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 6, 1998

[ ]  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)

      14255 49TH STREET NORTH, BUILDING 1, SUITE 101, CLEARWATER, FL 33762
      --------------------------------------------------------------------
                    (Address of principal executive offices)

          Registrant's telephone number, including area code: 727/519-2000

      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 October 6, 1998 - 29,330,385 shares


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                                TABLE OF CONTENTS



                                                                        PAGE NO.
                                                                        --------
PART I      FINANCIAL INFORMATION

   ITEM 1.  FINANCIAL STATEMENTS

            CONDENSED CONSOLIDATED BALANCE SHEETS
               SEPTEMBER 6, 1998 AND DECEMBER 28, 1997.......................3

            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               QUARTER ENDED SEPTEMBER 6, 1998 AND SEPTEMBER 
               28, 1997 AND THREE QUARTERS ENDED SEPTEMBER 6,
               1998 AND SEPTEMBER 28, 1997...................................5

            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
               THREE QUARTERS ENDED SEPTEMBER 6, 1998 AND
               SEPTEMBER 28, 1997............................................6

            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
               (UNAUDITED)...................................................7

   ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS....................................11

   ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .....16

PART II     OTHER INFORMATION

   ITEM 1.  LEGAL PROCEEDINGS................................................17

   ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS........................18

   ITEM 3.  DEFAULTS UPON SENIOR SECURITIES..................................18

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............18

   ITEM 5.  OTHER INFORMATION................................................19

   ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.................................19


                                       2
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<CAPTION>


PART 1.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS


                     RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

                                     ASSETS

                                                                  (UNAUDITED)
                                                                  SEPTEMBER 6,   DECEMBER 28,
                                                                     1998           1997
                                                                  -----------    ----------
<S>                                                               <C>            <C>
CURRENT ASSETS:

Cash and cash equivalents                                          $  4,286      $  4,008
Restricted cash                                                       1,380         1,380
Investments                                                             100           446
Accounts receivable, net                                              2,939         1,949
Notes receivable                                                         45          --
Inventory                                                             1,075         1,052
Prepaid expenses and other current assets                               567         1,057
Assets held for sale                                                  1,174         1,076
                                                                   --------      --------
    Total current assets                                             11,566        10,968

Property and equipment, net                                          64,075        68,067
Investment in affiliate, net of accumulated amortization             24,253        24,988
Notes receivable, net                                                   669           872
Goodwill, net of accumulated amortization                             9,520         9,913
Reacquired franchise and territory rights, net of accumulated
   amortization                                                      11,974        12,758
Other intangibles, net of accumulated amortization                    4,134         4,334
Other assets, net of accumulated amortization                         2,247         2,397
                                                                   --------      --------
                                                                   $128,438      $134,297
                                                                   ========      ========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       3
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<CAPTION>


                     RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                      (UNAUDITED)
                                                                      SEPTEMBER 6,     DECEMBER 29,
                                                                         1998             1997
                                                                      ------------    ------------
<S>                                                                   <C>             <C>
CURRENT LIABILITIES:

Accounts payable                                                       $   8,817       $   7,076
Reserves for restaurant relocations and abandoned sites                    2,343           1,665
Accrued liabilities                                                        7,780          10,858
Current maturities of long-term debt and obligations under
    capital lease                                                          1,234           1,194
                                                                       ---------       ---------
    Total current liabilities                                             20,174          20,793

Senior notes, net of discounts                                            56,854          58,005
Long-term debt, less current maturities                                    3,803           4,017
Obligations under capital lease, less current maturities                   4,940           5,228
Long-term reserves for restaurant relocations and adandoned sites          2,693           3,655
Other noncurrent liabilities                                               1,628           1,086
                                                                       ---------       ---------
    Total liabilities                                                     90,092          92,784

STOCKHOLDERS' EQUITY:
 Preferred Stock, $.10 par value, authorized 5,000,000 shares,
    issued and outstanding 0 at September 6, 1998 and 45,667
    at December 28, 1997                                                    --                 5
Common stock, $.10 par value, authorized 50,000,000
    shares, issued and outstanding 29,330,385 at
    September 6, 1998 and 24,563,445 at December 28, 1997                  2,960           2,484
Additional paid-in capital                                                97,332          97,277
Retained deficit                                                         (59,838)        (56,145)
                                                                       ---------       ---------
                                                                          40,454          43,621
Less treasury stock, at cost, 273,445 shares                              (2,108)         (2,108)
                                                                       ---------       ---------
    Net stockholders' equity                                              38,346          41,513
                                                                       ---------       ---------
                                                                       $ 128,438       $ 134,297
                                                                       =========       =========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       4
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<CAPTION>


                     RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands except per share amounts)
                                   (UNAUDITED)


                                                          QUARTER ENDED              THREE QUARTERS ENDED
                                                     ----------------------       --------------------------
                                                     SEPT. 6,      SEPT. 28,        SEPT. 6,       SEPT. 28,
                                                       1998          1997             1998            1997
                                                    (12 WEEKS)    (13 WEEKS)       (36 WEEKS)      (39 WEEKS)
                                                    ---------     ----------      -----------      ----------
<S>                                                 <C>           <C>             <C>              <C>
REVENUES:
Restaurant sales                                     $ 33,505       $ 37,145       $  97,640       $ 104,956
Franchise revenues and fees                             1,121          1,198           3,272           3,679
Owner fee income                                          170            179             498             572
                                                     --------       --------       ---------       ---------
    Total revenues                                   $ 34,796       $ 38,522       $ 101,410       $ 109,207
                                                     --------       --------       ---------       ---------

COSTS AND EXPENSES:
Restaurant food and paper costs                        10,787         12,280          31,337          34,169
Restaurant labor costs                                 10,348         10,958          30,399          31,232
Restaurant occupancy expense                            1,686          1,772           4,902           4,876
Restaurant depreciation and amortization                1,632          1,816           4,996           5,343
Other restaurant operating expense                      2,982          3,495           8,603           9,538
Advertising expense                                     2,585          2,986           6,976           7,819
Owner depreciation                                        158            156             439             470
Other depreciation and amortization                       559            673           1,727           1,972
General and administrative expenses                     3,000          3,732           9,258          10,383
Loss provisions                                          --               93             885              37
Loss (income) net of amortization on investment
        in affiliate                                      528           --               768            --
                                                     --------       --------       ---------       ---------
    Total costs and expenses                           34,265         37,961         100,290         105,839
                                                     --------       --------       ---------       ---------

