compensation and provide benefits to Lavely
     as follows:

     5.1  Salary.  The  Company  shall pay Lavely an annual  salary of  $175,000
          ("Salary"),  which shall be paid in  installments  consistent with the
          Company's policies.

     5.2  Bonus. For each full calendar quarter of the Term, commencing with the
          fourth  quarter of calendar year 1997,  the Company shall pay Lavely a
          bonus in an amount equal to (i) ten percent  (10%) of Lavely's  Salary
          then in effect,  multiplied by (ii) the full percentage point increase
          in gross sales of the  Company's  products  from the  Company's  owned
          restaurants over the corresponding  quarter of the preceding  calendar
          year (the "Bonus").  Such Bonus shall be paid within 30 days following
          the  expiration  of the  calendar  quarter for which such Bonus may be
          earned.  In the event  Lavely's  employment is  terminated  during the
          Term, Lavely shall be entitled to receive such Bonus only with respect
          to the full calendar quarter preceding the date of such termination.

     5.3  Stock Options.  Simultaneously  with the execution hereof, the Company
          and Lavely executed and delivered Stock Option  Agreements in the form
          of Exhibit A attached  hereto,  pursuant  to which  Lavely was granted
          options to purchase  100,000  shares of common  stock of the  Company,
          pursuant  to the terms,  provisions  and  conditions  set forth in the
          Company's 1990 Employee Stock Option Plan.

     5.4  Employee Benefit Plans. Lavely shall be entitled to participate in all
          employee benefit plans which the Company now maintains or which it may
          hereafter establish and maintain during the Term for its officer level
          employees in general.  Participation in such plans shall be subject to
          the same eligibility requirements,  and be in accordance with the same
          terms and  conditions,  as are applicable to the other officers of the
          Company.

     5.5  Business  Expenses.   The  Company  shall  reimburse  Lavely  for  all
          reasonable,  direct,  out-of-pocket  ordinary and  necessary  business
          expenses  incurred  by  Lavely  in the  performance  of  his  services
          hereunder and for which Lavely  properly  accounts in accordance  with
          the Company's regulations and procedures.

     5.6  Relocation.  In  connection  with Lavely's  relocation to  Louisville,
          Kentucky from Lexington, Kentucky, the Company shall pay to Lavely the
          following:

          (a)  The actual and reasonable costs of the transportation of Lavely's
               household goods from Lexington, Kentucky to Louisville, Kentucky;

          (b)  Costs actually  expended,  not to exceed $1,000 in the aggregate,
               for required structural,  termite,  radon and similar inspections
               of Lavely's present residence;

          (c)  Within 10 days  following  the date hereof,  $15,000 to cover any
               financing costs of a permanent residence in Louisville, Kentucky;
               and

          (d)  Temporary  housing costs and storage costs of Lavely's  household
               goods actually  expended during the four month period  commencing
               on the date hereof.


<PAGE>
Except for the amount  described in (c),  above,  all amounts  payable to Lavely
hereunder  will be  paid  promptly  upon  submission  by  Lavely  of  supporting
documentation. Additionally, all such amounts payable hereunder shall be subject
to applicable withholding taxes, to the extent required by law.

     5.7  Business  Items.  During the Term, the Company,  at its expense,  will
          provide to Lavely a pager,  computer and a cellular  phone;  provided,
          however, that Lavely shall be responsible for and pay or reimburse the
          Company for any personal use of such cellular phone.

     5.8  Attorney's  Fees.  Upon submission of appropriate  documentation,  the
          Company shall reimburse Lavely for the actual,  reasonable  costs, not
          to exceed  $2,000,  incurred by Lavely  with  respect to any review of
          this Agreement prior to the date hereof by Lavely's legal counsel.

