9
                                        
     
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                Washington, D. C.
                                        
                                    FORM 10-Q



(Mark One)

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

For the quarterly period ended June 28, 1998

                                       OR

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


                        Commission File Number:  0-20716


                                TACO CABANA, INC.

             (Exact name of registrant as specified in its charter)

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

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

     
     
     
          Indicate by check mark whether the registrant (1) has filed all
     reports required to be filed by Section 13 or 15(d) of the Securities
     Exchange Act of 1934 during the preceding 12 months (or for such
     shorter period that the registrant was required to file such reports),
     and (2) has been subject to such filing requirements for the past 90
     days:
     
           Yes   X                         No
     
          Indicate the number of shares outstanding of each of the issuer's
     classes of common stock, as of the latest practicable date:

                 Class         Outstanding at July 31, 1998
             Common Stock           14,256,200 shares


                                TACO CABANA, INC.
                                      INDEX


                                                                         Page
                                                                        Number

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

  Condensed Consolidated Balance Sheets at June 28, 1998
    and December 29, 1997                                                   2

  Condensed Consolidated Statements of Operations for the Thirteen Weeks
    Ended June 28, 1998 and June 29, 1997                                   3

  Condensed Consolidated Statements of Operations for the Twenty-Six Weeks
    Ended June 28, 1998 and June 29, 1997                                   4

  Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks
    Ended June 28, 1998 and June 29, 1997                                   5

  Notes to Condensed Consolidated Financial Statements                      6


Item 2.  Management's Discussion and Analysis of Financial Condition and
  Results of Operations                                                   7-16


PART II.  OTHER INFORMATION

Items 1 through 5 have been omitted since the registrant has no reportable
  events in relation to the items

Item 6. Exhibits and Reports on Form 8-K                                   16

Signature                                                                  17

                                TACO CABANA, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

                                          December 28,  June 28,
                                              1997        1998
                                          ------------  --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                  $ 339,000   $ 685,000
Receivables, net                             502,000     268,000
Inventory                                  2,105,000   2,256,000
Prepaid expenses                           1,704,000   1,659,000
Federal income taxes receivable              200,000     200,000
                                         ----------- -----------
Total current assets                       4,850,000   5,068,000
PROPERTY AND EQUIPMENT, net               59,540,000  66,240,000
NOTES RECEIVABLE                             344,000     295,000
INTANGIBLE ASSETS, net                    11,293,000  11,010,000
OTHER ASSETS                                 233,000     233,000
                                         ----------- ----------- 
TOTAL                                    $76,260,000 $82,846,000
                                         =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                           $4,430,000  $2,945,000
Accrued liabilities                         6,266,000   5,836,000
Current maturities of long-term debt 
and capital leases                          1,573,000   2,530,000
Line of credit                              4,223,000   2,824,000
                                          ----------- -----------
Total current liabilities                  16,492,000  14,135,000

LONG-TERM OBLIGATIONS, net of 
current maturities:
Capital leases                              2,357,000   2,250,000
Long-term debt                             11,170,000  16,933,000
                                          ----------- -----------
Total long-term obligations                13,527,000  19,183,000

ACQUISITION AND CLOSED
RESTAURANT LIABILITIES                      9,126,000   8,657,000
DEFERRED LEASE PAYMENTS                       702,000     749,000

STOCKHOLDERS' EQUITY:
Common stock                                  157,000     157,000
Additional paid-in capital                 97,095,000  97,303,000
Retained deficit                          (57,278,000)(52,124,000)
Treasury stock, at cost (881,937 
shares at December 29, 1997 and 
1,254,937 shares at June 28, 1998)         (3,561,000) (5,214,000)
  Total stockholders' equity               36,413,000  40,122,000
                                          ----------- -----------
TOTAL                                     $76,260,000 $82,846,000
                                          =========== ===========
                                        
            See Notes to Condensed Consolidated Financial Statements.