    Operating income                                      531            561           1,120           3,368
                                                     --------       --------       ---------       ---------

OTHER INCOME (EXPENSE):
Interest income                                           151            253             306             620
Interest expense                                       (1,667)        (1,847)         (5,041)         (5,581)
                                                     --------       --------       ---------       ---------

Loss before income tax expense                           (985)        (1,033)         (3,615)         (1,593)
Income tax expense                                         26            115              78             415
                                                     --------       --------       ---------       ---------

        Net loss                                     $ (1,011)      $ (1,148)      $  (3,693)      $  (2,008)
                                                     ========       ========       =========       =========
        Comprehensive loss income                    $ (1,011)      $ (1,148)      $  (3,693)      $  (2,008)
                                                     ========       ========       =========       =========

 Net loss per common share - basic                   $  (0.03)      $  (0.06)      $   (0.14)      $   (0.10)
                                                     ========       ========       =========       =========
 Net loss per common share - diluted                 $  (0.03)      $  (0.06)      $   (0.14)      $   (0.10)
                                                     ========       ========       =========       =========

Weighted average number of common shares -
      basic                                            29,330         20,565          26,198          20,552
                                                     ========       ========       =========       =========
Weighted average number of common shares -
      diluted                                          29,330         20,565          26,198          20,552
                                                     ========       ========       =========       =========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       5
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<CAPTION>

                   RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
                                   (UNAUDITED)
                                                                    THREE QUARTERS ENDED
                                                                  -------------------------
                                                                    SEPT. 6,     SEPT. 28,
                                                                      1998          1997
                                                                   (36 WEEKS)    (39 WEEKS)
                                                                   ----------    ----------
<S>                                                                <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                            $(3,693)      $(2,008)
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
    Depreciation and amortization                                     7,162         7,785
    Provision for losses on assets to be disposed of                    885            37
    Bond costs and discounts                                            278           294
    Warrant Expense                                                    --             725
    Loss on disposal of property & equipment                             23          --
    Provision for (recovery of) bad debt                                210          (440)
    Loss, net of amortization on investment in affilate                 768          --
    Provisions for income taxes                                          78           415
Changes in assets and liabilities:
    Increase in accounts receivables                                 (1,719)         (210)
    Decrease in notes receivable                                        158           183
    Decrease, (increase) in inventory                                    28           (51)
    Decrease, (increase) in prepaid expenses and other current
       assets                                                           750          (320)
    Decrease, (increase) in deposits and other                            1          (771)
    Increase in accounts payable                                      1,741           958
    (Decrease), increase in accrued liabilities                      (2,824)          266
                                                                    -------       -------
    Net cash provided by operating activities                         3,846         6,863
                                                                    -------       -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                 (1,408)       (4,368)
Cash paid on business purchases                                        (855)       (2,172)
Decrease in investments                                                 346           226
Proceeds from sale of assets                                            318         1,197
Cash paid for investments in affiliates                                 (32)         --
                                                                    -------       -------
    Net cash used in investing activities                            (1,631)       (5,117)
                                                                    -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) senior notes                           (1,226)          236
Principal payments on long-term debt and capital lease
    obligations                                                        (882)       (1,187)
Net proceeds from issuance of common stock                               55           100
Other equity funding                                                    116          --
                                                                    -------       -------
    Net cash used in financing activities                            (1,937)         (851)
                                                                    -------       -------
    Net increase in cash                                                278           895
CASH AT BEGINNING OF PERIOD                                           4,008         2,285
                                                                    -------       -------
CASH AT END OF PERIOD                                               $ 4,286       $ 3,180
                                                                    =======       =======
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION---
 Interest paid, net                                                 $ 3,954       $ 3,533
                                                                    =======       =======
 Income taxes paid                                                  $  --         $   331
                                                                    =======       =======
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       6
<PAGE>

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

NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)           BASIS OF PRESENTATION - The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included. The operating results for the three quarters ended September 6, 1998,
are not necessarily an indication of the results that may be expected for the
fiscal year ending December 28, 1998. 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 Company's Annual Report on Form 10-K for
the year ended December 28, 1997. Therefore it is suggested that the
accompanying financial statements be read in conjunction with the Company's
December 28, 1997 consolidated financial statements. As of December 29, 1997 the
Company changed from a 13 week quarter to a 12 week quarter with the exception
of the fourth quarter which will consist of sixteen weeks.

(b)           PURPOSE AND ORGANIZATION - The principal business of Rally's
Hamburgers, Inc. (the "Company", "Rally's") is the operation and franchising of
Rally's Restaurants. Rally's is one of the largest chains of double drive-thru
restaurants in the United States. At September 6, 1998, the Rally's system
included 482 restaurants in 18 states located primarily in the Midwest and the
Sunbelt and are comprised of 226 Company-owned and operated, 256 franchised
restaurants, including 28 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 in 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.

              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
inter-company accounts and transactions have been eliminated. The investment in
affiliate, which is owned more than 20% and less than 50% represents an
investment in Checkers Drive-In Restaurants, Inc. ("Checkers") and is recorded
under the equity method.

              Rally's Hamburgers, Inc., and three of it's subsidiaries, 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 1 was organized for the purpose of acquiring a
manufacturer of modular buildings and is currently inactive due to the sale of
the manufacturing business in January 1995.

(c)           REVENUE RECOGNITION - The Company recognizes franchise fees as
income on the date a restaurant is opened, at which time the Company has
performed its obligations relating to such fees. Area development fees are
generated from the awarding of exclusive rights to develop, own and operate
Rally's restaurants in certain geographic areas pursuant to an Area Development
Agreement. Such fees are recognized as income on a pro rata basis as the
restaurants are opened or upon the cancellation or expiration of an Area
Development Agreement. Both franchise fees and area development fees are
non-refundable. The Company also receives royalty fees from franchisees
typically in the amount of 4% of each franchised restaurant's gross revenues, as
defined in the Franchise Agreement. Royalty fees are recognized as earned.