6.   EVENTS CAUSING  TERMINIATION  OF EMPLOYMENT.  Lavely's  employment with the
     Company  shall  terminate  upon the  occurrence of any one of the following
     events:

     6.1  Causes.  Lavely is discharged for "cause," which, for purposes of this
          Agreement, shall mean:

          (a)  the  repeated  wilful  failure  by Lavely to  perform  his duties
               hereunder or the repeated gross  negligence or illegal conduct of
               Lavely in the performance of such duties;

          (b)  the  repeated  refusal  to  comply  with  reasonable  and  lawful
               instructions of the President of the Company or the Board;

          (c)  Lavely's  repeated  wilful  actions  contrary  to  the  Company's
               interests, as reasonably determined by the Board; or

          (d)  the  conviction  of Lavely  of a felony  or other  crime of moral
               turpitude.

     6.2  Disability. Lavely is under a "disability" which, for purposes of this
          Agreement, means a physical or mental condition resulting from injury,
          disease or mental  disorder  which,  after  reasonable  accommodation,
          renders him incapable of performing the services provided hereunder in
          a manner  reasonably  satisfactory  to the  Board  and which the Board
          determines,  in the  reasonable  exercise  of its  judgment  based  on
          competent  medical  and  other  evidence,  will  be of  continued  and
          indefinite duration.

     6.3  Death. Lavely dies.

     6.4  Notice. The Company terminates Lavely for any other or no reason.

     6.5  Voluntary  Termination  by Lavely.  Lavely gives notice to the Company
          that he is  terminating  his  employment  hereunder  or,  without such
          notice, Lavely terminates his employment hereunder.

7.   BENEFITS UPON TERMINATION OF EMPLOYMENT

     7.1  Termination Without Cause. If Lavely's employment is terminated during
          the Term  pursuant to the  provisions of Section 6.4, then the Company
          shall continue to pay Lavely his installments of Salary then in effect
          for the longer of the  remainder  of the Term,  or the one year period
          following the date of such  termination;  provided,  that Lavely shall
          execute a release of the Company  with  respect to any and all matters
          occurring prior to the date of such termination.

     7.2  Other  Termination.  Except as  provided  in Section  7.1  above,  the
          Company  shall have no  obligation to make any payments to Lavely upon
          any termination of his  employment,  except for his Salary to the date
          of such  termination  and any Bonus  earned  prior to the date of such
          termination.

8.   COVENANT NOT TO COMPETE.  For the period Lavely is employed by the Company,
     whether during or after the Term, and for a 12-month period thereafter,  he
     will not,  directly or  indirectly,  within any  geographic  area where the
     Company or any of its Affiliates conduct their businesses, provide services
     of the type  performed by Lavely  hereunder for any business  whose primary
     products are hamburgers,  whether for himself, or as an employee,  partner,
     shareholder,  director,  officer,  principal,  agent,  consultant or in any
     other  relationship  or capacity;  provided,  that the purchase of publicly
     traded  securities of a corporation  engaged in such business  shall not in
     itself be deemed  violative  of this  Agreement  so long as Lavely does not
     own,  directly  or  indirectly,  more  than  1% of the  securities  of such
     corporation.

9.   DISCLOSURE OF INFORMATION. Lavely agrees that at no time hereafter will he
     divulge,  furnish or make accessible to anyone any confidential information
     or trade  secrets with respect to the  customers or business  operations of
     the Company or its Affiliates.

10.  SOLICITATION  OF  EMPLOYEES.  Lavely  agrees  that  from and after the date
     hereof he shall not entice or induce, directly or indirectly,  any employee
     of the Company or any of its  Affiliates to leave the employ of the Company
     or any such  Affiliate  to work with him or with any person or entity  with
     whom he is or becomes affiliated.

