<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------

                                    FORM 10-K

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

For the fiscal year ended December 28, 1997
Commission file number 0-18629


                                O'CHARLEY'S INC.
               ---------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Tennessee                                      62-1192475
--------------------------------             ----------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

        3038 Sidco Drive
      Nashville, Tennessee                                    37204
--------------------------------                --------------------------------
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:    (615) 256-8500

Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   X    No
                                              -----     ------

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 26, 1998 was approximately $179,452,772. For purposes
of this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors and shareholders beneficially owning
10% or more of the outstanding Common Stock. The market value calculation was
determined using the closing sale price of the registrant's common stock on
March 26, 1998 ($20.375) as reported on The Nasdaq Stock Market's National
Market.

         The number of shares of common stock, no par value, outstanding on
March 26, 1998, was 10,213,494.


                       DOCUMENTS INCORPORATED BY REFERENCE

                        Documents from which portions are
Part of Form 10-K       incorporated by reference
-----------------       ---------------------------------
Part III                Proxy Statement relating to the registrant's Annual
                        Meeting of Shareholders to be held May 7, 1998

<PAGE>   2



                                O'CHARLEY'S INC.

                                     PART I

ITEM 1. BUSINESS

         At December 28, 1997, the Company owned and operated 82 O'Charley's
restaurants located in Alabama, Florida, Georgia, Indiana, Kentucky,
Mississippi, North Carolina, Ohio, South Carolina and Tennessee and had one
franchised O'Charley's restaurant in South Carolina. O'Charley's restaurants are
intended to appeal to traditional casual dining customers as well as
value-oriented customers by offering high quality food at moderate prices with
outstanding customer service. O'Charley's restaurants are open seven days a
week, and most offer full bar service.

THE O'CHARLEY'S CONCEPT

         O'Charley's restaurants provide fresh, high quality food at moderate
prices in a relaxed atmosphere. The key elements of the O'Charley's concept
include the following:

         Variety of Freshly Prepared Items. O'Charley's restaurants offer a
varied menu of distinctive American fare made from original recipes. The
Company's menu features approximately 45 items including prime rib, steaks,
chicken, seafood, made-from-scratch soups, entree salads, sandwiches, pastas and
an assortment of appetizers and desserts. All specialty entrees are prepared
using aged beef and fresh chicken and seafood, are cooked to order and are
served with a choice of soup or salad, fresh yeast rolls and a side item. Most
items are prepared on premises using fresh ingredients. To maintain freshness
and quality, the Company operates its own commissary at which it ages and cuts
its beef and prepares the yeast rolls and salad dressings served in its
restaurants. The Company introduced a redesigned menu in the fourth quarter of
1996 and is continually developing new menu items to respond to changing
customer tastes and preferences. In addition to its normal menu, the Company's
restaurants offer an express lunch, a Sunday brunch, a children's menu and
seasonal menu offerings.

         Attractive Menu Pricing. The Company believes its menu offers a
compelling value to the traditional casual dining customer while remaining
competitive with restaurants targeting value-oriented customers. The Company's
prices range from $5.99 to $15.99 for entrees, with many items priced under
$10.00. Additionally, the Company offers a "Kids Eat Free" program for children
ten and under in most of its restaurants. In 1997, the average check per
customer, including beverages, was approximately $8.25 for lunch and $12.10 for
dinner.

         Casual Ambiance. The Company seeks to create a casual, neighborhood
atmosphere in its restaurants. The interior decor of the Company's prototype
restaurant is open, casual and well lighted and features an exposed kitchen,
warm woods, polished brass and brick and neon accents. Hand-painted murals
depicting local history, people, places and events tailor the decor of many of
the restaurants to the local community. The Company remodels its restaurants on
average every three to five years to reflect refinements in the Company's
prototype restaurant and changes in customer tastes.






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OPERATING STRATEGY

         The Company's objective is to differentiate its restaurants by
exceeding customer expectations as to the quality of food and the friendliness
of service. To achieve this objective, the Company employs the following key
operating strategies:

         Quality Assurance. The Company is committed to providing a broad menu
of freshly prepared, high quality items. The Company believes that its menu
offerings allow for simplified food preparation, efficient delivery and
consistent quality. Unlike most casual dining restaurants, the Company operates
its own commissary which enables the Company to better control its food quality
and costs. The commissary purchases and distributes food and other supplies to
all of the Company's restaurants, operates a USDA approved facility at which it
ages and cuts its beef and prepares fresh breads and salad dressings. Management
believes the commissary also provides the Company with a competitive advantage
by simplifying purchasing duties of restaurant level management, thus enabling
them to focus on restaurant operations.

         Commitment to Value. Management believes that the food quality and
service at the Company's restaurants are comparable or superior to that of other
casual dining restaurants. The Company believes that its pricing strategy
creates an attractive price-to-value relationship, thereby increasing the
Company's ability to attract value-oriented customers as well as traditional
casual dining customers. O'Charley's restaurants serve fresh yeast rolls with
every order and a choice of soup or salad with specialty entree items.
Additionally, programs such as "Express Lunch" and "Kids Eat Free" reinforce the
Company's value-oriented philosophy.

         Focus on Customer Service. The Company believes that it must provide
prompt, friendly and efficient service to ensure customer satisfaction. The
Company staffs each restaurant with an experienced management team and keeps
table-to-server ratios low. Through the use of customer surveys, management
receives valuable feedback on its restaurants and through prompt response
demonstrates a continuing dedication to customer satisfaction. The Company also
employs a "mystery shopper" program to independently monitor quality control in
areas such as timeliness of service, atmosphere, employee attitude and food
quality.

         Well-Trained and Highly Motivated Employees. The Company believes a
well-trained, highly motivated restaurant management team is critical to
achieving the Company's operating objectives. The Company's training and
compensation systems are designed to create accountability at the restaurant
level for the performance of each restaurant. The Company expends significant
resources to train, motivate and educate its restaurant level managers and
hourly coworkers. The Company has recently opened a management training facility
at its home office in Nashville, Tennessee. Each new manager participates in a
comprehensive 12-week training program which combines hands-on experience in one
of the Company's training restaurants and instruction at the training facility.
To instill a sense of ownership in restaurant management, compensation is based,
in part, on restaurant profit, employee turnover and mystery shopper reports.
Management believes this focus on unit level operations creates a "single store
mentality" and provides an incentive for managers to focus on increasing same
store sales and restaurant profitability.

GROWTH STRATEGY

         The Company's growth strategy is to open new Company-owned restaurants
and increase sales at existing restaurants. The Company intends to continue
clustering new restaurants in existing metropolitan markets, which management
believes enhances supervisory, marketing and distribution efficiencies. The
Company attempts to cluster restaurants in a manner that does not result in a
material decrease in sales at existing restaurants. The Company also intends to
develop restaurants in selected new metropolitan markets in the Southeast and
Midwest and in smaller markets in close proximity to the Company's existing
metropolitan markets


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<PAGE>   4



to enable the Company to utilize existing supervisory, marketing and
distribution systems. The Company expects to open 14 to 16 new Company-owned
restaurants in 1998.