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


                                         For the Thirteen Weeks Ended
                                         ----------------------------
                                            June 29,     June 28,
                                              1997         1998
                                           -----------  ----------
REVENUES:
Restaurant sales                          $34,104,000   $36,206,000
Franchise fees and royalty income              96,000        86,000
                                          -----------   -----------
Total revenues                             34,200,000    36,292,000
                                          -----------   -----------
COSTS AND EXPENSES:
Restaurant cost of sales                   10,572,000    10,829,000
Labor                                       9,292,000     9,738,000
Occupancy                                   2,052,000     1,958,000
Other restaurant operating costs            6,276,000     6,093,000
General and administrative                  1,782,000     1,954,000
Depreciation, amortization and 
restaurant opening costs                    2,570,000     1,974,000
                                          -----------   -----------
Total costs and expenses                   32,544,000    32,546,000
                                          -----------   -----------
INCOME FROM OPERATIONS                      1,656,000     3,746,000
                                          -----------   -----------
INTEREST EXPENSE, NET                        (265,000)     (449,000)
                                          ------------  -----------
INCOME BEFORE INCOME TAXES                  1,391,000     3,297,000
                                          -----------   -----------
PROVISION FOR INCOME TAXES                   (515,000)            -
                                          -----------   -----------
NET INCOME                                  $ 876,000    $3,297,000
                                          ===========   ===========
BASIC EARNINGS PER SHARE                    $    0.06    $     0.22
                                          ===========   ===========
BASIC WEIGHTED SHARES OUTSTANDING          15,680,713    14,768,266
                                          ===========   ===========
DILUTED EARNINGS PER SHARE                  $    0.06     $    0.22
                                          ===========   ===========
DILUTED WEIGHTED SHARES OUTSTANDING        15,743,447    15,091,502
                                          ===========   ===========

            See Notes to Condensed Consolidated Financial Statements.

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


                                        For the Twenty-Six Weeks Ended
                                        ------------------------------  
                                            June 29,     June 28,
                                              1997         1998
                                         ------------  ------------
REVENUES:
Restaurant sales                          $64,204,000   $68,528,000
Franchise fees and royalty income             182,000       171,000
                                          -----------   -----------
Total revenues                             64,386,000    68,699,000
                                          -----------   -----------
COSTS AND EXPENSES:
Restaurant cost of sales                   19,734,000    20,621,000
Labor                                      17,378,000    18,410,000
Occupancy                                   4,099,000     3,865,000
Other restaurant operating costs           11,751,000    12,095,000
General and administrative                  3,575,000     3,867,000
Depreciation, amortization and 
restaurant opening costs                    5,060,000     3,842,000
                                          -----------   -----------
Total costs and expenses                   61,597,000    62,700,000
                                          -----------   -----------
INCOME FROM OPERATIONS                      2,789,000     5,999,000
                                          -----------   -----------
INTEREST EXPENSE, NET                        (516,000)     (845,000)
                                          -----------   -----------
INCOME BEFORE FOR INCOME TAXES              2,273,000     5,154,000
                                          -----------   -----------
PROVISION FOR INCOME TAXES                   (841,000)            -
                                          -----------   -----------
NET INCOME                                 $1,432,000    $5,154,000
                                          ===========   ===========
BASIC EARNINGS PER SHARE                   $     0.09    $     0.35
                                          ===========   ===========
BASIC WEIGHTED SHARES OUTSTANDING          15,693,625    14,797,202
                                          ===========   ===========
DILUTED EARNINGS PER SHARE                 $     0.09    $     0.34
                                          ===========   ===========
DILUTED WEIGHTED SHARES OUTSTANDING        15,768,272    15,069,175
                                          ===========   ===========

            See Notes to Condensed Consolidated Financial Statements.

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

                                       For the Twenty-Six Weeks Ended
                                       ------------------------------
                                            June 29,       June 28,
                                              1997           1998
                                          -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                 $1,432,000     $5,154,000
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation and amortization           5,060,000      3,445,000
    Deferred income taxes                     901,000              -
    Capitalized interest                      (45,000)       (77,000)
    Deferred lease payments                  (144,000)        47,000
    Changes in operating working 
    capital items                            (993,000)    (1,739,000)
                                          -----------   ------------
Net cash provided by operating activities   6,211,000      6,830,000
                                          -----------   ------------ 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment         (6,270,000)   (12,209,000)
Proceeds from the sale of property 
and equipment                                       -      1,955,000
                                          -----------   ------------
Net cash used for investing activities     (6,720,000)   (10,254,000)
                                          -----------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
  and draws on line of credit               2,414,000      6,685,000
Principal payments under long-term 
debt and line of credit                    (1,073,000)    (1,378,000)
Principal payments under capital leases      (105,000)       (92,000)
Purchase of treasury stock                 (1,449,000)    (1,653,000)
Exercise of stock options                           -        208,000
                                          -----------   ------------   
Net cash provided (used) by 
financing activities                         (213,000)     3,770,000
                                          -----------   ------------
NET INCREASE (DECREASE) IN CASH              (722,000)       346,000

CASH AND CASH EQUIVALENTS, 
beginning of period                           748,000        339,000
                                          -----------   ------------
CASH AND CASH EQUIVALENTS, end of period     $ 26,000       $685,000
                                          ===========   ============

            See Notes to Condensed Consolidated Financial Statements.