(d)           CASH AND CASH EQUIVALENTS - The Company considers all highly
liquid instruments purchased with an original maturity of less than three months
to be cash equivalents.

(e)           RESTRICTED CASH - Restricted cash consists of amounts held in
certificates of deposit as collateral for letters of credit and automated
clearinghouse ("ACH") transactions.

                                       7
<PAGE>
(f)           RECEIVABLES - Receivables consist primarily of franchise fees,
royalties and notes due from franchisees and owner fee income and advances to
the National Advertising Fund which provides broadcast creative production for
use by the Company and its franchisees. Allowances for doubtful receivables were
$655,000 at September 6, 1998 and $431,000 at December 28, 1997.

(g)           INVENTORY - Inventory is valued at latest invoice cost, which
approximates the lower of first-in, first-out cost or market.

(h)           IMPAIRMENT OF LONG LIVED ASSETS - The Company accounts for
tangible property and intangibles under the 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), which requires the write-down
of certain intangibles and tangible property associated with under performing
sites to the level supported by the forecasted discounted cash flow in cases
where undiscounted cash flow projected does not exceed the book value of the
related assets.

(i)           PROPERTY AND EQUIPMENT - Property and equipment are depreciated
using the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. The estimated useful lives for financial
reporting purposes are the shorter of 20 years or the lease life plus available
renewal options for buildings and property held under capital leases, eight
years for furniture and equipment, five years for software and computer systems
and the life of the lease for leasehold improvements. Expenditures for major
renewals and betterments are capitalized while expenditures for maintenance and
repairs are expensed as incurred.

(j)           USE OF ESTIMATES - 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

(k)           DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The
balance sheets as of September 6, 1998 and December 28, 1997 reflect the fair
value amounts which have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The carrying amounts of cash and
cash equivalents, receivables, accounts payable, and long-term debt are a
reasonable estimate of their fair value. Interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for debt issues that are not quoted
on an exchange.

(l)           EARNINGS (LOSS) PER COMMON SHARE - Basic and diluted earnings
(loss) per share are calculated in accordance with the Statement of Financial
Accounting Standard No. 128, "Earnings per Share". Effective for periods ending
after December 15, 1997, SFAS 128 replaces the presentation of primary earnings
per share and fully diluted earnings per share previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") with basic
earnings per share and diluted earnings per share. Potentially dilutive common
stock warrants and options have no effect, as they are anti-dilutive for all
periods presented.

(m)           COMPREHENSIVE INCOME - In June 1997, the Financial Accounting
Standards Board issued SFAS 130 "Reporting Comprehensive Income", effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Reclassification of the Company's financial statements
for earlier periods provided for comparative purposes are required under SFAS
130.

(n)           YEAR 2000 - Many computer systems using two-digit fields to store
years must be converted to read four-digit fields before the turn of the century
in order to recognize the difference between the years 1900 and 2000. The
Company's software system and certain Restaurant level hardware will be upgraded
or replaced in time to meet the Year 2000 requirements at a cost estimated at
approximately $300,000 and will be funded through operating cash flows. The
Company anticipates expensing all non-capitalizable costs associated with these
systems changes as the costs are incurred.

(o)           RECLASSIFICATIONS - 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.

                                       8
<PAGE>

NOTE 2      RELATED PARTY TRANSACTION

            Effective November 30, 1997, the Company entered into a Management
Services Agreement, ("the Agreement") pursuant to which, certain of the
management of Checkers Drive-In Restaurants, Inc. ("Checkers") is providing key
services to Rally's, including executive management, financial planning and
accounting, franchise administration, purchasing and human resources. In
addition, Rally's and Checkers share certain of their executive officers,
including the Chief Executive Officer and the Chief Operating Officer. The
Agreement carries a term of seven years, terminable upon the mutual consent of
the parties. The Company incurs fees from Checkers relative to the shared
departmental costs times the respective store ratios of the companies. Checkers
increased its corporate and regional staff in late 1997 and early 1998 in order
to meet the demands of the Agreement, but management believes that sharing of
administrative expenses under the terms of the Agreement will enable Checkers to
attract the management staff with expertise necessary to more successfully
manage and operate both Checkers and the Company at significantly reduced costs
to both entities. Although the number of Checkers employees has grown to handle
the increased workload, the costs of each department are equitably allocated
between the Company and Checkers in accordance with the Agreement. The total
cost of these services to the Company was $1.5 million during the third quarter
of 1998 and $3.5 million for the three quarters ended September 6, 1998.

NOTE 3      STOCKHOLDER EQUITY

            On June 11, 1998, the 45,667 shares of preferred stock were
converted into 4,566,700 shares of the Company's common stock, in accordance
with that certain Exchange Agreement, dated December 18, 1997, whereby the
Company acquired approximately 19.1 million shares of the common stock of
Checkers Drive-In Restaurants, Inc..

NOTE 4        LITIGATION

              FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN
V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative
class action was filed on September 29, 1998, in the Delaware Chancery Court in
and for New Castle County, Delaware by an alleged stockholder of 500 shares of
the common stock of Checkers Drive-In Restaurants, Inc. ("Checkers"). The
complaint names the Company and certain of its current officers and directors as
defendants including William P. Foley, II, James J. Gillespie, Harvey Fattig,
Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt Sugarman and C.
Thomas Thompson. The Complaint also names Checkers and GIANT GROUP, LTD.
("GIANT") as defendants. The complaint arises out of the proposed merger
announced on September 28, 1998 between the Company, Checkers and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants engaged
in an unlawful scheme and plan to permit the Company to acquire the public
shares of the common stock of Checkers in a "going-private" transaction for
grossly inadequate consideration and in breach of the defendants' fiduciary
duties. The plaintiff allegedly initiated the Complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks INTER ALIA, certain
declaratory and injunctive relief against the consummation of the Proposed
Merger, or in the event the Proposed Merger is consummated, recision of the
Proposed Merger and costs and disbursements incurred in connection with bringing
the action, including attorney's fees, and such other relief as the Court may
deem just and proper. The Company believes the lawsuit is without merit and
intends to defend it vigorously. No estimate of possible loss or range of loss
resulting from the lawsuit can be made at this time.

              DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON
BEHALF OF THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET
AL. Case No. 16680. This putative class action was filed on October 2, 1998, in
the Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified number
of shares of the common stock of Checkers. The complaint names the Company and
certain of its current officers and directors as defendants including William P.
Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, James T. Holder,
Terry N. Christensen, Burt Sugarman and C. Thomas Thompson. The Complaint also
names Checkers and GIANT GROUP, LTD. ("GIANT") as defendants. As with the FIRST
ALBANY complaint described above, this complaint arises out of the proposed
merger announced on September 28, 1998 between the Company, Checkers and GIANT
(the "Proposed Merger") and alleges generally, that certain of the defendants
engaged in an unlawful scheme and plan to permit the Company to acquire the
public shares of the Checkers' common stock in a "going-private" transaction for
grossly inadequate consideration and in breach of the defendant's fiduciary
duties. The plaintiffs allegedly initiated the Complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks INTER ALIA, certain
declaratory and injunctive relief against the consummation of the Proposed
Merger, or in the event the Proposed Merger is consummated, recision of the
Proposed Merger and costs and disbursements incurred in connection with bringing
the action, including attorneys' fees, and such other relief as the Court may
deem just and proper. The Company believes the lawsuit is without merit and
intends to defend it vigorously. No estimate of possible loss or range of loss
resulting from the lawsuit can be made at this time.

                                       9
<PAGE>


NOTE 5        SUBSEQUENT EVENT

              On September 25, 1998, the Company agreed in principle to a merger
transaction pursuant to which Checkers and GIANT GROUP, LTD. ("GIANT") will
become wholly-owned subsidiaries of the Company. Checkers, together with its
franchisees, operates approximately 483 double drive-thru hamburger restaurants
primarily in the southeastern United States. Under the terms of the letter of
intent executed by the Company, Checkers and GIANT, each share of Checkers
common stock will be converted into 0.5 share of the Company's common stock and
each share of GIANT's common stock will be converted into 10.48 shares of the
Company's common stock upon consummation of the merger. The transaction is
subject to negotiation of definitive agreements, receipt of fairness opinions by
each party, receipt of stockholder and other required approvals and other
customary conditions.


                                       10
<PAGE>


ITEM 2.      MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

INTRODUCTION

              The Company commenced operations in 1985 to operate and franchise
Rally's Hamburgers. As of September 6, 1998, the Company had an ownership
interest in 226 Company-operated Restaurants and an additional 256 restaurants
were operated by franchisees, including 28 Company-owned restaurants in Western
markets which are operated as Rally's restaurants by CKE Restaurants, Inc.
("CKE") under an operating agreement which began in July, 1996. During the third
quarter of fiscal 1998, the Company and its franchisees combined experienced a
net decrease of two operating restaurants. In 1998, the franchise community has
indicated intent to open approximately 10 new units and the Company intends to
open approximately two new restaurants. To date in 1998, franchisees have opened
10 new units. The Company still expects to open two new units before the end of
fiscal 1998.

              The Company's fiscal year historically has ended on the Sunday
closest to December 31 and has included twelve reporting periods and quarters
that include 13 weeks each. Effective with fiscal year 1998, the fiscal year
will end on the Monday closest to December 31 and includes thirteen reporting
periods, three quarters that include twelve weeks and the fourth quarter that
will include sixteen weeks.

              During the third quarter of fiscal 1998, sales at the Company's
comparable stores decreased 4.4% over the same twelve weeks in the prior year.
The quarterly comparison of total revenues is negatively impacted by the extra
week of sales ($2.5 million) in the prior year's third quarter as described
above, and reduced sales related to the net decrease of three Company-operated
units since September 28, 1997.

              The Company continues to test the viability of adding dining rooms
to existing restaurants to provide indoor seating for those customers that
consider that an important criteria in their choice of a restaurant. As of
September 6, 1998, dining rooms have been tested at five restaurants with a wide
range in sales increases. With the experience gained from this initial test
group, management has surveyed all company-owned units and identified the next
group of test units that will be considered for the dining room addition.

              The Company experienced decreases in food and paper cost and
increases in labor costs during the third quarter of 1998. While the food and
paper component decreased by 0.9% of restaurant sales, the food, paper and labor
costs combined totaled 63.1% of restaurant sales versus 62.6% in the third
quarter of 1997. This increase is due primarily to certain price point
promotions and additional labor used to focus on speed of service improvements
during the third quarter of 1998.

              Effective November 30, 1997, the Company entered into a Management
Services Agreement ("the Agreement") with Checkers Drive-In Restaurants, Inc.
("Checkers") whereby Checkers provides administrative services such as
accounting, information technology, human resources, purchasing and other
functional and management services for the Company. The Agreement carries a term
of seven years, terminable upon the mutual consent of the parties. The Company
pays fees to Checkers relative to the shared departmental costs times the
respective store ratios of the companies. Management believes that the sharing
of administrative expenses under the terms of this agreement will enable the
companies to attract the management staff with expertise necessary to more
successfully manage and operate both Checkers and the Company at significantly
reduced costs to both entities. During the third quarter of 1998, the Company
was able to expand the scope of synergistic opportunities under the Management
Services Agreement to include the consolidation of marketing personnel as well
as the services provided by the marketing agency utilized by both concepts.