         During 1997, the Company opened 13 new Company-owned restaurants in the
following markets:

                Indianapolis, IN (2)               Lebanon, TN
                Gainesville, GA                    Louisville, KY
                Elizabethtown, KY                  Spartanburg, SC
                Conyers, GA                        Meridian, MS
                Alcoa, TN                          Asheville, NC
                Dayton, OH                         Decatur, AL

         Management devotes significant time and resources to analyzing
prospective restaurant sites and gathering appropriate cost, demographic and
traffic data. The Company utilizes an in-house construction and real estate
department to develop architectural and engineering plans and to oversee new
construction. While the Company prefers to develop its prototype restaurant, the
Company considers developing additional O'Charley's restaurants in existing
buildings where appropriate. Management believes that its ability to remodel an
existing building into an O'Charley's restaurant permits greater accessibility
to quality sites in more developed markets. The Company prefers to own, rather
than lease, its restaurants.

         In the past, the Company has entered into joint ventures for the
development of other restaurant concepts, and from time to time the Company may
consider developing additional restaurant concepts.


RESTAURANT DESIGN

         The prototypical O'Charley's restaurant is a freestanding building
containing approximately 6,500 square feet and seating for approximately 260
customers, including approximately 50 bar seats. The exterior features old-style
red brick, bright red and green neon borders, multi-colored awnings and
attractive landscaping. The interior is open, casual and well lighted and
features an exposed kitchen, warm woods, polished brass, brick and neon accents,
and hand-painted murals depicting local history, people, places and events. In
addition, the kitchen design provides the Company with flexibility in the types
of food items that can be prepared so that it can adapt to changing customer
tastes and preferences.

         The Company remodels its restaurants on average every three to five
years to reflect refinements in the Company's prototype restaurant and changes
in customer tastes. The Company remodeled 16 restaurants in 1997 and plans to
remodel an additional 11 restaurants in 1998. The average cost to remodel the
Company's restaurants in 1997 approximated $175,000 per restaurant.


RESTAURANT OPERATIONS

         Restaurant Management. The Company believes that each O'Charley's
restaurant requires an effective management team in order to ensure high quality
food and attentive service. Each restaurant typically has six managers (a
general manager, three assistant managers, a kitchen manager and an assistant
kitchen manager) and approximately 80 full-time and part-time employees. The
Company employs area supervisors who have day-to-day responsibility for the
operating performance of three to five restaurants. The Company's five regional
directors currently supervise 12 to 23 restaurants in their region and are
directly involved in the development of new restaurants. The Company's Director
of Operations oversees all restaurant operations of the Company.



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         The Company has a "3-Point Compensation Plan" which gives general
managers an opportunity to participate in the growth of their restaurant and the
Company. Pursuant to the 3-Point Compensation Plan, general managers receive a
competitive minimum base salary, a quarterly bonus based upon a certain
percentage of the profit of the restaurant for which the manager has
responsibility and long-term performance-based stock options which provide an
incentive for general managers to increase store level profitability and
shareholder value. The quarterly bonuses are based on the attainment of certain
performance targets that the managers establish each year for their own
restaurants.

         As an incentive for restaurant managers to improve sales and operating
efficiency, the Company also has a monthly incentive compensation plan. Pursuant
to this plan, each member of the restaurant management team may earn a bonus,
payable during each four-week accounting period, based on a percentage of the
sales of the restaurant for which the manager has responsibility. The period
bonus is earned when budgeted financial results are achieved, subject to
adjustment based upon same store sales increases and certain operating
performance factors.

         The Company believes that its compensation plans, particularly the
quarterly bonus, encourage the general managers to establish and implement an
annual strategy. The Company's area supervisors, regional directors and senior
management also receive incentive based cash bonuses and participate in the
Company's senior management stock program pursuant to which they receive
performance-based stock options, the vesting of which is based on the Company
achieving certain budgeted levels of profitability and the individual achieving
goals related to their area of responsibility.

         Recruiting and Training. The Company emphasizes the careful selection
and training of all restaurant employees. The restaurant management recruiting
and training program begins with an evaluation and screening program. In
addition to multiple interviews, and background and experience verification, the
Company conducts a testing procedure designed to identify those applicants who
are best suited to manage the Company's restaurant operations. Management
trainees are required to complete a 12-week training program, a portion of which
is conducted at the Company's training center in Nashville, Tennessee. The
training facility has a theater-style auditorium, facilities for operational and
information services training and an area for team-building exercises. The
program familiarizes new managers with all the responsibilities required at an
individual restaurant and with the Company's operations, management objectives,
controls and evaluation criteria before they assume restaurant management
responsibility. Each new hourly coworker is trained by a qualified in-store
trainer called an "ETE" (Educator Through Excellence). Each store has
approximately 12 ETEs who are qualified and tested in their area of
responsibility. Restaurant level management is responsible for the hiring and
training of employees but they involve the Company's hourly coworkers in the
process.

SUPPORT OPERATIONS

         Commissary Operations. The Company operates its own commissary in
Nashville, Tennessee through which it purchases and distributes most of its food
products and restaurant supplies. At the commissary, the Company operates a
USDA-approved meat processing facility at which it ages and cuts its beef and
prepares salad dressings and fresh breads. The commissary primarily services the
Company's restaurants; however, it also sells food products and supplies to
certain other customers, including retail grocery chains, mass merchandisers and
wholesale clubs. Food products and other restaurant supplies are distributed to
the Company's restaurants twice each week by Company-operated trucks. Seafood,
poultry and most produce, which require more frequent deliveries, are typically
purchased locally by restaurant management to ensure freshness. The commissary
contains approximately 52,000 square feet of dry storage, 30,000 square feet of
refrigerated storage and 16,500 square feet of production facilities.



                                        5

<PAGE>   6



         Management believes that its commissary enhances its restaurant
operations by assisting the Company in maintaining consistent food quality and
controlling costs. The commissary also simplifies the restaurant managers'
purchasing duties by providing fixed prices on food items and supplies, which
allows unit level management to focus on other areas of restaurant operations.
The Company establishes food and other product quality standards, and the
commissary negotiates directly with food manufacturers and other suppliers to
obtain the lowest possible prices at the required quality. The Company also
utilizes select long-term contracts on certain items to mitigate short-term food
cost fluctuations.

         Quality Control. The Company uses written customer evaluations, which
are available to customers in the restaurants, as a means of monitoring customer
satisfaction. The Company also employs a "mystery shopper" program to
independently monitor quality control in areas such as timeliness of service,
atmosphere, cleanliness, employee attitude and food quality. In addition, the
Company has established a customer service department that receives calls and
routes comments to the appropriate personnel.

         Advertising and Marketing. The Company has an ongoing defined
advertising and marketing plan for the development of television, radio and
newspaper advertising and also uses point of sale and local store marketing. The
Company's advertising focuses on building brand loyalty and emphasizing the
distinctiveness of the O'Charley's atmosphere and menu offerings. The Company
conducts annual studies of changes in customer tastes and preferences and is
constantly evaluating the quality of its menu offerings. The Company expended
2.8% of its 1997 restaurant sales on advertising. In addition to advertising,
the Company encourages unit level personnel to become active in their
communities through local charities and other organizations and sponsorships.