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

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

The   unaudited  Condensed  Consolidated  Financial  Statements  include  all
adjustments, consisting of normal, recurring adjustments and accruals,  which
the  Company considers necessary for fair presentation of financial  position
and  the results of operations for the periods presented. Certain information
and  footnote disclosures normally included in financial statements  prepared
in  accordance  with  generally  accepted  accounting  principles  have  been
condensed  or  omitted. The interim financial statements should  be  read  in
conjunction with the Company's Annual Report on Form 10-K for the year  ended
December 28, 1997.

Recently  Issued  Accounting Pronouncements: In April  1998,  the  Accounting
Standards  Executive Committee of the American Institute of Certified  Public
Accountants  (AICPA)  issued Statement of Position 98-5,  "Reporting  on  the
Costs of Start-Up Activities".  The accounting standard requires entities  to
expense  as incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. The accounting standard is effective  for
fiscal  years  beginning  after December 15, 1998, with  earlier  application
encouraged.   The  Company adopted the accounting standard during  the  first
quarter  of  1998.  The  cumulative effect of the change  in  the  accounting
principle is not material to the results of operations or financial  position
of the Company.


2.  Earnings per Share

Basic  earnings per share was computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding  for
the  reporting  period.   Diluted earnings per share reflects  the  potential
dilution  that could occur if securities or other contracts to  issue  common
stock  were  exercised  or  converted into common stock.   Outstanding  stock
options issued by the Company represent the only dilutive effect reflected in
diluted  weighted  average shares.  All earnings per share  amounts  for  all
periods have been presented, and where necessary, restated to conform to  the
Statement of Financial Accounting Standards No. 128, Earnings per Share.

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

                                 13 Weeks Ended         26 Weeks Ended
                                 --------------         --------------
                               June 29,    June 28,     June 29,     June 28,
                                 1997        1998         1997         1998
                               ---------  ----------  -----------  -----------
Numerator for basic and 
diluted earnings per 
share - net income              $876,000  $3,297,000   $1,432,000   $5,154,000
Denominator:
  Denominator for basic 
  earnings per share:
    Weighted-average shares   15,680,713  14,768,266   15,693,625   14,797,202
  Effect of dilutive securities:
    Employee stock options        62,734     323,236       74,647      271,973
                              ----------  ----------   ----------   ----------
Denominator for diluted 
earnings per share:
  Adjusted weighted-average
  and assumed conversions     15,743,447  15,091,502   15,768,272   15,069,175
                              ==========  ==========   ==========   ==========
Basic earnings per share        $   0.06    $   0.22     $   0.09     $   0.35
                              ==========  ==========   ==========   ==========
Diluted earnings per share      $   0.06    $   0.22     $   0.09     $   0.34
                              ==========  ==========   ==========   ==========

3.   Supplemental Disclosure of Cash Flow Information


                                      Twenty-Six Weeks Ended
                                      ----------------------
                                       June 29,      June 28,
                                         1997          1998
                                      ----------    ----------
                                      (Unaudited)   (Unaudited)
                                                      
                                                       
    Cash paid for interest            $ 604,000     $ 810,000
    Interest capitalized on   
    construction costs                   45,000        77,000
    Cash paid for income taxes           62,000             -
    Cash received for income taxes        4,000             -
                                        
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                        
                                        
Introduction

The  Company  commenced operations in 1978 with the opening of  the  first  Taco
Cabana  restaurant in San Antonio, Texas.  As of July 31, 1998, the Company  had
100 Company-owned restaurants and 10 franchised restaurants including one joint-
venture  owned.   The  Company's revenues are derived primarily  from  sales  by
Company-owned  restaurants,  with franchise fees and  royalty  income  currently
contributing less than 1% of total revenues.

During  the  twenty-six weeks ended June 28, 1998, the Company  opened  six  and
closed  three  Company-owned restaurants and a franchisee of the Company  closed
one  restaurant.  Subsequent to June 28, 1998, one Company owned restaurant  was
closed.
The  following  table  sets  forth  for the  periods  indicated  the  percentage
relationship to total revenues, unless otherwise indicated, of certain operating
statement  data.  The  table also sets forth certain  restaurant  data  for  the
periods indicated.