                                       11
<PAGE>


RESULTS OF OPERATIONS

      The table below sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's condensed
consolidated statements of operations and operating data for the periods
indicated:
<TABLE>
<CAPTION>

                                                        QUARTER ENDED          THREE QUARTERS ENDED
                                                         (UNAUDITED)               (UNAUDITED)
                                                   ----------------------    ----------------------
                                                    SEPT. 6,    SEPT. 28,     SEPT. 6,    SEPT. 28,
                                                      1998        1997          1998         1997
REVENUES                                           (12 WEEKS)   (13 WEEKS)   (36 WEEKS)   (39 WEEKS)
                                                   ----------   ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>          <C>  
    Restaurant sales                                  96.3%        96.4%        96.3%        96.1%
    Franchise revenues and fees                        3.2%         3.1%         3.2%         3.4%
    Owner fee income                                   0.5%         0.5%         0.5%         0.5%
                                                      -----        -----        -----        -----
        Total revenues                                 100%         100%         100%         100%
                                                      -----        -----        -----        -----
COSTS AND EXPENSES
    Restaurant food and paper costs (1)               32.2%        33.1%        32.1%        32.6%
    Restaurant labor costs (1)                        30.9%        29.5%        31.1%        29.8%
    Restaurant occupancy expense (1)                   5.0%         4.8%         5.0%         4.6%
    Restaurant depreciation and amortization (1)       4.9%         4.9%         5.1%         5.1%
    Other restaurant operating expenses                8.9%         9.4%         8.8%         9.1%
    Advertising expense (1)                            7.7%         8.0%         7.1%         7.4%
    Owner depreciation (2)                            92.9%        87.2%        88.2%        82.2%
    Other depreciation and amortization                1.6%         1.7%         1.7%         1.8%
    General and administrative expense                 8.6%         9.7%         9.1%         9.5%
    Loss provisions                                    0.0%         0.2%         0.9%         0.0%
    Loss (income) net of amortization 
      on investment                                    1.5%         0.0%         0.8%         0.0%
                                                      -----        -----        -----        -----
     Operating income                                  1.5%         1.5%         1.1%         3.1%
                                                      -----        -----        -----        -----
OTHER INCOME (EXPENSE)
    Interest income                                    0.4%         0.7%         0.3%         0.6%
    Interest expense                                 (4.8)%       (4.8)%       (5.0)%       (5.1)%
                                                      -----        -----        -----        -----
    Loss before income tax expense                   (2.8)%       (2.7)%       (3.6)%       (1.5)%
    Income tax expense                                 0.1%         0.3%         0.1%         0.4%
                                                      -----        -----        -----        -----
      Net loss                                        (2.9)%       (3.0)%       (3.6)%       (1.8)%
                                                      =====        =====        =====        =====

-----------
(1)  As a percent of Restaurant sales.
(2)  As a percent of Owner fee income.

Number of Restaurants (System-wide):
    Restaurants open at the beginning of period         484          473          477          467
                                                      -----        -----        -----        -----
    Company restaurants opened (closed or
transferred), net during period                          (4)          12           (3)          20
    Franchised restaurants opened (closed or
transferred), net during period                           2           (4)           8           (6)
                                                      -----        -----        -----        -----
     Total restaurants opened (closed or
transferred), net during period                          (2)           8            5           14
                                                      -----        -----        -----        -----
     Total restaurants open at end of period            482          481          482          481
                                                      =====        =====        =====        =====
</TABLE>


                                       12
<PAGE>


COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED SEPTEMBER 6, 1998 AND QUARTER
ENDED SEPTEMBER 28, 1997

              REVENUES. The comparison of total revenues for the quarter is
impacted by the inclusion of thirteen weeks in the quarter-ended September 28,
1997 as opposed to twelve weeks in the quarter ended September 6, 1998 as
discussed above. Total revenue for the twelve weeks ended September 6, 1998 of
$34.8 million reflects a decrease of $3.7 million from the revenue of $38.5
million that was recognized for the thirteen weeks ended September 28, 1997.
Revenue that was recognized during the extra week of the quarter ended September
28, 1997 was $2.5 million. Sales were also negatively impacted by a decrease in
comparable store sales for Company-operated restaurants of 4.4% compared to the
same twelve weeks of the prior year. Comparable Company-operated restaurants are
those continuously open during both reporting periods. In addition to comparable
store sales decreases, sales were also negatively impacted by the net decrease
of three company-operated units since the third quarter of the prior fiscal
year.

              COSTS AND EXPENSES. Restaurant food and paper cost decreased to
32.2% of restaurant sales in the quarter ended September 6, 1998 compared to
33.1% of Restaurant sales in the quarter ended September 28, 1997. The decrease
is due primarily to improved purchasing contracts that have been negotiated in
1997 and 1998.

              Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits, and related taxes increased to 30.9% of restaurant
sales for the quarter ended September 6, 1998 compared to 29.5% of restaurant
sales for the quarter ended September 28, 1997. This increase is due primarily
to additional labor used to focus on speed of service improvements and increased
group insurance costs and the inefficiencies associated with operating at a
lower sales volume.

              Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $1.7 million or 5.0% of restaurant sales for the
quarter ended September 6, 1998 compared to $1.8 million or 4.8% of restaurant
sales for the quarter ended September 28, 1997. The increase as a percentage of
sales is due primarily to the decline in average restaurant sales relative to
the fixed and semi-variable nature of these expenses.

              Restaurant depreciation and amortization decreased to $1.6 million
for the quarter ended September 6, 1998 compared to $1.8 million for the quarter
ended September 28, 1997. During the prior year, the depreciation for each
quarter was generally 25% of the projected annual total. During the current
year, the depreciation for the first three-quarters will be approximately 23% of
the projected annual total and depreciation for the fourth quarter will be
approximately 31% of the projected annual total. As discussed above, the first
three-quarters will each include three (3) four-week accounting periods and the
fourth quarter will include four (4) four-week accounting periods. In addition
to this change, certain assets have become fully depreciated since the end of
the quarter ended September 28, 1997 plus the net decrease of the three
company-operated restaurants since September 28, 1997.

              Other restaurant operating expenses include all other restaurant
level operating expenses other than food and paper costs, labor and benefits,
rent and other occupancy costs and specifically includes utilities, maintenance
and other costs. These expenses decreased as a percentage of restaurant sales to
$3.0 million or 8.9% of restaurant sales for the quarter ended September 6, 1998
compared to $3.5 million or 9.4% of restaurant sales during the quarter ended
September 28, 1997. This decrease is primarily due to the thirteenth week in the
quarter ended September 28, 1997, the net decrease of three company operated
restaurants since September 28, 1997 and reduced maintenance costs.

              Advertising expense decreased to $2.6 million or 7.7% of
restaurant sales for the quarter ended September 6, 1998 compared to $3.0
million or 8.0% of restaurant sales for the quarter ended September 28, 1997.
The decrease is due primarily to tighter media spending in the third quarter of
1998 and the inclusion of the additional week in the prior fiscal quarter.