         Restaurant Reporting. Systems and technology are essential for the
management oversight needed to monitor the Company's restaurant operations.
Operational and financial controls are maintained through the use of point of
sale systems in each restaurant and an automated data processing system at the
home office. The management accounting system polls data from the point of sale
system and generates daily reports of sales, sales mix, customer counts, check
average, cash, labor and food cost. Inventories are taken of key products daily
and of all products at the end of each four-week accounting period. Management
utilizes this data to monitor the effectiveness of controls and to prepare
periodic financial and management reports. The system is also utilized for
financial and budgetary analysis, including analysis of sales by restaurant,
product mix and labor utilization.

         Real Estate and Construction. The Company maintains an in-house
construction and real estate department to assist in the site selection process,
develop architectural and engineering plans and oversee new construction. The
Company's Director of Real Estate, Chief Executive Officer and Chief Operating
Officer, together with other members of management, analyze prospective sites
and maintain a broad database of possible sites. Once a site is selected, the
Director of Real Estate oversees the zoning process, obtains all required
governmental permits, develops detailed building plans and specifications and
equips the restaurants.

         Human Resources. The Company maintains a human resources department
that supports restaurant operations through the design and implementation of
policies, programs, procedures and benefits for the Company's employees. The
human resources department also includes an employee relations manager and
maintains a toll-free number for employee comments and questions. The Company
has had in place for several years a plan to foster diversity throughout its
workforce.


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<PAGE>   7



RESTAURANT LOCATIONS

         At December 28, 1997, the Company operated 82 O'Charley's restaurants.
The following table sets forth the locations (including the number of
restaurants at each location) of these 82 restaurants.

      ALABAMA                    KENTUCKY                    SOUTH CAROLINA
        Birmingham (4)             Bowling Green               Anderson
        Decatur                    Elizabethtown               Spartanburg
        Huntsville                 Florence                  TENNESSEE
        Mobile                     Lexington (2)               Alcoa
        Montgomery                 Louisville (5)              Chattanooga (2)
        Oxford                     Owensboro                   Clarksville (2)
        Tuscaloosa                 Paducah                     Cleveland
      FLORIDA                      Richmond                    Cookeville
        Pensacola                MISSISSIPPI                   Gatlinburg
      GEORGIA                      Biloxi                      Jackson
        Atlanta (3)                Hattiesburg                 Johnson City
        Conyers                    Meridian                    Knoxville (4)
        Dalton                   NORTH CAROLINA                Lebanon
        Gainesville                Asheville                   Memphis (3)
        Lawrenceville              Raleigh (3)                 Murfreesboro
        Woodstock                  Winston-Salem               Nashville (7)
      INDIANA                    OHIO                          Pigeon Forge
        Clarksville                Cincinnati (5)
        Evansville                 Dayton
        Indianapolis (5)


FRANCHISED RESTAURANT

         The Company has one franchisee which owns one O'Charley's restaurant in
Greenville, South Carolina. The Company's franchised restaurant is currently
operated pursuant to a franchise agreement that provides for royalties of 2.0%
of gross sales, marketing contributions of up to 1.0% of gross sales and a
20-year term. The Company retains the right to terminate the franchise agreement
in the event of a breach or default under the franchise agreement, including
failure to maintain Company operating standards. In addition, the franchisee is
required to comply with Company specifications as to space, design and decor,
menu items, principal food ingredients and day-to-day operations. The Company is
currently in negotiations to acquire the franchised restaurant. The Company does
not currently intend to franchise any additional O'Charley's restaurants.

SERVICE MARKS

         The Company has registered the name "O'Charley's" and its logo as a
service mark with the United States Patent and Trademark Office. The Company is
aware of names and marks similar to the service marks of the Company used by
third parties in certain limited geographical areas. Such third party use may
prevent the Company from licensing the use of its service marks for restaurants
in such areas. Except for these limited geographical areas, the Company is not
aware of any infringing uses that could materially affect its business. The
Company intends to protect its service mark by appropriate legal action whenever
necessary.



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<PAGE>   8



GOVERNMENT REGULATION

         The Company is subject to various federal, state, and local laws
affecting its business. The Company's commissary is licensed and subject to
regulation by the USDA. In addition, each of the Company's restaurants is
subject to licensing and regulation by a number of governmental authorities,
which may include alcoholic beverage control, health, safety, sanitation,
building, and fire agencies in the state or municipality in which the restaurant
is located. Most municipalities in which the Company's restaurants are located
require local business licenses. Difficulties in obtaining or failures to obtain
the required licenses or approvals could delay or prevent the development of a
new restaurant in a particular area. The Company is also subject to federal and
state environmental regulations, but such regulations have not had a material
adverse effect on the Company's operations to date.

         Approximately 12% of the Company's restaurant sales in 1997 was
attributable to the sale of alcoholic beverages. Each restaurant, where
permitted by local law, has appropriate licenses from regulatory authorities
allowing it to sell liquor, beer and wine, and in some states or localities to
provide service for extended hours and on Sunday. Each restaurant has food
service licenses from local health authorities, and similar licenses would be
required for each new restaurant. The failure of a restaurant to obtain or
retain liquor or food service licenses could adversely affect, or in an extreme
case, terminate its operations. However, each restaurant is operated in
accordance with standardized procedures designed to assure compliance with all
applicable codes and regulations. The Company is subject in most states in which
it operates restaurants to "dram-shop" statutes or judicial interpretations,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment which wrongfully served alcoholic
beverages to such person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.

         The Federal Americans With Disabilities Act (the "ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. The ADA became effective as to public accommodations in January 1992
and as to employment in July 1992. The Company currently designs its restaurants
to be accessible to the disabled and believes that it is in substantial
compliance with all current applicable regulations relating to restaurant
accommodations for the disabled. The Company intends to comply with future
regulations relating to accommodating the needs of the disabled, and the Company
does not currently anticipate that such compliance will require the Company to
expend substantial funds.

         The development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental
regulations. The Company's restaurant operations are also subject to federal and
state minimum wage laws and other laws governing such matters as working
conditions, citizenship requirements, overtime and tip credits. In the event a
proposal is adopted which materially increases the applicable minimum wage, such
an increase would result in an increase in the Company's payroll and benefits
expense.

EMPLOYEES

         At December 28, 1997, the Company employed approximately 6,500 persons,
110 of whom were home office management and staff personnel, 140 of whom were
commissary personnel and the remainder of whom were restaurant personnel. A
substantial number of the Company's restaurant personnel are employed on a
part-time basis. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be good.

FORWARD-LOOKING STATEMENTS/RISK FACTORS

         This report contains certain forward-looking statements within the
meaning of the federal securities laws, which are intended to be covered by the
safe harbors created thereby. Those statements include, but may not be




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limited to, all statements regarding the intent, belief and expectations of the
Company and its management such as statements concerning the Company's future
profitability and its operating and growth strategy. Investors are cautioned
that all forward-looking statements involve risks and uncertainties including,
without limitation, the factors set forth below. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this report
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved. The
Company undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.