11.  CUMLATIVE  REMEDIES;  ENFORCEABILITY.   Lavely  agrees  that  each  of  the
     covenants  and  agreements  contained  in Sections 10, 11 or 12, taken as a
     whole,  are  reasonable  in their scope and  duration and that he shall not
     raise any issue of reasonableness of the scope or duration of any covenants
     or agreements in any  proceedings to enforce such covenants and agreements.
     Lavely agrees that the Company may not be adequately compensated by damages
     for a breach by Lavely of any of the covenants contained in Sections 10, 11
     or 12, and that the  Company  shall be entitled  to  injunctive  relief and
     specific performance in addition to all other remedies.  If any court shall
     finally determine that the restraints provided for in Sections 10, 11 or 12
     are too broad as to the area, activity or time covered,  the area, activity
     or  time  covered  may be  reduced  to  whatever  extent  the  court  deems
     reasonable  and such  covenant  shall be enforced as to such reduced  area,
     activity  or time.  The 12 month  period  referred to in Section 8 shall be
     extended  by any length of time that  Lavely is in breach of the  covenants
     set forth in such Section.

12.  MISCELLANEOUS

     12.1 Affiliates.  As used herein, the term "Affiliates" shall have the same
          definition as in Rule 405 of the General Rules and  Regulations of the
          Securities Act of 1933, as amended.

     12.2 Survival.  This Agreement  shall extend to and be binding upon Lavely,
          his legal  representatives,  heirs and assigns,  and upon the Company,
          its successors and assigns.

     12.3 Waiver  of  Breach.  The  waiver  by the  Company  of a breach  of any
          provision  of  this  Agreement  by  Lavely  shall  not  operate  or be
          construed as a waiver of any subsequent breach by Lavely.


<PAGE>

     12.4 Entire Agreement;  Cancellation of Prior  Agreements.  This instrument
          contains the entire  agreement  of the parties.  It may not be changed
          orally,  but only by an  amendment  in  writing  signed  by the  party
          against  whom   enforcement  is  sought.   All  prior   agreements  or
          understandings  concerning  Lavely's  employment  by the  Company  are
          hereby  canceled  and  declared  null and void as of the date  hereof,
          including  without  limitation,  the  provisions of that certain offer
          letter, dated August 18, 1997, from the Company to Lavely.

     12.5 Governing Law. This Agreement  shall be governed by, and construed and
          enforced in accordance with, the laws of the Commonwealth of Kentucky.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day,
month and year first above written.


                                        RALLY'S HAMBURGERS, INC.
                                        
                                        By:       /s/  Donald E. Doyle
                                                  ----------------------
                                        Title:    President & CEO

                                                     (the "Company")

                                             

                                                  /s/ Anthony M. Lavely
                                                  ----------------------
                                                  ANTHONY M. LAVELY

                                                       ("Lavely")


<PAGE>

                                                                   EXHIBIT 10.18



                              EMPLOYMENT AGREEMENT

     THIS  EMPLOYMENT  AGREEMENT  ("Agreement")  is effective as of November 10,
1997 (the "Effective Date"), by and among RALLY'S  HAMBURGERS,  INC., a Kentucky
corporation  ("Rally's"),   CHECKERS  DRIVE-IN  RESTAURANTS,   INC.,  a  Florida
corporation  ("Checkers"),  and JAY GILLESPIE,  an individual (the "Executive").
Rally's and Checkers are sometimes  referred to herein singularly as a "Company"
and  collectively as the  "Companies." In  consideration of the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:

1.   Employment  and  Duties.  Subject  to the  terms  and  conditions  of  this
     Agreement, the Companies each employ the Executive to serve in an executive
     and managerial capacity as their Chief Executive Officer, and the Executive
     accepts   such   employment   and   agrees  to  perform   such   reasonable
     responsibilities and duties commensurate with the aforesaid  positions,  as
     directed by the Boards of Directors of the Companies or as set forth in the
     Articles  of  Incorporation  and/or  the Bylaws of the  Companies,  for all
     locations in which the Companies have offices.  In addition,  the Boards of
     Directors  of each  Company,  or any  appropriate  committee of such Board,
     shall  recommend to the  shareholders  of such  Company  that  Executive be
     elected to serve as a director  on the Board of such  Company for each year
     during the Term (as defined below).