              Owner depreciation of $158,000 for the quarter ended September 6,
1998 represents the Company's segregated ownership cost related to the 28
Rally's restaurants and two other units operated by CKE. These expenses consist
primarily of depreciation and amortization associated with these properties.

              General and administrative expenses were $3.0 million for the
quarter ended September 6, 1998 compared to $3.7 million for the quarter ended
September 28, 1997. This reduction is due primarily to the continued savings
associated with the Management Services agreement with Checkers and the
inclusion of thirteen weeks in the quarter ended September 28, 1997 versus
twelve weeks in the quarter ended September 6, 1998.


                                       13
<PAGE>

              LOSS PROVISIONS. During the third quarter of 1997, the Company
recorded provisions of $93,000 related to surplus property writedowns. No such
provisions were recorded during the third quarter of 1998.

              The loss on investment in affiliate of $528,000 represents the
Company's share of the losses of Checkers Drive-In Restaurants, Inc.
("Checkers") for the quarter ended September 7, 1998 ($383,000) and the
amortization of related goodwill ($145,000).

              INTEREST EXPENSE. Interest expense decreased to $1.7 million for
the quarter ended September 6, 1998 which included twelve weeks compared to $1.8
million for the quarter ended September 28, 1997 which included thirteen weeks.
A portion of this decrease relates to the decreased weighted average balance of
debt outstanding during respective periods.

              INTEREST INCOME. Interest income decreased 40.3% for the quarter
ended September 6, 1998 to $151,000 compared to $253,000 for the quarter ended
September 28, 1997 due primarily to lower average investments and the inclusion
of the additional week in the prior fiscal quarter.

              INCOME TAX. The company's net tax provision for both quarters
represents estimated state income taxes expected to be payable for both years.
The Company has not recorded a benefit for the current book losses due to
uncertainty of their ultimate realization.

COMPARISON OF HISTORICAL RESULTS - THREE QUARTERS ENDED SEPTEMBER 6, 1998 AND
THREE QUARTERS ENDED SEPTEMBER 28, 1997

              REVENUES. The comparison of total revenues for the three quarters
is impacted by the inclusion of 39 weeks in the three quarters ended September
28, 1997 as opposed to 36 weeks in the three quarters ended September 6, 1998 as
discussed above. Total revenue for the 36 weeks ended September 6, 1998 of
$101.4 million reflects a decrease of $7.8 million from the revenue of $109.2
million that was recognized for the 39 weeks ended September 28, 1997. Revenue
that was recognized during the extra three weeks of the three quarters ended
September 28, 1997 was $8.8 million. Sales were also negatively impacted by a
decrease in comparable store sales for Company-operated restaurants of 2.7%
compared to the same 36 weeks of the prior year. Comparable Company-operated
restaurants are those continuously open during both reporting periods.

              COSTS AND EXPENSES. Restaurant food and paper cost decreased to
32.1% of restaurant sales in the three quarters ended September 6, 1998 compared
to 32.6% of restaurant sales in the three quarters ended September 28, 1997. The
decrease is due to improved purchasing contracts that have been negotiated in
1997 and 1998.

              Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits, and related taxes increased to 31.1% of restaurant
sales for the three quarters ended September 6, 1998 compared to 29.8% of
restaurant sales for the three quarters ended September 28, 1997. This increase
is due primarily to additional labor used to focus on speed of service
improvements and the discounting that occurred during the three quarters ended
September 6, 1998.

              Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $4.9 million or 5.0% of restaurant sales for the
three quarters ended September 6, 1998 compared to $4.9 million or 4.6% of
restaurant sales for the three quarters ended September 28, 1997. The increase
as a percentage of sales is due primarily to the decline in average restaurant
sales relative to the fixed and semi-variable nature of these expenses.

              Restaurant depreciation and amortization decreased to $5.0 million
for the three quarters ended September 6, 1998 compared to $5.3 million for the
three quarters ended September 28, 1997. During the prior year, the depreciation
for each quarter was generally 25% of the projected annual total. During the
current year, the depreciation for the first three-quarters will be
approximately 23% of the projected annual total and depreciation for the fourth
quarter will be approximately 31% of the projected annual total. As discussed
above, the first three-quarters will each include three (3) four-week accounting
periods and the fourth quarter will include four (4) four-week accounting
periods. In addition to this change, certain assets have become fully
depreciated since September 28, 1997 plus the net decrease of the three
company-operated restaurants.

              Other restaurant operating expenses include all other restaurant
level operating expenses other than food and paper costs, labor and benefits,
rent and other occupancy costs and specifically includes utilities, maintenance
and other costs. These expenses totaled $8.6 million or 8.8% of restaurant sales
for the three quarters ended September 6, 1998 compared to $9.5 million or 9.1%
of Restaurant sales during the three quarters ended September 28, 1997. The
decrease as a percent of sales was due primarily to reduced maintenance costs,
partially offset by increased utilities costs.


                                       14
<PAGE>


              Advertising expense decreased to $7.0 million or 7.1% of
restaurant sales for the three quarters ended September 6, 1998 compared to $7.8
million or 7.4% of restaurant sales for the three quarters ended September 28,
1997. The decrease is primarily due to the inclusion of a $405,000 provision for
the funding of franchisee advertising expenses in the quarter ended June 29,
1997 and the inclusion of the additional three weeks in the three quarters ended
September 28, 1997.

              Owner depreciation of $439,000 for the three quarters ended
September 6, 1998 represents the Company's segregated ownership cost related to
the 28 Rally's restaurants and two other units operated by CKE. These expenses
consist of depreciation and amortization associated with these properties.

              General and administrative expenses were $9.3 million for the
three quarters ended September 6, 1998 compared to $10.4 million for the three
quarters ended September 27, 1997. This reduction is due primarily to the
continued savings associated with the Management Services Agreement with
Checkers and the inclusion of 39 weeks in the three quarters ended September 28,
1997 versus 36 weeks in the three quarters ended September 26, 1998.