                             13 Weeks Ended       26 Weeks Ended
                            ----------------     ----------------
                             June 29, June 28,    June 29, June 28,
                              1997     1998        1997      1998
                            --------  -------    --------  -------
Operating Statement Data:
REVENUES:
  Restaurant sales             99.7%    99.8%     99.7%    99.8%
  Franchise fees and 
  royalty income                0.3      0.2       0.3      0.2
                              ------   ------    ------   ------
  Total revenues              100.0%   100.0%    100.0%   100.0%
                              ======   ======    ======   ======
COSTS AND EXPENSES:
  Restaurant cost of 
  sales (1)                    31.0%    29.9%     30.7%     30.1%
  Labor (1)                    27.2     26.9      27.1      26.9
  Occupancy (1)                 6.0      5.4       6.4       5.6
  Other restaurant operating 
  costs (1)                    18.4     16.8      18.3      17.6
  General and administrative    5.2      5.4       5.6       5.6
  Depreciation, amortization and
    restaurant opening costs    7.5      5.4       7.9       5.6
                              ------   ------    ------    ------ 
INCOME FROM OPERATIONS          4.8     10.3       4.3       8.7
                              ------   ------    ------    ------
INTEREST EXPENSE, net          (0.8)    (1.2)     (0.8)     (1.2)
                              ------   ------    ------    ------
INCOME BEFORE
  INCOME TAXES                  4.1      9.1       3.5       7.5
PROVISION FOR
  INCOME TAXES                 (1.5)       -      (1.3)        -
                              ------   ------    ------    ------
NET INCOME                      2.6%     9.1%      2.2%      7.5%
                              ======   ======    ======    ======
Restaurant Data:
Company-owned restaurants:
  Beginning of period           106       99       104        98
  Opened                          1        3         3         6
  Closed                          -       (1)        -        (3)
                              ------   ------    ------    ------
  End of period                 107       101      107       101

Franchised (2) and joint-venture
  owned restaurants:             14        10       14        10
                              ------   ------    ------    ------
Total restaurants:              121       111      121       111
                              ======   ======    ======    ======
(1)  Percentage is calculated based upon restaurant sales.
(2)  Excludes Two Pesos licensed restaurants.

The Thirteen Weeks Ended June 28, 1998 Compared to the Thirteen Weeks Ended June
29, 1997

Restaurant Sales.  Restaurant sales increased by $2.1 million, or 6.2%, to $36.2
million for the second quarter of 1998 from $34.1 million for the second quarter
in  1997.   The  increase is due primarily to an increase in sales  at  existing
restaurants.   Comparable store sales, defined as Taco Cabana  restaurants  that
have  been  open  18  months or more at the beginning of the quarter,  increased
4.2%.   Management attributes the increase to several factors including  a  more
consistent  marketing program featuring a value meal message,  a  commitment  to
increased staffing levels at existing restaurants, the ongoing reimage  program,
a menu price increase of approximately 2% which was implemented during the first
quarter  of  1998  and the closing of underperforming restaurants.   Sales  from
restaurants  opened  after  June 29, 1997 accounted  for  an  increase  of  $4.1
million.  This  increase  was offset by sales of $2.4 million  from  restaurants
which were closed after June 28, 1998.

Restaurant  Cost of Sales.  Restaurant cost of sales, calculated as a percentage
of restaurant sales, decreased to 29.9% in the second quarter of 1998 from 31.0%
for  the  second  quarter of 1997. The decrease was due primarily  to  continued
improvements  in  the  management  of  food costs  through  utilizing  increased
controls  and improved purchasing programs, including the continued  negotiation
of  favorable  commodity pricing.  In addition, food costs as  a  percentage  of
restaurant   sales  were  favorably  impacted  by  a  menu  price  increase   of
approximately  2%  which  was  implemented during the  first  quarter  of  1998.
Management expects cost of sales to increase slightly, as a percentage of sales,
during the remainder of the year due to recent increases in commodity prices.

Labor.  Labor costs calculated as a percentage of restaurant sales decreased  to
26.9%  during the second quarter of 1998 from 27.2% for the same period in 1997.
Adjusting  for  restaurants closed after June 29, 1997, comparable  labor  as  a
percentage  of  restaurant sales in the second quarter of 1997 was  25.9%.   The
increase in comparable labor costs is due to an increase in the minimum wage  in
September  1997, management's continued commitment to increased staffing  levels
at  the  restaurant level in order to provide a consistent guest  experience  as
well  as  higher than normal labor costs at newer restaurants.  New  restaurants
generally  have higher than normal labor costs for the first four to six  months
of  operations.   Management  expects the trend in  comparable  labor  costs  to
continue during the remainder of 1998.