2.   Term. The term of employment  under this Agreement shall be for a period of
     two (2) years (the "Term")  commencing  on the Effective  Date,  subject to
     termination   pursuant  to  Section  4,   below.   This   Agreement   shall
     automatically  be  renewed  each year for an  additional  one (1) year term
     unless the Companies  notify the Executive that they are  terminating  this
     Agreement prior to November 10th of such year.

3.   Compensation.

     3.1. Annual Salary. During the Term of this Agreement,  the Companies shall
          pay  Executive  an  aggregate  minimum  base  annual  salary,   before
          deducting  all  applicable  withholdings,  of Two  Hundred  Eighty-Two
          Thousand Five Hundred Dollars ($282,500) per year (the "Base Salary"),
          payable  at the times and in the  manner  dictated  by the  Companies'
          standard  payroll  policies.  The Boards of  Directors of Checkers and
          Rally's shall determine how the Base Salary under this Section 3.1 and
          the Incentive Bonus earned by the Executive under 3.2(a),  below shall
          be allocated between the Companies.

     3.2. Other  Compensation  and  Benefits.  During  the Term,  as  additional
          compensation,  the Executive  shall be entitled to  participate in and
          receive the following:

          (a)  Incentive  Bonus.  The Executive shall be entitled to participate
               in the  Companies'  Incentive  Bonus Plan,  pursuant to which the
               Executive  shall be  entitled  to earn up to a  maximum  of fifty
               percent  (50%) of his Base Salary (the  "Incentive  Bonus").  The
               Incentive  Bonus  will be based on certain  performance  criteria
               determined in good faith by the Companies'  respective  Boards of
               Directors. The Incentive Bonus shall be pro-rated for any partial
               employment  period.  Any Incentive  Bonus due for a given year of
               the term shall be paid no later than April 15th of the  following
               year.

          (b)  Benefits. Executive shall be entitled to choose to participate in
               and  receive  all  benefits  under  either  (i)  Rally's  or (ii)
               Checker's employee benefit plans or programs (including,  without
               limitation,  medical,  dental,  disability,  and group life), any
               retirement   savings  plans  or  programs   (including,   without
               limitation,  employee  stock  purchase  plans),  and  such  other
               perquisites  of office as Rally's or Checkers  may,  from time to
               time and in their sole  discretion,  make available  generally to
               employees  of  similar  rank  as   Executive,   subject  to  such
               eligibility provisions as may be in effect from time to time.

          (c)  Stock  Options.  Rally's  hereby  grants to Executive  options to
               purchase  300,000 shares of Rally's  Common Stock,  in accordance
               with and pursuant to the terms of Rally's  Stock Option Plan (the
               "Plan"). The exercise price for such options shall be the closing
               price on the  Effective  Date of Rally's  Common  Stock  publicly
               traded on NASDAQ, as stated in the Wall Street Journal. The above
               described options shall vest and become  exercisable in three (3)
               equal  installments  of 100,000  shares each on each of the first
               three (3)  anniversaries  of the Effective Date.  Notwithstanding
               the above,  if the Term is not  extended  for an addition one (1)
               year pursuant to Section 2, above, then 200,000 shares of options
               shall vest and become  exercisable  on the second  anniversary of
               the Effective Date.

          (d)  Moving Expenses/Monthly  Stipend. Rally's and/or Checkers, as the
               Companies so determine,  shall pay all of Executive's  reasonable
               moving  expenses  from  Dallas,  Texas to the  location  at which
               Executive shall initially perform his primary duties hereunder or
               any subsequent relocation of Executive required by the Companies.
               In addition,  in order to assist  Executive with such  transition
               expenses, Rally's and/or Checkers, as the Companies so determine,
               shall pay Executive the sum of One Thousand  Dollars ($1,000) per
               month  commencing on the Effective  Date and  continuing  for the
               five (5) consecutive months thereafter.

          (e)  Commencement   Bonus.  On  the  Effective  Date,  Rally's  and/or
               Checkers,  as the Companies so  determine,  shall pay Executive a
               one time commencement bonus of Fifty Thousand Dollars ($50,000).