         Expansion Risks. The Company's continued growth depends on its ability
to locate acceptable sites, open new restaurants and operate such restaurants
profitably. The Company's growth strategy includes opening new restaurants in
geographic markets in which the Company has limited or no previous operating
experience. The Company's growth strategy also includes opening new restaurants
in geographic markets in which there are a number of existing O'Charley's
restaurants, which could have an adverse effect on sales and profitability at
these existing restaurants. The Company's ability to expand the number of its
restaurants will depend on a number of factors, including the selection and
availability of quality restaurant sites, the negotiation of acceptable lease or
purchase terms, the securing of required governmental permits and approvals, the
adequate supervision of construction, the hiring, training and retaining of
skilled management and other personnel, the availability of adequate financing
and other factors, many of which are beyond the control of the Company. The
hiring and retention of management and other personnel may be difficult given
the low unemployment rates in certain areas in which the Company operates. There
can be no assurance that the Company will be successful in opening new
restaurants in accordance with the Company's proposed schedule. Furthermore,
there can be no assurance that the Company's new restaurants will generate
revenues or profit margins consistent with those of the Company's existing
restaurants or that the new restaurants will operate profitably.

         Geographic Concentration. The Company's existing restaurants are
located predominantly in the Southeastern and Midwestern United States, with 27
of the 82 Company-owned O'Charley's restaurants located in Tennessee. The
Company's plans include further expansion in the Southeast and Midwest. As a
result, the Company's business, financial or operating results may be materially
adversely affected by economic, weather or business conditions in the Southeast
and Midwest, as well as other geographic regions in which the Company locates
restaurants.

         Increases in Operating Costs. The profitability of the Company is
significantly dependent on its ability to anticipate and react to changes in the
prices of food, commodities, labor, employee benefits and similar items. Many
restaurant commodities are subject to seasonal fluctuations in prices as a
result of weather, changes in demand and other factors. Most of the factors
affecting costs are beyond the control of the Company. There can be no assurance
that the Company will be able to anticipate and react to changing costs through
its purchasing practices or menu price adjustments without a material adverse
effect on the Company's business, financial condition or operating results.

         Labor Cost and Availability. The Company competes with other
restaurants for experienced management personnel and hourly employees. Given the
low unemployment rates in certain areas in which the Company operates, the
hiring and retention of qualified management and other personnel may be
difficult. The Company may be forced to enhance its wage and benefits package in
order to attract qualified management and other personnel. No assurance can be
given that the Company's labor costs will not increase or that, if they do
increase, they can be absorbed by the Company or offset by menu price
adjustments. Any failure by the Company to attract and retain qualified
management and other personnel, control its labor costs or offset any increased
labor costs



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<PAGE>   10



through menu price adjustments could have a material adverse effect on the
Company's business, financial condition and operating results.

         Competition. The restaurant industry is intensely competitive with
respect to price, service, location and food quality, and there are many
well-established competitors with substantially greater financial and other
resources than the Company. Such competitors include a large number of national
and regional restaurant chains. Some of the Company's competitors have been in
existence for a substantially longer period than the Company and may be better
established in the markets where the Company's restaurants are or may be
located. The Company's restaurants located in larger cities and metropolitan
areas generally face more intense competition than restaurants located in
smaller markets. Historically, the restaurant business has been affected by
changes in consumer tastes and by national, regional or local economic
conditions and demographic trends. The performance of individual restaurants may
be affected by factors such as traffic patterns and the type, number and
location of competing restaurants. The Company also competes with other
restaurants and retail establishments for quality sites.

EXECUTIVE OFFICERS

         Officers of the Company are elected by the Board of Directors and serve
at the pleasure of the Board of Directors. There are no family relationships
among any officers. The following table sets forth certain information regarding
the executive officers of the Company.

<TABLE>
<CAPTION>
Name                       Age       Position
----                       ---       --------
<S>                        <C>       <C>
Gregory L. Burns           43        President, Chief Executive Officer, and Chairman of
                                     the Board of Directors

Steven J. Hislop           38        Executive Vice President and Chief Operating Officer

A. Chad Fitzhugh           37        Chief Financial Officer, Secretary, and
                                     Treasurer

William E. Hall, Jr.       43        Vice President - Operations
</TABLE>


         The following is a brief summary of the business experience of each of
the executive officers of the Company.

         Gregory L. Burns has served as Chairman of the Board and Chief
Executive Officer of the Company since February 1994, and as President of the
Company since September 1996. Mr. Burns, a director of the Company since 1990,
served as Chief Financial Officer of the Company from October 1983 to September
1996, as Executive Vice President and Secretary of the Company from October 1983
to May 1993, and as President of the Company from May 1993 to February 1994. Mr.
Burns is a certified public accountant.

         Steven J. Hislop has served as Executive Vice President and Chief
Operating Officer of the Company since March 1997 and as a director of the
Company since March 1998. Mr. Hislop served as Senior Vice President Operations
from January 1993 to March 1997, and as Vice President - Operations from April
1990 to January 1993.


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         A. Chad Fitzhugh has served as Chief Financial Officer since September
1996, as Secretary of the Company since May 1993, and as Treasurer since April
1990. Mr. Fitzhugh served as Controller from 1987 until his appointment as Chief
Financial Officer. Mr. Fitzhugh is a certified public accountant.

         William E. Hall, Jr. has served as Vice President - Operations since
March 1997. Mr. Hall served as Director of Operations from December 1996 to
March 1997, as a Regional Director of the Company from July 1992 to December
1996, and as an Area Supervisor of the Company from May 1991 to July 1992.

ITEM 2.  PROPERTIES

         Of the 82 Company-operated restaurants in operation at December 28,
1997, 47 are owned by the Company in fee simple while the remainder are leased.
Seven of the leased locations are owned by partnerships whose partners are
affiliated with the Company. Restaurant lease expirations range from 1999 to
2019, with the majority of the leases providing for an option to renew for
additional terms ranging from 5 to 20 years. All of the Company's leases provide
for a specified annual rental, and some leases call for additional rental based
on sales volume at the particular location over specified minimum levels.
Generally, the leases are net leases which require the Company to pay the cost
of insurance and taxes. The Company's executive offices and its commissary are
located in Nashville, Tennessee in approximately 138,000 square feet of office
and warehouse space under a lease which expires in March 2002. The Company has
an option to extend the lease for two additional five-year terms. The Company
has an option to purchase the property at various times during the lease term.

ITEM 3.  LEGAL PROCEEDINGS

         On February 15, 1994, a class action suit was filed in the United
States District Court in the Western District of Tennessee against the Company,
Gregory L. Burns, David K. Wachtel, Jr., and Charles F. McWhorter (Messrs.
Wachtel and McWhorter are former directors and executive officers of the
Company). The suit was later transferred to the United States District Court for
the Middle District of Tennessee. The suit alleged racially discriminatory job
selection, termination and work environment practices in violation of federal
law. The suit sought actual, compensatory and punitive damages in an unspecified
amount. Although the Company believes the suit was without merit, the Company
entered into a settlement agreement in November 1996 in order to permit
management to focus its resources on the Company's operation. The Court approved
a consent decree approving the definitive settlement of the suit in the fourth
quarter of 1996. The settlement agreement created a settlement pool of $4.8
million for the benefit of the class members, $700,000 for claims administration
and fees and $2.0 million for the attorneys representing the class. The Company
accrued an additional $1.0 million for legal and other expenses related to the
settlement. An adjustment of approximately $2.3 million was made to the original
accrual in December 1996 as a result of the lower than originally anticipated
number of claims submitted by members of the plaintiff class. After the
adjustment, the total settlement amount payable to the plaintiff class and their
attorneys was approximately $5.2 million, of which approximately $445,000 was
paid through the issuance of shares of the Company's Common Stock and the
remaining amounts were to be paid in cash. As of December 28, 1997,
substantially all of the required payments under this settlement had been paid.