Occupancy.   Occupancy costs decreased by $94,000 during the second  quarter  of
1998  compared to the second quarter of 1997.  The decrease is primarily due  to
the  closure  of  underperforming restaurants during 1997.  As a  percentage  of
restaurant  sales,  occupancy costs decreased to 5.4% in the second  quarter  of
1998 compared to 6.0% in the second quarter of 1997, due to increased restaurant
average  unit volumes attributable to the closure of underperforming restaurants
and the opening of new restaurants with higher sales volumes.

Other Restaurant Operating Costs.  Other restaurant operating costs decreased to
$6.1  million  in  the second quarter of 1998 compared to $6.3  million  in  the
second  quarter  of 1997. As a percentage of restaurant sales, other  restaurant
operating  costs decreased to 16.8% for the second quarter of 1998  compared  to
18.4%  for  the  second  quarter  of 1997.  The decrease  is  due  to  decreased
marketing  and  promotional  activities and increased  restaurant  average  unit
volumes.  Management expects the favorable comparisons as a percentage of  sales
to continue during 1998.

General  and  Administrative.  General and administrative expenses increased  to
$2.0  million for the second quarter of 1998 from $1.8 million in the comparable
period  of  1997. As a percentage of sales, general and administrative  expenses
increased  to 5.4% for the second quarter of 1998 compared to 5.2% in  the  same
period  of 1997.  Management expects this amount to slightly decrease or  remain
constant, as a percentage of sales, throughout the remainder of 1998.


Depreciation,   Amortization  and  Restaurant  Opening   Costs.    Depreciation,
amortization and restaurant opening costs consisted of the following:

                                       Thirteen Weeks Ended
                                       --------------------
                                       June 29,    June 28,
                                         1997        1998
                                       --------    --------
                                      (Unaudited) (Unaudited)
                                                       
    Depreciation of property
    and equipment                     $2,102,000  $1,632,000
    Amortization of intangible           396,000     146,000
    assets
    Restaurant opening costs              72,000     196,000


Depreciation expense decreased by $470,000 for the quarter ended June  28,  1998
compared to the quarter ended June 29, 1997.  The decrease was primarily due  to
the  closure of restaurants and the writedown of assets in conjunction with  the
special charge recorded in the fourth quarter of 1997, offset by new restaurants
opened  since  June  29,  1997,  as well as continued  capital  improvements  to
existing  restaurants.  Amortization of intangible assets decreased by  $250,000
for the quarter ended June 28, 1998 compared to the quarter ended June 29, 1997.
The  decrease  was  primarily  due  to the writedown  of  intangible  assets  in
conjunction  with  the special charge recorded in the fourth  quarter  of  1997.
Restaurant opening costs increased by $124,000 during the second quarter of 1998
compared  to  the  same period in 1997, primarily due to the  opening  of  three
Company owned restaurants during the second quarter of 1998.  See footnote 1  to
Condensed   Consolidated  Financial  Statements  regarding  the   treatment   of
restaurant opening costs.

Interest  Expense,  net.   Interest expense,  net  of  interest  capitalized  on
construction  costs, increased to $449,000 in the second quarter  of  1998  from
$265,000  in  the  second quarter of 1997, primarily as a result  of  additional
borrowings  under  the  Company's  debt facilities.  In  addition,  the  Company
capitalized  $25,000 of interest related to new restaurant construction  in  the
most recent quarter compared to $24,000 during the second quarter of 1997.

Income  Taxes.   Provision for income taxes decreased to  zero  for  the  second
quarter  of  1998 compared to $515,000, or 37% of income before taxes,  for  the
second  quarter of 1997. The decrease in income taxes is due to the  recognition
of previously reserved deferred tax assets.

Net Income and Earnings Per Share.  Net income increased to $3.3 million for the
second  quarter of 1998 from $876,000 for the same period in 1997.   Net  income
was  9.1% of total revenues for the second quarter in 1998 compared to  2.6%  in
the second quarter of 1997.  Diluted earnings per share was $0.22 for the second
quarter  of 1998 compared to $0.06 in the same period of 1997.  The increase  in
earnings per share during the second quarter of fiscal 1998 compared to the same
quarter last year is due to higher sales at existing restaurants, the opening of
new  restaurants, continued strong cost controls, the closing of underperforming
restaurants, a reduction in depreciation and amortization expense, the lack of a
provision for income taxes in the current quarter and a reduction in the  number
of shares outstanding.