The Companies shall deduct from all compensation payable under this Agreement to
Executive  any  taxes or  withholdings  the  Companies  are  required  to deduct
pursuant to state and Federal laws or by mutual agreement among the parties.

     3.3. Vacation.  Executive  will  be  entitled  to  paid  vacation  time  in
          accordance with the Companies'  personnel policies and procedures made
          available to the  Companies'  executive  employees of similar rank, as
          the same may change from time to time,  or as otherwise  determined by
          the  respective  Boards of  Directors of the  Companies.  In addition,
          Executive  shall be  entitled  to such  holidays  consistent  with the
          Companies' standard policies or as the Companies' respective Boards of
          Directors may approve.

     3.4. Expense  Reimbursement.  In addition to the  compensation and benefits
          provided  herein,  the Companies  shall,  upon receipt and approval of
          appropriate  documentation,  reimburse  Executive  each  month for his
          reasonable  travel,  lodging,   entertainment,   promotion  and  other
          ordinary and necessary business expenses. The arrangement set forth in
          this Section 3.4 is intended to constitute an accountable  plan within
          the meaning of Section 162 of the Internal  Revenue  Code,  as amended
          (the  "Code")  and the  accompanying  regulations,  and the  Executive
          agrees to comply with all  reasonable  guidelines  established  by the
          Companies from time to time to meet the requirements of Section 162 of
          the Code and the accompanying regulations.

4.   Termination.

     4.1. For  Cause.  Notwithstanding  any  other  provisions  to the  contrary
          contained   herein,   the  Companies  may  terminate   this  Agreement
          immediately  for cause upon written notice to the Executive,  in which
          event the  Companies  shall be  obligated  to pay the  Executive  that
          portion of the Base Salary and the  Incentive  Bonus,  if any, due him
          through  the date of  termination.  For  purposes  of this  Agreement,
          "cause" shall mean: (a) material  default or other material  breach by
          Executive of Executive's  obligations  hereunder;  (b) the willful and
          habitual  failure by Executive to perform the duties that Executive is
          required to perform under this Agreement or the  Companies'  corporate
          policies,  provided  such  corporate  policies  have  previously  been
          delivered   to    Executive;    or   (c)    misconduct,    dishonesty,
          insubordination,  or  other  act by  Executive  that  in any way has a
          direct,  substantial and adverse effect on either Company's reputation
          or their respective  relationships  with their customers or employees,
          including,  without  limitation,  (i) use of alcohol or illegal  drugs
          such as to interfere with the Executive's obligations hereunder,  (ii)
          conviction of a felony or of any crime  involving  moral  turpitude or
          theft,  and  (iii)  material  failure  by  Executive  to  comply  with
          applicable laws or governmental  regulations pertaining to Executive's
          employment hereunder.

     4.2. Without Cause.  Notwithstanding  any other  provisions to the contrary
          contained herein,  the Companies,  on the one hand, and the executive,
          on the other hand, may terminate this  Agreement  immediately  without
          cause  by  giving  written  notice  to the  other.  If  the  Companies
          terminate this Agreement  under this Section 4.2, it shall continue to
          pay to the Executive (i) the Base Salary and (ii) the Incentive  Bonus
          earned by the Executive in the prior year,  for the unexpired  Term of
          this  Agreement.  The amount payable to Executive  hereunder  shall be
          paid to the  Executive  in lump sum or as  otherwise  directed  by the
          Executive.  If the  Executive  terminates  this  Agreement  under this
          Section  4.2,  the  Companies  shall only be  obligated  to pay to the
          Executive the Base Salary due him through the date of termination.

     4.3. Disability.  Notwithstanding  any  other  provisions  to the  contrary
          contained  herein,  if the  Executive  fails  to  perform  his  duties
          hereunder  on account of illness or other  incapacity  for a period of
          six (6)  consecutive  months,  the Companies shall have the right upon
          written notice to the Executive to terminate this  Agreement,  without
          further obligation, by paying Executive the Base Salary without offset
          for the  remainder  of the Term of this  Agreement in a lump sum or as
          otherwise directed by Executive.