         The Company is presently a party in a civil action in the United States
District Court for the Middle District of Tennessee involving a former general
manager of the Company. In September 1995, the Company filed an action against
the former employee alleging wrongful conversion of Company funds and fraudulent
misrepresentation. The former employee has moved to amend his answer in the
civil action filed by the Company claiming damages of $30.0 million relating to
counterclaims alleging malicious prosecution and intentional infliction of
emotional distress and $600,000 relating to counterclaims alleging breach of
contract and race discrimination. To date the court has not ruled on whether it
will allow the former employee to pursue any of the foregoing counterclaims. The
Company believes the counterclaims are without merit, intends to vigorously
prosecute its claims and vigorously defend any counterclaims. Based on the
advice of counsel, the Company



                                       11

<PAGE>   12



believes that to the extent the counterclaims relating to malicious prosecution
and intentional infliction are allowed to proceed, it is likely that these
counterclaims will be dismissed upon the Company's motion for summary judgment.
The Company does not believe the outcome of this proceeding will materially
affect its financial condition or results of operations.

         The Company is also involved in litigation and proceedings in the
ordinary course of its business. The Company does not believe the outcome of any
such litigation will have a material adverse effect upon the Company's business,
financial condition or results of operations.

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

         No matters were submitted to a vote of the shareholders during the
fourth quarter ended December 28, 1997.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

         The Company's Common Stock trades on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "CHUX." As of March 26,
1998, there were approximately 650 shareholders of record. The following table
shows quarterly high and low sales prices for the Common Stock for the periods
indicated, as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
Fiscal 1996                                      High                Low
-----------                                ---------------      --------------
<S>                                        <C>                  <C>
First Quarter..........................         $14.75              $10.50
Second Quarter.........................          15.50               10.50
Third Quarter..........................          12.50                9.75
Fourth Quarter.........................          13.50                9.50

Fiscal 1997                                      High                Low
-----------                                ---------------      --------------
First Quarter..........................         $14.38              $11.88
Second Quarter.........................          18.38               12.63
Third Quarter..........................          18.38               14.75
Fourth Quarter.........................          19.38               15.38
</TABLE>

         The Company has never paid a dividend on its Common Stock. The Company
intends to retain its earnings to finance the growth and development of its
business and does not expect to pay any cash dividends in the foreseeable
future. The Company's revolving credit facility prohibits the payment of cash
dividends on the Common Stock without the consent of the participating banks.

         No securities of the Company were sold during the fiscal year ended
December 28, 1997 without registration under the Securities Act of 1933, as
amended.


                                       12

<PAGE>   13

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                          December 28,    December 29,    December 31,   December 25,   December 26,
(In Thousands, Except Per Share Data)         1997            1996            1995            1994           1993
--------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>             <C>             <C>             <C>
For the Year Ended
RESULTS OF OPERATIONS
     Revenues                              $ 200,403       $ 164,530       $ 147,557       $ 122,697       $ 95,586
     Restaurant Operating Margin              39,976          29,320          25,016          19,904         14,416
     Advertising, General and
         Administrative Expenses              12,932           9,370           8,187           7,717          5,894
     Depreciation and Amortization            10,331           8,141           6,164           4,711          3,437
     Asset Revaluation                            --           5,110              --              --             --
     Income From Operations                   16,920           6,838          11,138           8,051          5,582
     Litigation                                   --           6,200           1,000              --             --
     Earnings (Loss) Before
         Income Taxes                         13,686          (1,944)         16,662           7,465          5,085
     Income Tax Expense (Benefit)(1)           4,886            (797)          6,071           2,492          1,867
     Net Earnings (Loss)(1)                    8,800          (1,147)         10,591           4,973          3,218
                                          --------------------------------------------------------------------------

EARNINGS PER SHARE DATA (DILUTED)(2)
     Net Earnings (Loss)(1)                $    0.99       $   (0.15)      $    1.27       $    0.61       $   0.42
     Weighted Average Common
         Shares Outstanding                    8,907           7,809           8,308           8,137          7,689
                                          --------------------------------------------------------------------------

At Year End
FINANCIAL POSITION
     Cash                                  $   1,965       $   1,616       $   2,576       $   1,727       $  1,180
     Working Capital (Deficit)               (11,309)        (10,864)         (7,344)         (3,050)        (3,327)
     Property and Equipment, net             136,051         103,281          81,512          64,609         50,219
     Total Assets                            150,515         117,159          93,351          76,082         57,971
     Long-Term Debt                           13,679          29,822          11,990          15,140          8,987
     Capitalized Lease Obligations            14,039          11,797           9,272           5,744          4,697
     Shareholders' Equity                     95,383          50,926          51,787          40,804         33,204
                                          --------------------------------------------------------------------------
</TABLE>

(1)      The income tax expense, net earnings and per share data for fiscal
         years 1995, 1994 and 1993 represent pro forma amounts (see Note 2 and
         Note 10 in Notes to Financial Statements).

(2)      Earnings (loss) per share data has been restated to reflect the
         adoption of FAS 128 in the fourth quarter of 1997.


                                       13

<PAGE>   14


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RESULTS OF OPERATIONS

GENERAL

This report contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding the intent, belief and expectations of the Company and
its management such as statements concerning the Company's future profitability
and its operating and growth strategy. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, increases in food, labor and employee benefit costs, the
availability of experienced management and hourly coworkers, the Company's
ability to locate and open new restaurants and to operate such restaurants
profitably, and the intense competition in the restaurant industry. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. The Company undertakes no obligation to publicly release any revisions
to any forward-looking statements contained herein to reflect events and
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.

At December 28, 1997, the Company owned and operated 82 O'Charley's restaurants
in Alabama, Florida, Georgia, Indiana, Kentucky, Mississippi, North Carolina,
Ohio, South Carolina and Tennessee and franchised one O'Charley's restaurant in
South Carolina. The following table reflects changes in the number of
company-owned restaurants for the periods presented.

<TABLE>
<CAPTION>
     Restaurants                                                        1997              1996             1995
----------------------------------------------------------------------------------------------------------------
     <S>                                                                <C>               <C>              <C>
     In operation, beginning of period                                   69                55               44
     Restaurants opened                                                  13                12               11
     Restaurants acquired from franchisee                                 -                 6                -
     Restaurants closed                                                   -                (4)               -
                                                                        ----------------------------------------
     In operation, end of period                                         82                69               55
                                                                        ----------------------------------------
</TABLE>

REVENUES consist of restaurant sales and to a lesser extent commissary sales and
franchise revenue. Restaurant sales include food and beverage sales and are net
of applicable state and local sales taxes. Commissary sales represent sales to
outside parties. Prior to October 1995, commissary sales consisted primarily of
sales of food products and other supplies to third-party restaurant companies.
Since October 1995, commissary sales have consisted primarily of sales of
O'Charley's label food items, primarily salad dressings, to retail grocery
chains, mass merchandisers and wholesale clubs. Consistent with industry trends,
liquor sales as a percentage of restaurant sales has declined in each of the
last three fiscal years.