The  Twenty-Six Weeks Ended June 28, 1998 Compared to the Twenty-Six Weeks Ended
June 29, 1997

Restaurant Sales.  Restaurant sales increased by $4.3 million, or 6.7%, to $68.5
million for the twenty-six weeks ended June 28, 1998 from $64.2 million for  the
comparable  period  in 1997.  The increase is due primarily to  an  increase  in
sales  at existing restaurants.  Comparable store sales, defined as Taco  Cabana
restaurants  that  have  been open 18 months or more at  the  beginning  of  the
quarter, increased 5.5%.  Management attributes the increase to several  factors
including a more consistent marketing program featuring a value meal message,  a
commitment  to  increased staffing levels at existing restaurants,  the  ongoing
reimage program, favorable weather during the first quarter of 1998 compared  to
1997, a menu price increase of approximately 2% which was implemented during the
first  quarter  of  1998 and the closing of underperforming restaurants.   Sales
from  restaurants opened after June 29, 1997 accounted for an increase  of  $6.6
million.  This increase was offset by sales from restaurants which  were  closed
after June 28, 1998 of $4.5 million.

Restaurant  Cost of Sales.  Restaurant cost of sales, calculated as a percentage
of  restaurant sales, decreased to 30.1% during the twenty-six weeks ended  June
28,  1998 from 30.7% for same period in 1997. The decrease was due primarily  to
continued  improvements  in  the  management of  food  costs  through  utilizing
increased  controls  and improved purchasing programs, including  the  continued
negotiation  of  favorable  commodity pricing.  In addition,  food  costs  as  a
percentage of restaurant sales were favorably impacted by a menu price  increase
of  approximately  2% which was implemented during the first  quarter  of  1998.
Management expects cost of sales to increase slightly, as a percentage of sales,
during the remainder of the year due to recent increases in commodity prices.

Labor.  Labor costs calculated as a percentage of restaurant sales decreased  to
26.9%  for  the  twenty-six weeks ended June 28, 1998 from 27.1%  for  the  same
period  in  1997.   Adjusting  for  restaurants  closed  after  June  29,  1997,
comparable labor as a percentage of restaurant sales during the twenty-six weeks
ended June 28, 1998 was 26.1%.  The increase in comparable labor costs is due to
an  increase  in  the  minimum  wage in September 1997,  management's  continued
commitment  to  increased staffing levels at the restaurant level  in  order  to
provide a consistent guest experience as well as higher than normal labor  costs
at  newer restaurants.  New restaurants generally have higher than normal  labor
costs  for  the first four to six months of operations. Management  expects  the
trend in comparable labor costs to continue during the remainder of 1998.

Occupancy.   Occupancy costs decreased by $234,000 during the  twenty-six  weeks
ended  June  28,  1998  compared to the same period in 1997.   The  decrease  is
primarily  due to the closure of underperforming restaurants during 1997.  As  a
percentage of restaurant sales, occupancy costs decreased to 5.6% in during  the
twenty-six  weeks  ended June 28, 1998 compared to 6.4% in the  same  period  of
1997.  The  decrease  is due to an increase in restaurant average  unit  volumes
during 1998.

Other Restaurant Operating Costs.  Other restaurant operating costs increased to
$12.1  million  in  the twenty-six weeks ended June 28, 1998 compared  to  $11.8
million  in the same period of 1997. As a percentage of restaurant sales,  other
restaurant  operating  costs decreased to 17.6% for the twenty-six  weeks  ended
June  28,  1998 compared to 18.3% for the same period of 1997.  The decrease  is
due  to  decreased  marketing  and promotional activities  and  an  increase  in
restaurant average unit volumes. Management expects the favorable comparisons as
a percentage of sales to continue during 1998.

General  and  Administrative.  General and administrative expenses increased  to
$3.9  million for the twenty-six weeks ended June 28, 1998 from $3.6 million  in
the   comparable  period  of  1997.  As  a  percentage  of  sales,  general  and
administrative expenses remained constant at 5.6% for the twenty-six weeks ended
June  28,  1998 and for the comparable period in 1997. Management  expects  this
amount  to  slightly  decrease or remain constant, as  a  percentage  of  sales,
throughout the remainder of 1998.