              LOSS PROVISIONS. During the first two quarters of 1998, the
company recorded provisions totaling $885,000 to reserve for costs associated
with the closure of seven restaurants and the relocation of one restaurant. In
the comparable quarters of the prior year, the company recorded provisions
totaling $37,000, also related to restaurant closures.

              The loss on investment in affiliate of $768,000 represents the
Company's share of the income of Checkers for the three quarters ended September
6, 1998 ($330,000) offset by the amortization of related goodwill ($438,000).

              INTEREST EXPENSE. Interest expense decreased to $5.0 million for
the three quarters ended September 6, 1998 which included 36 weeks compared to
$5.6 million for the three quarters ended September 28, 1997 which included 39
weeks. A portion of this decrease also relates to the decreased weighted average
balance of debt outstanding during respective periods.

              INTEREST INCOME. Interest income decreased 50.6% for the three
quarters ended September 6, 1998 to $306,000 compared to $620,000 for the three
quarters ended September 28, 1997 due primarily to lower average investments and
the inclusion of the additional three weeks in the three quarters ended
September 28, 1997.

              INCOME TAX. The company's net tax provision for the quarters
represents estimated state income taxes expected to be payable for both years.
The Company has not recorded a benefit for the current book losses due to
uncertainty of their ultimate realization.

LIQUIDITY AND CAPITAL RESOURCES

              The Company's cash flow provided in operating activities was
approximately $3.8 million for the three quarters ended September 6, 1998
compared with cash flow provided by operating activities of approximately $6.9
million for the three quarters ended September 28, 1997. This decrease resulted
primarily from the increased net loss, payment of accrued liabilities, the
increase in receivables and the inclusion of the additional three weeks in the
three quarters ended September 28, 1997.

              Capital expenditures of approximately $1.4 million for the three
quarters ended September 6, 1998 were funded primarily through cash provided by
operating activities and sales of surplus properties. These expenditures were
primarily for the construction of side dining rooms or conversion of existing
stores. Remaining capital expenditures were primarily for the purchase and
installation of certain replacement equipment.

              The Company plans to open two new units in the fourth quarter of
1998. Full year capital expenditures are expected to be in the range of
approximately $2 million to $3 million, inclusive of replacement capital but
excluding costs that may be incurred related to the addition of dining rooms to
existing units.

              Principal payments of debt and capital leases totaled
approximately $882,000 during the three quarters ended September 6, 1998. During
the third quarter of 1998, the Company has completed the required mandatory
sinking fund payment due June 15, 1999 calculated to retire 33 1/3% in aggregate
original principal amount of the Senior Notes issued with the balance maturing
on June 15, 2000.


                                       15
<PAGE>

              The Company is actively marketing the assets included in the
caption "Assets held for sale" in the accompanying consolidated balance sheet
and expects realization in cash over the next 12 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 fair market value less costs to
sell. There can be no assurances that these values will be ultimately realized.
Approximately $318,000 was generated during the three quarters ended September
6, 1998 from the sale of such assets.

              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 became
exercisable on December 20, 1997. The exercise price is $4.375 per share, the
closing price of the Common Stock on December 20, 1996. The registration of the
underlying shares of Common Stock registered with the Securities and Exchange
Commission is not yet effective and, therefore, the shares are not freely
tradable. If exercised, these warrants would provide approximately $6.6 million
in additional capital to the Company. The proceeds generated from any 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 September 25, 1998, the Company agreed in principle to a merger
transaction pursuant to which Checkers Drive-In Restaurants, Inc., a Delaware
corporation ("Checkers") and GIANT GROUP, LTD. ("GIANT") will become
wholly-owned subsidiaries of the Company. Checkers, together with its
franchisees, operates approximately 483 double drive-thru hamburger restaurants
primarily in the southeastern United States. Under the terms of the letter of
intent executed by the Company, Checkers and GIANT each share of Checkers common
stock will be converted into 0.5 share of the Company's common stock and each
share of GIANT's common stock will be converted into 10.48 shares of the
Company's common stock upon consummation of the merger. The transaction is
subject to negotiation of definitive agreements, receipt of fairness opinions by
each party, receipt of stockholder and other required approvals and other
customary conditions.

              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.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMPETITION

              The Company's operations compete in the fast food industry, which
is highly competitive with respect to price, concept, quality and speed of
service, restaurant location, attractiveness of facilities, customer
recognition, convenience and food quality and variety. The industry includes
many fast food chains, including national chains which have significantly
greater resources than the Company that can be devoted to advertising, product
development and new restaurants. In certain markets, the Company will also
compete with other quick-service double drive-thru hamburger chains with
operating concepts similar to the Company. The fast food industry is often
significantly affected by many factors, including changes in local, regional or
national economic conditions affecting consumer spending habits, demographic
trends and traffic patterns, changes in consumer taste, consumer concerns about
the nutritional quality of quick-service food and increases in the number, type
and location of competing quick-service restaurants. The Company competes
primarily on the basis of speed of service, price, value, food quality and
taste. In addition, with respect to selling franchises, the Company competes
with many franchisors of restaurants and other business concepts. All of the
major chains have increasingly offered selected food items and combination
meals, including hamburgers, at temporarily or permanently discounted prices.
Beginning generally in the summer of 1993, the major fast food hamburger chains
began to intensify the promotion of value priced meals, many specifically
targeting the 99(cent) price point at which the Company sells its "Rally's
Burger(R)". This promotional activity has continued at increasing levels, and
management believes that it has had a negative impact on the Company's sales and
earnings. Increased competition, additional discounting and changes in marketing
strategies by one or more of these competitors could have an adverse effect on
the Company's sales and earnings in the affected markets.

SFAS 121

              The Company examines its long-lived assets for potential
impairment where circumstances indicate that such impairment may exist, in
accordance with 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"). The Company believes such examination requires the operations and
store level economics of individual restaurants be evaluated for potential
impairment.

                                       16
<PAGE>


The Company recorded write-downs of its assets in the fourth quarter of fiscal
year 1995 and during fiscal year 1996 pursuant to SFAS 121. No assurance can be
given that even an overall return to profitability will preclude the write-down
of assets associated with the operation of an individual restaurant or
restaurants in the future.


GOVERNMENT REGULATIONS

              The Company has no material contracts with the United States
government or any of its agencies.