COST OF FOOD, BEVERAGE AND SUPPLIES primarily consists of the costs of beef,
poultry, seafood, produce and alcoholic and non-alcoholic beverages. Various
factors beyond the Company's control, including adverse weather, cause periodic
fluctuations in food costs. Generally, temporary increases are absorbed by the
Company and are not passed on to customers; however, management may adjust menu
prices to compensate for increased costs of a more permanent nature.

PAYROLL AND BENEFITS includes restaurant management salaries and bonuses, hourly
wages for unit level employees, payroll taxes, workers' compensation, various
health, life and dental insurance programs, vacation expense and sick pay. The
Company has an incentive bonus plan that compensates store management for
achieving certain store level financial targets and performance goals.

RESTAURANT OPERATING COSTS includes occupancy and other expenses at the
restaurant level, except property and equipment depreciation and amortization,
which are primarily fixed in nature and generally do not vary with unit sales
volume. Rent, supervisory salaries, bonuses and expenses, management training
salaries, property insurance, property taxes, utilities, repairs and
maintenance, outside services and credit card fees account for the major
expenses in this category.

RESTAURANT OPERATING MARGIN is defined as restaurant sales less cost of
restaurant sales. Cost of restaurant sales consists of cost of food, beverage
and supplies, payroll and benefits and restaurant operating costs.


                                       14

<PAGE>   15

ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES includes all advertising and
corporate and administrative functions that support the existing restaurant base
and provide the infrastructure for future growth. Advertising, executive
management and support staff salaries, bonuses and related expenses, data
processing, legal and accounting expenses and office expenses account for the
major expenses in this category.

DEPRECIATION AND AMORTIZATION primarily includes depreciation on property and
equipment calculated on a straight-line basis over an estimated useful life and
amortization of preopening costs for new restaurants, which includes costs of
hiring and training the initial staff and certain other costs. Depreciation and
amortization as a percentage of total revenues may increase as the number of new
store openings increases.

A $5.1 million charge relating to the revaluation of certain assets was recorded
in fiscal 1996 pursuant to the provisions of FAS 121. See "Results of
Operations-Fiscal Year Ended December 29, 1996 Compared to the Fiscal Year Ended
December 31, 1995" and Note 3 of Notes to the Company's financial statements.

The following section should be read in conjunction with "Selected Financial
Data" and the Company's financial statements and the related Notes thereto
included elsewhere herein. The following table highlights the operating results
for fiscal years 1997, 1996 and 1995 as a percentage of total revenues unless
otherwise indicated. Fiscal years 1997 and 1996 are comprised of 52 weeks while
1995 is comprised of 53 weeks.

<TABLE>
<CAPTION>
                                                                        1997              1996             1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>              <C>
REVENUES:
     Restaurant sales                                                    98.6%             98.6%            93.6%
     Commissary sales                                                     1.4%              1.4%             6.4%
                                                                        -------------------------------------------
                                                                        100.0%            100.0%           100.0%

COSTS AND EXPENSES:
     Cost of restaurant sales:(1)
         Cost of food, beverage and supplies                             34.7%             35.9%            36.7%
         Payroll and benefits                                            30.6%             30.9%            30.1%
         Restaurant operating costs                                      14.5%             15.1%            15.1%
                                                                        -------------------------------------------
                                                                         79.8%             81.9%            81.9%
                                                                        -------------------------------------------
         Restaurant operating margin(2)                                  20.2%             18.1%            18.1%

     Cost of commissary sales(3)                                         93.7%             95.2%            95.3%
     Advertising, general and administrative expenses                     6.5%              5.7%             5.5%
     Depreciation and amortization                                        5.2%              4.9%             4.2%
     Asset revaluation                                                     --               3.1%              --
                                                                        -------------------------------------------


INCOME FROM OPERATIONS                                                    8.4%              4.2%             7.5%

OTHER (INCOME) EXPENSE:
     Interest expense, net                                                1.7%              1.6%             1.3%
     Litigation                                                           -                 3.8%             0.7%
     Other, net                                                          (0.1%)             -               (5.7%)
                                                                        -------------------------------------------

EARNINGS (LOSS) BEFORE INCOME TAXES                                       6.8%             (1.2%)           11.3%

INCOME TAX EXPENSE (BENEFIT)(4)                                           2.4%             (0.5%)            4.1%
                                                                        -------------------------------------------

NET EARNINGS (LOSS)(4)                                                    4.4%             (0.7%)            7.2%
                                                                        -------------------------------------------
</TABLE>


(1)      As a percentage of restaurant sales.
(2)      Reflects restaurant sales less cost of restaurant sales, expressed as a
         percentage of restaurant sales.
(3)      As a percentage of commissary sales.
(4)      The income tax expense and net earnings for 1995 represent pro forma
         amounts.


                                       15

<PAGE>   16

FISCAL YEAR ENDED DECEMBER 28, 1997 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 29, 1996

TOTAL REVENUES in 1997 increased $35.9 million, or 21.8%, to $200.4 million from
$164.5 million in 1996 primarily as a result of an increase in restaurant sales
of $35.3 million, or 21.8%, and an increase in commissary sales of $555,000, or
24.5%. The increase in restaurant sales was primarily attributable to the
addition of 13 restaurants in 1997 and an increase in same store sales of 4.7%.
The increase in same store sales resulted from an increase in customer traffic
and menu price increases. Management attributes the increase in customer traffic
to the introduction of a redesigned menu, a new advertising campaign, increased
promotional items, improved restaurant operations and milder weather in the
Company's markets during the first quarter of 1997 compared to 1996. The Company
initiated a new advertising campaign beginning in the fourth quarter of 1996
that continued through 1997. This new advertising effort focused on the
Company's defining differences and in some cases highlighted certain promotional
items. Menu price increases were instituted during the first and third quarters
of 1997 which realized approximately 1%. Liquor sales as a percentage of
restaurant sales decreased to 11.9% in 1997 reflecting industry trends.

COST OF FOOD, BEVERAGE AND SUPPLIES in 1997 increased $10.4 million, or 17.9%,
to $68.6 million from $58.2 million in the prior year. Cost of food, beverage
and supplies as a percentage of restaurant sales decreased to 34.7% in 1997 from
35.9% in 1996. This decrease was primarily attributable to cost reductions in
certain high volume food commodities, increased operating efficiencies at the
Company's commissary and overall lower produce costs due primarily to lower
potato costs. The Company's redesigned menu and seasonal promotions also
contributed to lower food cost by offering a mix of menu items competitively
priced that produced a lower food cost percentage while enhancing the Company's
quality standards. Overall, the effects of the impact of inflation on food cost
was minimal. While the Company has not yet experienced a significant increase in
food costs due to the effects of El Nino, management is expecting a possible
increase in certain produce items beginning in the second quarter of 1998.