Depreciation,   Amortization  and  Restaurant  Opening   Costs.    Depreciation,
amortization and restaurant opening costs consisted of the following:

                                      Twenty-Six Weeks Ended
                                      ----------------------
                                       June 29,    June 28,
                                         1997        1998
                                      ---------  ----------
                                     (Unaudited) (Unaudited)
                                                       
    Depreciation of property and     $4,137,000  $3,163,000
    equipment  
    Amortization of intangible          812,000     283,000
    assets
    Restaurant opening costs            111,000     396,000


Depreciation expense decreased by $974,000 for the twenty-six weeks  ended  June
28,  1998  compared to the same period in 1997.  The decrease was primarily  due
the  closure of restaurants and the writedown of assets in conjunction with  the
special charge recorded in the fourth quarter of 1997, offset by new restaurants
opened  since  June  29,  1997,  as well as continued  capital  improvements  to
existing  restaurants.  Amortization of intangible assets decreased by  $529,000
for  the  twenty-six weeks ended June 28, 1998 compared to the  same  period  in
1997.   The decrease was primarily due to the writedown of intangible assets  in
conjunction  with  the special charge recorded in the fourth  quarter  of  1997.
Restaurant opening costs increased by $285,000 during the twenty-six weeks ended
June  28,  1998, compared to the same period in 1997. The increase was primarily
due to the opening of six restaurants during the twenty-six weeks ended June 28,
1998.   See  footnote 1 to Condensed Consolidated Financial Statements 
regarding the treatment of restaurant opening costs.

Interest  Expense,  net.   Interest expense,  net  of  interest  capitalized  on
construction costs, increased to $845,000 during the twenty-six weeks ended June
28,  1998  from $516,000 in the same period of 1997, primarily as  a  result  of
additional  borrowings  under the Company's debt facilities.  In  addition,  the
Company  capitalized $77,000 of interest related to new restaurant  construction
during  the twenty-six weeks ended June 28, 1998 compared to $45,000 during  the
same period in 1997.

Income  Taxes.  Provision for income taxes decreased to zero for the  twenty-six
weeks  ended June 28, 1998 compared to $841,000, or 37% of income before  taxes,
for  the  same  period  in 1997. The decrease in income  taxes  is  due  to  the
recognition of previously reserved deferred tax assets.

Net Income and Earnings Per Share.  Net income increased to $5.2 million for the
twenty-six  weeks ended June 28, 1998 from $1.4 million for the same  period  in
1997.  Net income was 7.5% of total revenues for the twenty-six weeks ended June
28,  1998  compared  to 2.2% in the same period of 1997.  Diluted  earnings  per
share  was $0.34 for the twenty-six weeks ended June 28, 1998 compared to  $0.09
in  the  same  period of 1997.  The increase in earnings per  share  during  the
twenty-six  weeks ended June 28, 1998 compared to the same period last  year  is
due  to  higher  sales at existing restaurants, the opening of new  restaurants,
continued  strong cost controls, the closing of underperforming  restaurants,  a
reduction in depreciation and amortization expense, the lack of a provision  for
income taxes and a reduction in the number of shares outstanding.

Liquidity and Capital Resources

Historically,  the  Company has financed business and  expansion  activities  by
using  funds  generated from operating activities, build-to-suit leases,  equity
financing,  short  and long-term debt and capital leases. The Company  maintains
credit  facilities  totaling $30.0 million, including a $5.0  million  unsecured
revolving  line  of credit. As of July 31, 1998, $21.0 million  was  outstanding
under these commitments.

Net  cash  provided by operating activities was $6.8 million for the  twenty-six
weeks ended June 28, 1998, and $6.2 million for the twenty-six weeks ended  June
29, 1997.

Net cash used in investing activities was $10.3 million for the twenty-six weeks
ended June 28, 1998 representing primarily capital expenditures of $12.2 million
for   the   construction  of  new  restaurants  and  improvements  to   existing
restaurants.  This was offset by the sale of assets generating $2.0  million  in
proceeds.   This  compares  to  $6.7 million  in  net  cash  used  in  investing
activities for the twenty-six weeks ended June 29, 1997, representing  primarily
capital expenditures for the construction of new restaurants and improvements to
existing restaurants.

Net  cash  provided by financing activities was $3.8 million for the  twenty-six
weeks  ended  June 28, 1998 representing primarily net draws from the  Company's
debt  facilities  of  $5.3 million, offset by the purchase of  $1.7  million  in
treasury  stock.   This  compares to net cash used in  financing  activities  of
$213,000  in  the same period of 1997, representing net draws on  the  Company's
debt  facilities  of  $1.3 million, offset by the purchase of  $1.5  million  in
treasury stock.

On  April  16,  1997,  the  Company's Board of  Directors  approved  a  plan  to
repurchase up to 1,500,000 shares of the Company's Common Stock.  As of July 31,
1998,  the  Company had repurchased all 1,500,000 shares at an average  cost  of
$4.91 per share.  The Company has funded the repurchases through available  bank
credit  facilities,  as  well as the liquidation of  the  Company's  short  term
investment  portfolio.   On  July 27, 1998, the  Company's  Board  of  Directors
approved  the purchase of up to an additional 1,000,000 shares of the  Company's
Common Stock.  The timing, price, quantity and manner of purchases will be  made
at  the  discretion of management and will depend upon market  conditions.   The
Company  will  fund  the  repurchase  program  through  available  bank   credit
facilities as well as current cash flows from operations.