              The restaurant industry generally, and each Company-operated and
franchised Restaurant specifically, are subject to numerous federal, state and
local government regulations, including those relating to the preparation and
sale of food and those relating to building, zoning, health, accommodations for
disabled members of the public, sanitation, safety, fire, environmental and land
use requirements. The Company and its franchisees are also subject to laws
governing their relationship with employees, including minimum wage
requirements, accommodation for disabilities, overtime, working and safety
conditions and citizenship requirements. The Company is also subject to
regulation by the Federal Trade Commission and certain laws of States and
foreign countries which govern the offer and sale of franchises, several of
which are highly restrictive. Many State franchise laws impose substantive
requirements on the franchise agreement, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some States require that certain materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
food licenses or approvals to sell franchises, or an increase in the minimum
wage rate, employee benefit costs (including costs associated with mandated
health insurance coverage) or other costs associated with employees could
adversely affect the Company and its franchisees. Mandated increases in the
minimum wage rate were implemented in 1996 and 1997.

              The Company's construction, transportation and placement of
modular restaurant packages is subject to a number of federal, state and local
laws governing all aspects of the manufacturing process, movement, end use and
location of the building.. The transportation of the Company's modular
restaurant package is subject to state, federal and local highway use laws and
regulations which may prescribe size, weight, road use limitations and various
other requirements. The descriptions and the substance of the Company's
warranties are also subject to a variety of state laws and regulations.


         PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

              In January and February 1994, two putative class action lawsuits
were filed, purportedly on behalf of the stockholders of Rally's, in the United
States District Court for the Western District of Kentucky, Louisville division,
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 cases
were subsequently consolidated under the case name Jonathan Mittman et al vs.
Rally's Hamburgers, Inc., et al, case number C-94-0039-L(CS). The complaints
allege defendants violated the Securities Exchange Act of 1934, among other
claims, by issuing inaccurate public statements about the Company in order to
arbitrarily inflate the price of its common stock. The plaintiffs seek
unspecified 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. In addition, the Court
denied plaintiffs' motion for class certification; the plaintiffs renewed this
motion, and despite opposition by the defendants, the Court granted such motion
for class certification on April 16, 1996, certifying a class from July 20, 1992
to September 29, 1993. 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 position as both a former director of Rally's and a partner
in Christensen, Miller. Defendants filed an opposition to the motion, and the
motion to disqualify Christensen, Miller was denied. 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.
The defendants deny all wrongdoing and intend to defend themselves vigorously in
this matter. Discovery is proceeding. Because these matters are in a preliminary
stage, 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.

              In February 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's against GIANT and certain of
Rally's 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


                                       17
<PAGE>


GIANT, breached their fiduciary duties to the public shareholders of Rally's by
causing Rally's to repurchase from GIANT 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. The Chancery Court conducted a hearing on November
26, 1996 and denied the motions to dismiss on April 3, 1997. The Company denies
all wrongdoing and intends to vigorously defend the action. It is not possible
to predict the outcome of this action at this time.

              FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN
V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative
class action was filed on September 29, 1998, in the Delaware Chancery Court in
and for New Castle County, Delaware by an alleged stockholder of 500 shares of
the common stock of Checkers Drive-In Restaurants, Inc. ("Checkers"). The
complaint names the Company and certain of its current officers and directors as
defendants including William P. Foley, II, James J. Gillespie, Harvey Fattig,
Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt Sugarman and C.
Thomas Thompson. The Complaint also names Checkers and GIANT as defendants. The
complaint arises out of the proposed merger announced on September 28, 1998
between the Company, Checkers and GIANT (the "Proposed Merger") and alleges
generally, that certain of the defendants engaged in an unlawful scheme and plan
to permit the Company to acquire the public shares of the common stock of
Checkers in a "going-private" transaction for grossly inadequate consideration
and in breach of the defendants' fiduciary duties. The plaintiff allegedly
initiated the Complaint on behalf of all stockholders of Checkers as of
September 28, 1998, and seeks INTER ALIA, certain declaratory and injunctive
relief against the consummation of the Proposed Merger, or in the event the
Proposed Merger is consummated, recision of the Proposed Merger and costs and
disbursements incurred in connection with bringing the action, including
attorney's fees, and such other relief as the Court may deem just and proper.
The Company believes the lawsuit is without merit and intends to defend it
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.

              DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON
BEHALF OF THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET
AL. Case No. 16680. This putative class action was filed on October 2, 1998, in
the Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified number
of shares of the common stock of Checkers. The complaint names the Company and
certain of its current officers and directors as defendants including William P.
Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, James T. Holder,
Terry N. Christensen, Burt Sugarman and C. Thomas Thompson. The Complaint also
names Checkers and GIANT as defendants. As with the FIRST ALBANY complaint
described above, this complaint arises out of the proposed merger announced on
September 28, 1998 between the Company, Checkers and GIANT (the "Proposed
Merger") and alleges generally, that certain of the defendants engaged in an
unlawful scheme and plan to permit the Company to acquire the public shares of
the Checkers' common stock in a "going-private" transaction for grossly
inadequate consideration and in breach of the defendant's fiduciary duties. The
plaintiffs allegedly initiated the Complaint on behalf of all stockholders of
Checkers as of September 28, 1998, and seeks INTER ALIA, certain declaratory and
injunctive relief against the consummation of the Proposed Merger, or in the
event the Proposed Merger is consummated, recision of the Proposed Merger and
costs and disbursements incurred in connection with bringing the action,
including attorneys' fees, and such other relief as the Court may deem just and
proper. The Company believes the lawsuit is without merit and intends to defend
it vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.

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


ITEM 2.  CHANGES IN SECURITIES

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         None.


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<PAGE>


ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

  (a)    27 Financial Data Schedule

  (b)    Reports on 8-K:

         There were no reports on Form 8-K filed during the quarter ended
         September 6, 1998.


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<PAGE>


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.


                                        RALLY'S HAMBURGERS, INC.
                                        (Registrant)



Date: October 20, 1998                  By: /s/ JOSEPH N. STEIN
                                            -----------------------------
                                            Joseph N. Stein
                                            Chief Financial Officer
                                            (Principal Accounting Officer)


                                       20