PAYROLL AND BENEFITS increased $10.2 million, or 20.3%, to $60.4 million in 1997
from $50.2 million in the prior year. Payroll and benefits as a percentage of
restaurant sales decreased to 30.6% in 1997 from 30.9% in 1996. The Company
achieved a lower percentage of payroll and benefit cost due primarily to the
economies achieved from higher average unit sales volumes, reduced management
and hourly turnover and from certain employee benefit cost reductions. These
decreases were partially offset by increases in restaurant management bonus
expense and wage rates. Bonus expense increased due to a larger percentage of
stores meeting and exceeding their financial targets and performance goals in
1997 as compared to 1996. As a result of increased competition and the low
unemployment rates in the markets in which O'Charley's restaurants are located,
the Company continued to increase wages and benefits in order to attract and
retain management and hourly coworkers.

RESTAURANT OPERATING COSTS in 1997 increased $4.1 million, or 16.6%, to $28.6
million from $24.5 million in the prior year. Restaurant operating costs as a
percentage of restaurant sales decreased to 14.5% in 1997 from 15.1% in 1996.
This decrease was primarily attributable to the allocation of certain
supervisory and overhead costs over a greater number of restaurants and
economies achieved from higher average unit sales. Since January 1996, the
Company has generally opened new stores in existing geographical markets which
has contributed to a slower growth rate in certain expenses, particularly
supervisory costs. Additionally, rent expense, as a percentage of restaurant
sales, was lower as the Company continued to purchase most of its restaurant
sites. These decreases in the restaurant operating percentage were partially
offset by an increase in the amount of bonus expense earned by supervisory
management. Bonus expense increased due to the improved financial and
performance results in 1997.

RESTAURANT OPERATING MARGIN increased 36.3% to $40.0 million in 1997 from $29.3
million in 1996. As a percentage of restaurant sales, the restaurant operating
margin increased to 20.2% in 1997 from 18.1% in 1996. This improvement was
primarily attributable to the leverage achieved from overall higher average unit
volumes and lower food cost.

ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES increased $3.5 million, or
38.0%, to $12.9 million in 1997 from $9.4 million in the prior year.
Advertising, general and administrative expenses as a percentage of total
revenues increased to 6.5% in 1997 from 5.7% in 1996. This increase was
primarily the result of an increase in advertising expenditures and bonus
expense for corporate management. The Company introduced a television and radio
advertising campaign in the fourth quarter of 1996 in conjunction with the
introduction of a redesigned menu. These advertising expenses increased to 2.8%
of restaurant sales in 1997 as compared to approximately 2.4% in 1996.
Management expects


                                       16

<PAGE>   17

to continue its advertising efforts in 1998 at approximately 2.8% to 3.0% of
restaurant sales. Bonus expense increased primarily as a result of an increase
in the bonus compensation of senior management and executive officers that is
based in part on a formula that rewards increased profits.

DEPRECIATION AND AMORTIZATION in 1997 increased $2.2 million, or 26.9%, to $10.3
million from $8.1 million in the prior year. Depreciation and amortization as a
percentage of total revenues increased to 5.2% in 1997 from 4.9% in 1996. The
increase is primarily due to the Company incurring additional capital
expenditures for the remodeling of certain existing stores and the relocation of
two stores. See "New Accounting Pronouncements" for anticipated changes in the
reporting of preopening cost beginning in the first quarter of 1999.

INCOME FROM OPERATIONS increased $10.1 million, or 147.4%, to $16.9 million in
1997 from $6.8 million in 1996. This increase was primarily the result of the
$5.1 million charge in 1996 for assets impaired under FAS 121. Excluding the
$5.1 million charge in 1996, income from operations in 1996 would have been
$11.9 million and the increase in 1997 would have been $5.0 million over 1996.
Income from operations as a percentage of total revenues, excluding the FAS 121
charge in 1996, would have increased from 7.3% in 1996 to 8.4% in 1997. This
increase was primarily a result of improved restaurant operating margin, which
was partially offset by increased general and administrative and depreciation
and amortization expenses.

INTEREST EXPENSE, NET increased $871,000, or 33.7%, to $3.5 million in 1997 from
$2.6 million in 1996. This increase in interest expense was primarily the result
of increased borrowings under the Revolver and capitalized lease obligations to
fund the Company's growth. The Company reduced its long-term debt by
approximately $34.7 million in the fourth quarter of 1997 with the net proceeds
received from the sale of common stock.

INCOME TAX EXPENSE was $4.9 million in 1997 as compared to income tax benefit of
$797,000 in the prior year. Income tax expense (benefit) as a percentage of
earnings (loss) before income taxes for 1997 was 35.7% as compared to (41.0%) in
1996. The income tax benefit in 1996 was higher than the expected rate because
of the amount of the Federal Insurance Contribution Act tip credits in relation
to a lower taxable income.

FISCAL YEAR ENDED DECEMBER 29, 1996 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 1995

TOTAL REVENUES in 1996 increased $17.0 million, or 11.5%, to $164.5 million from
$147.5 million in 1995 as a result of an increase in restaurant sales of $24.1
million, or 17.5%, partially offset by a decrease in commissary sales of $7.2
million, or 76.0%. This increase in restaurant sales was primarily attributable
to the addition of 12 new restaurants in 1996 and an increase in same store
sales of 0.4%. In 1996, the Company's average check increased approximately
$0.30 primarily as a result of a menu price increase of 1.5% taken in the fourth
quarter of 1995 and a redesigned menu (introduced in 1996) which included
several higher priced menu items. Restaurant sales were significantly impacted
during January and February of 1996 by unusually severe winter storms in the
Company's markets. The comparison of 1996 and 1995 restaurant sales was also
affected by 1995 being a 53-week year while 1996 was a 52-week year and the
closure of four restaurants in the third quarter of 1996 that were open for all
of 1995. Liquor sales as a percentage of restaurant sales decreased to 13.3% in
1996 reflecting industry trends.

COST OF FOOD, BEVERAGE AND SUPPLIES in 1996 increased $7.5 million, or 14.8%, to
$58.2 million from $50.7 million in 1995. Cost of food, beverage and supplies as
a percentage of restaurant sales decreased to 35.9% in 1996 from 36.7% in 1995.
This decrease was primarily related to an overall decrease in food costs as a
result of cost reductions in certain high volume food commodities and to the
increased purchasing power and operating efficiencies of the Company's
commissary. The Company experienced lower overall produce cost in 1996 primarily
as a result of lower lettuce and potato costs. Additionally, the Company's
overall poultry and beef costs were lower in 1996. Other overall wholesale costs
increased slightly in 1996 but did not have a significant impact on food and
beverage cost. The redesigned menu introduced in the fourth quarter of 1996
slightly lowered the overall food cost percentage.

PAYROLL AND BENEFITS increased $8.7 million, or 21.0%, to $50.2 million in 1996
from $41.5 million in 1995. Payroll and benefits as a percentage of restaurant
sales increased to 30.9% in 1996 from 30.1% in 1995 primarily as a result of
higher hourly wage rates, increased bonuses and employee benefit costs,
including vacation expense and health insurance. In addition, an increase in the
federal minimum wage rate to $4.75 from $4.25 on October 1, 1996 resulted in a
slight increase in labor cost. These increases were partially offset by a
reduction in workers' compensation expense.