The special charges recorded in 1997 and 1995 included accruals of approximately
$10.2  million to record the estimated monthly lease payments, net  of  expected
sublease  receipts, associated with certain restaurants which have been  closed.
Cash  requirements for this accrual were approximately $1.4 million  during  the
twenty-six  weeks ended June 28, 1998.  During the twenty-six weeks  ended  June
28,  1998,  the  Company sold properties relating to the special  charges  which
resulted  in proceeds of $2.0 million, which approximated the carrying value  of
the  assets sold.  Subsequent to June 28, 1998, the company sold assets relating
to  the  special  charges  which resulted in proceeds  of  $1.2  million,  which
approximated  the carrying value of the assets sold.  The Company currently  has
several  closed restaurant properties for sale which were covered by the special
charges.   Although there can be no assurance of the particular price  at  which
such property will be sold, the Company expects to receive funds equal to or  in
excess  of the carrying value upon the actual disposition of this property.   In
addition,  certain acquisition and accrued liabilities related to the Two  Pesos
acquisition were reduced by payments of approximately $129,000 during the 
twenty-six weeks ended June 28, 1998.

The   Company  believes  that  existing  cash  balances,  funds  generated  from
operations, its ability to borrow, and the possible use of lease financing  will
be sufficient to meet the Company's capital requirements through 1998, including
the  planned opening of eight to ten restaurants, six of which have been  opened
at  July  31,  1998, and the reimaging of 25 restaurants during the 1998  fiscal
year.  Total capital expenditures related to new restaurants are estimated to be
$12.0 to $15.0 million.  The total for other capital expenditures, including the
cost  of the reimagings, is estimated to be $7.5 to $8.5 million.  Total capital
expenditures for 1998 are expected to approximate $19.5 to $23.5 million.

Impact of Inflation

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

Seasonality and Quarterly Results

The  Company's  sales fluctuate seasonally. Historically, the Company's  highest
sales  and  earnings  occur  in  the second and  third  quarters.  In  addition,
quarterly  results  are  affected by the timing of the opening  and  closing  of
stores. Therefore, quarterly results cannot be used to indicate results for  the
entire year.

Forward-Looking Statements

Statements  in  this  quarterly report concerning  Taco  Cabana  which  are  (a)
projections  of  revenues, costs, including trends in cost of sales,  labor  and
general  and  administrative costs or other financial items, (b)  statements  of
plans  and  objectives for future operations, specifically statements  regarding
planned  restaurant openings and reimages as well as share repurchases and  cash
flows  (c)  statements  of future economic performance,  or  (d)  statements  of
assumptions  or  estimates underlying or supporting the foregoing  are  forward-
looking  statements within the meaning of Section 27A of the Securities  Act  of
1933  and  Section  21E of the Securities Exchange Act of  1934.   The  ultimate
accuracy  of  forward-looking statements is subject to a wide range of  business
risks and changes in circumstances, and actual results and outcomes will differ,
often  materially,   from expectations.  Any number of important  factors  could
cause  actual  results  to differ materially from those in  the  forward-looking
statements herein, including the following:  the timing and extent of changes in
prices  of  commodities and supplies that the Company utilizes; actions  of  our
customers and competitors; state and federal environmental, economic, safety and
other policies and regulations, any changes therein, and any legal or regulatory
delays  or  other  factors beyond the Company's control;  execution  of  planned
capital projects; weather conditions affecting the Company's operations; natural
disasters  affecting operations; and adverse rulings, judgments, or  settlements
in  litigation or other legal matters.  The Company undertakes no obligation  to
publicly  release  the  result  of any revisions  to  any  such  forward-looking
statements  that may be made to reflect events or circumstances after  the  date
hereof or to reflect the occurrence of unanticipated events.


Item 6. Exhibits and Reports on Form 8-K

The Company has filed the following exhibits with the report:

     10.18     Extension and Amendment to Employment Agreement between 
               Taco Cabana, Inc and Steve Clark
     27.       Financial Data Schedule
     
No reports on Form 8-K were filed during the period covered by this report.

Signature

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


Dated: August 12, 1998        Taco Cabana, Inc.





                         David G. Lloyd
                         Senior Vice President, Chief Financial Officer,
                         Secretary and Treasurer



                         Signing on behalf of the registrant and as the
                         principal financial and accounting officer