     4.4. Death.  Notwithstanding any other provisions to the contrary contained
          herein, if the Executive dies during the Term of this Agreement,  this
          Agreement  shall  terminate  immediately,  and the  Executive's  legal
          representatives or designated beneficiary shall be entitled to receive
          the Base Salary to the date of  Executive's  death in a lump sum or as
          otherwise directed by Executive's legal  representatives or designated
          beneficiary, whichever the case may be.

     4.5. Termination by Companies  Following Change of Control. In the event of
          a Change  of  Control  (as  defined  below)  of  either  Company,  the
          Companies shall require any Successor (as defined below) to assume and
          agree to perform  this  Agreement  in the same  manner and to the same
          extent that such Company would be required to perform if the Change of
          Control had not occurred. Upon the assumption of this Agreement by the
          Successor,  and its agreement to perform the duties and obligations of
          such  Company  hereunder,  that  Company  shall be  released  from any
          further  liability under this Agreement.  As used herein, a "Change of
          Control"  of  either   Company  shall  mean  the   acquisition   by  a
          "Successor,"  whether  directly or  indirectly,  by purchase,  merger,
          consolidation or otherwise,  of all or substantially all of the common
          stock, business and/or assets of such Company; provided, however, that
          a Change of Control  shall not be deemed to have  occurred as a result
          of an increased  ownership  interest in either Company by Carl Karcher
          Enterprises,  Inc. or Fidelity  National  Financial,  Inc.,  or any of
          their  respective  affiliates,  or a  transfer  of any such  ownership
          interests by any such entity to any of its affiliates.

     4.6. Effect of Termination.  Termination for any cause shall not constitute
          a waiver of the Companies' rights under this Agreement as specified in
          Section 6 nor a release of  Executive  from any  obligation  hereunder
          except  his  obligation  to  perform  his  day-to-day   duties  as  an
          Executive.

5.   Non-Delegation of Executive's Rights. The obligations,  rights and benefits
     of Executive  hereunder are personal and may not be assigned or transferred
     in any manner  whatsoever,  nor are such  obligations,  rights or  benefits
     subject to involuntary alienation, assignment or transfer.

6.   Covenants of Executive.

     6.1. Confidentiality.  Executive  acknowledges  that in his  capacity as an
          Executive  of each  Company  he will  occupy a  position  of trust and
          confidence,  and he further  acknowledges  that he will have access to
          and  learn   substantial   information  about  each  Company  and  its
          respective  operations  that is confidential or not generally known in
          the industry including,  without limitation,  information that relates
          to purchasing,  sales, customers,  marketing, such Company's financial
          position and financing  arrangements.  Executive  agrees that all such
          information  is  proprietary  or  confidential  or  constitutes  trade
          secrets and is the sole property of such Company. Accordingly,  during
          the Executive's employment by each Company and for a period of two (2)
          years  thereafter,  Executive  will  keep  confidential,  and will not
          without such Company's permission  reproduce,  copy or disclose to any
          other  person  or  firm,  any such  information  or any  documents  or
          information relating to such Company's methods, processes,  customers,
          accounts,    analyses,   systems,   charts,   programs,    procedures,
          correspondence,  or records,  or any other  documents used or owned by
          such Company,  nor will Executive  advise,  discuss with or in any way
          assist any other person or firm in obtaining or learning  about any of
          the items  described  in this  section,  either  alone or with others,
          outside the scope of his duties and responsibilities with such Company
          unless otherwise required by law or court ordered subpoena.

     6.2. Competitive Activities During Employment. Executive agrees that during
          his employment by the Companies,  he will devote substantially all his
          business  time  and  effort  to  and  give  undivided  loyalty  to the
          Companies. Executive will not, during his employment by the Companies,
          engage in any way whatsoever,  directly or indirectly, in any business
          that is competitive with either Company,  nor solicit, or in any other
          manner  work for or assist  any  business  which is  competitive  with
          either Company. During his employment by the Companies, Executive will
          undertake no planning  for or  organization  of any business  activity
          competitive  with the  work he  performs  as an  executive  of  either
          Company,  and  Executive  will  not,  during  his  employment  by  the
          Companies,  combine  or  conspire  with any other  employee  of either
          Company or any other  person for the  purpose of  organizing  any such
          competitive business activity.

     6.3. Remedy for Breach.  Executive  acknowledges that the Companies will be
          irrevocably damaged if all of the provisions of this Section 6 are not
          specifically  enforced.  Accordingly,  the  Executive  agrees that, in
          addition to any other relief to which the  Companies  may be entitled,
          the Companies  will be entitled to seek and obtain  injunctive  relief
          from a court of competent  jurisdiction for the purpose of restraining
          the Executive from any actual or threatened  breach of this Section 6.
          The  Executive's  obligations  under this Section 6 shall  survive the
          Executive's  termination  of  employment  with the  Companies  for the
          periods of time specified in this Section 6.

7.   Return of Documents.  Upon  termination of this Agreement,  Executive shall
     return immediately to the appropriate  Company all records and documents of
     or  pertaining  to such  Company  and shall not make or retain  any copy or
     extract of any such record or document.

8.   Improvements  and Inventions.  Any and all improvements or inventions which
     Executive may  conceive,  make or  participate  in during the period of his
     employment  shall be the  sole and  exclusive  property  of the  Companies.
     Executive will,  whenever  requested by either Company during the period of
     his  employment,  execute  and  deliver  any and all  documents  which such
     Company shall deem appropriate in order to apply for and obtain patents for
     improvements or inventions or in order to assign and convey to such Company
     the  sole  and  exclusive  right,   title  and  interest  in  and  to  such
     improvements, inventions, patents or applications.

9.   Miscellaneous.

     9.1. Entire  Agreement;  Amendment.  This Agreement  constitutes the entire
          agreement  between the parties with respect to Executive's  employment
          with the Companies and supersedes any and all prior or contemporaneous
          agreements or understandings, whether oral or written, relating to the
          such   employment.   This   Agreement   may  be   amended,   modified,
          supplemented,  or  changed  only by a written  document  signed by all
          parties to this Agreement.

     9.2. Governing  Law and Venue.  Any dispute  arising  exclusively  from the
          relationship  between  Rally's and the Executive  under this Agreement
          shall be  governed  by Kentucky  law,  and venue for any such  dispute
          shall be in Clay County,  Kentucky.  Any dispute  arising  exclusively
          from the  relationship  between  Checkers and the Executive under this
          Agreement  shall be  governed by Florida  law,  and venue for any such
          dispute shall be in Pinellas County,  Florida.  Any dispute under this
          Agreement involving both Companies and the Executive shall be governed
          either by Kentucky  law or Florida law, and venue for any such dispute
          shall be either in Clay County, Kentucky or Pinellas County, Florida.

     9.3. Attorneys' Fees. In any litigation,  arbitration,  or other proceeding
          by which one party  either  seeks to  enforce  its  rights  under this
          Agreement (whether in contract,  tort, or both) or seeks a declaration
          of any rights or  obligations  under this  Agreement,  the  prevailing
          party  shall be  entitled  to recover  from the  non-prevailing  party
          reasonable  attorney  fees,  together with any costs and expenses,  to
          resolve the dispute and to enforce the final judgment.

     9.4. Severability.  If any section, subsection or provision hereof is found
          for any reason whatsoever to be invalid or inoperative,  that section,
          subsection or provision shall be deemed severable and shall not affect
          the force and validity of any other  provision of this  Agreement.  If
          any  covenant  herein  is  determined  by a court to be  overly  broad
          thereby making the covenant unenforceable, the parties agree and it is
          their desire that such court shall substitute a reasonable  judicially
          enforceable  limitation in place of the offensive part of the covenant
          and that as so modified the covenant shall be as fully  enforceable as
          if set forth herein by the parties  themselves  in the modified  form.
          The  covenants  of each Company and the  Executive  in this  Agreement
          shall  each be  construed  as an  agreement  independent  of any other
          provision in this  Agreement,  and the existence of any claim or cause
          of action of the Executive against either Company or of either Company
          against  the  Executive,  whether  predicated  on  this  Agreement  or
          otherwise,  shall not  constitute a defense to the  enforcement by the
          Companies or the Executive of the covenants in this Agreement.

     9.5. Notices.  Any notice,  request,  or instruction to be given  hereunder
          shall  be in  writing  and  shall  be  deemed  given  when  personally
          delivered  or  three  (3)  days  after  being  sent by  United  States
          certified mail, postage prepaid, with return receipt requested, to the
          parties at their respective addresses set forth below:

                  To Rally's:

                           Rally's Hamburgers, Inc.
                           10002 Shelbyville Road, Suite 150
                           Louisville, Kentucky  40223
                           Attn:  William P. Foley, II

                  To Checkers:

                           Checkers Drive-In Restaurants, Inc.
                           600 Cleveland Street
                           Clearwater, Florida 34615
                           Attn:  William P. Foley, II

                  To Executive:

                           Jay Gillespie
                           115 Twin Lakes Drive
                           Double Tree, Texas 75067

     9.6. Waiver.  The failure of a party to insist upon strict adherence to any
          term of this  Agreement  on any  occasion  shall not be  considered  a
          waiver thereof or deprive that party of the right thereafter to insist
          upon  strict  adherence  to  that  term  or any  other  term  of  this
          Agreement.

     9.7. Assignment.  This  Agreement  shall be  binding  upon and inure to the
          benefit of the  parties  and their  permitted  assigns.  Neither  this
          Agreement  nor  any of the  rights  of the  parties  hereunder  may be
          transferred  or  assigned by either  party,  except that if there is a
          Change of  Control  of a Company  and the  Successor  assumes,  either
          expressly or by operation of law,  such  Company's  obligations  under
          this  Agreement,  then  such  Company  shall  assign  its  rights  and
          obligations  hereunder  to such  Successor  subject  to the  terms  of
          Section 4.5 of this Agreement. Any assignment or transfer in violation
          of this Section 9.7 shall be void.

     9.8. Captions and Headings.  The captions and headings are for  convenience
          of  reference  only and  shall  not be used to  construe  the terms or
          meaning of any provisions of this Agreement.

     9.9. Potential Conflicts of Interests.  In the event that the assumption by
          Executive of the duties of Chief  Executive  Officer of both Companies
          creates a conflict of interest, the Companies shall indemnify,  defend
          and hold  harmless  Executive  from and  against  any and all  claims,
          losses,  damages,  causes of action or other proceedings,  and any and
          all other liabilities of any nature whatsoever,  which arise out of or
          relate to such alleged conflict. Nothing contained in this Section 9.9
          shall be  deemed  to be an  admission  by the  Companies  that  such a
          conflict exists, and  notwithstanding the Companies agreement to abide
          by the terms of this  Section 9.9, the  Companies  expressly  disclaim
          that such a conflict exists.



<PAGE>
     IN WITNESS WHEREOF the parties have executed this  Employment  Agreement as
of the date set forth above.

                              RALLY'S:

                              RALLY'S HAMBURGERS, INC., a
                              Kentucky corporation

                              By:  /s/ William P. Foley, II
                                   --------------------------
                              Its: Chairman of the Board               


                              CHECKERS:

                              CHECKERS DRIVE-IN RESTAURANTS, INC., 
                              a Florida corporation

                              By:  /s/ William P. Foley, II          
                                   --------------------------
                              Its: Chairman of the Board 


                              EXECUTIVE:

                              /s/ Jay Gillespie   
                              ------------------------------
                              Jay Gillespie

<PAGE>