                                       17

<PAGE>   18

RESTAURANT OPERATING COSTS in 1996 increased $3.6 million, or 17.3%, to $24.5
million from $20.9 million in 1995. Restaurant operating costs as a percentage
of restaurant sales were unchanged in 1996 as compared to 1995. Supervisory and
overhead costs decreased as a percentage of restaurant sales as a result of
allocating such costs over a greater number of stores. Additionally, rent
expense as a percentage of restaurant sales was lower as the Company continued
to purchase most of its restaurant sites. These decreases were offset by
increases in certain operating costs including utilities, outside services and
taxes.

RESTAURANT OPERATING MARGIN as a percentage of restaurant sales was 18.1% in
both 1996 and 1995.

ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES increased $1.2 million, or
14.4%, to $9.4 million in 1996 from $8.2 million in 1995. Advertising, general
and administrative expenses as a percentage of total revenues increased to 5.7%
in 1996 from 5.5% in 1995. The Company increased advertising expenditures in
1996, particularly during the fourth quarter as the redesigned menu was
introduced in conjunction with a new radio and television advertising campaign.
Additionally, the Company incurred higher salary and related payroll costs as a
result of the hiring of additional management personnel in the areas of
information services, advertising and real estate. These increases were
partially offset by a decrease in executive officers' bonus compensation that is
based in part on a formula that rewards increased profits. Certain other cost
percentages decreased as a result of spreading certain general and
administrative expenses over increased total revenues.

DEPRECIATION AND AMORTIZATION in 1996 increased $1.9 million, or 32.1%, to $8.1
million from $6.2 million in 1995. Depreciation and amortization as a percentage
of total revenues increased to 4.9% in 1996 from 4.2% in 1995. Amortization of
preopening expenses increased as a result of a greater number of new stores open
for less than one year. In 1996, the Company incurred additional capital
expenditures for several major restaurant remodels, computer equipment and
technological upgrades that increased the amount of depreciation expense.

ASSET REVALUATION in 1996 represents charges for assets impaired under FAS 121.
During the second quarter of 1996, the Company identified certain restaurant
units for possible impairment. Once identified, management estimated the
undiscounted future cash flows for each unit and determined that for each unit
the asset's net book value exceeded its related undiscounted cash flows. As a
result, the Company recognized asset write-downs totaling $5.1 million in the
second quarter of 1996. Such amount included $2.5 million related to assets to
be disposed of, including a charge of $536,000 related to two restaurant units
which were subsequently closed and sold later in the year, and $2.0 million for
two restaurant units which were closed in the third quarter of 1996. The Company
also recognized asset write-downs related to assets to be held and used totaling
$2.6 million, including $445,000 primarily for restaurant computer equipment and
$2.2 million for five restaurant units expected to remain open or to be
relocated. The write-downs were based on management's estimates of the fair
market value of the respective restaurant unit as determined primarily by
reference to market prices for similar assets and, in the case of the units to
be disposed of, management's estimates of the cost to dispose of such units. The
write-down of restaurant computer equipment and software related to systems
which management decided to abandon in favor of new systems. See Note 3 of Notes
to the Company's financial statements.

INCOME FROM OPERATIONS decreased $4.3 million, or 38.6%, to $6.8 million in 1996
from $11.1 million in 1995. This decrease was primarily the result of the $5.1
million charge for assets impaired under FAS 121. Excluding the $5.1 million
charge for assets impaired under FAS 121, income from operations in 1996 would
have been $11.9 million, an increase of $810,000 over 1995. Income from
operations as a percentage of total revenues, excluding the effects of the
charge for assets impaired, would have decreased to 7.3% in 1996 from 7.5% in
1995. This decrease was primarily the result of increased advertising, general
and administrative expenses, due primarily to increased advertising
expenditures, and increased depreciation and amortization, due primarily to
increased depreciation resulting from the increased level of capital
expenditures from store expansion.

INTEREST EXPENSE, NET increased $668,000, or 34.8%, to $2.6 million in 1996 from
$1.9 million in 1995. The increased amount of interest expense was directly
related to the increase in borrowings under the Revolver and increased
borrowings under capitalized lease obligations. This increase was partially
offset by a reduction in the average interest rate paid by the Company in 1996.

LITIGATION in 1996 and 1995 represents charges related to a class action
lawsuit. See "Liquidity and Capital Resources."


                                       18

<PAGE>   19

OTHER, NET decreased significantly in 1996 from 1995 as a result of the sale of
the Company's interest in Logan's in 1995. In July 1995, Logan's completed an
initial public offering, and the Company sold substantially all of its interest
in Logan's and recorded a gain of approximately $7.4 million.

INCOME TAX BENEFIT was $797,000 in 1996 as compared to income tax expense of
$6.1 million in 1995. Income tax expense (benefit) as a percentage of earnings
(loss) before income taxes was (41.0%) in 1996 as compared to 36.4% in 1995. The
income tax benefit in 1996 was higher than the statutory rate of 36.0% because
of the amount of the Federal Insurance Contribution Act tip credits in relation
to a lower taxable income. Taxable income was lower as a result of the tax
deductibility of certain litigation and FAS 121 expenses. Beginning in October
1996, the Work Opportunity Tax Credit ("WOTC") program was started which
replaced the Targeted Job Tax Credits ("TJTC") program that was discontinued at
the beginning of 1995. The WOTC program is similar to the TJTC program in that
companies receive federal tax credits for hiring certain qualified disadvantaged
workers.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal capital needs arise from the development of new
restaurants and the maintenance and improvement of existing restaurants.
Historically, the Company's primary sources for working capital have been cash
provided from operations, bank indebtedness and capitalized lease obligations.
During 1997, the Company expended approximately $41.8 million in capital for the
development of 13 new restaurants, improvements to existing restaurants,
relocation of two restaurants, the construction of the Company's training center
and for new equipment and additional warehouse space at the Company's
commissary. Additionally, the Company repaid $36.1 million in principal on its
long-term debt and capitalized lease obligations. These capital outlays were
funded primarily by $34.7 million of net proceeds from the sale of shares of the
Company's common stock, $18.3 million in cash provided by operating activities,
borrowings of $16.4 million under the Company's revolving credit agreement (the
"Revolver"), borrowings of approximately $7.1 million under capitalized lease
obligations and approximately $1.0 million in proceeds from the sale of certain
assets. During the fourth quarter of 1997, the Company consummated the sale of
2,232,000 shares of its common stock. Net proceeds of approximately $34.7
million were used to reduce the Company's indebtedness under its Revolver.

The Company expects to open 14 to 16 new company-owned restaurants in 1998. As
of December 28, 1997, the Company had seven additional restaurants under
construction, five of which are expected to open during the first quarter of
1998. Management estimates that the Company will make approximately $40.0
million in capital expenditures in 1998. Actual capital expenditures may
increase based on a number of factors, including the timing of additional
purchases of future restaurant sites. The Company intends to continue financing
the furniture, fixtures and equipment for its new stores with capitalized lease
obligations.

On December 8, 1997, the Company entered into an amended and restated Revolver
with its bank group that increased its previously existing maximum borrowing
capacity from $70 million to $100 million. As of December 28, 1997, $13.0
million of indebtedness was outstanding under the Revolver and bore interest at
6.65%. The maturity of the Revolver was extended to November 30, 2000 which may
be extended annually by one year, at the participating banks' option, beginning
on the first anniversary of the Revolver. The Revolver imposes restrictions on
the Company with respect to the maintenance of certain financial ratios, the
incurrence of indebtedness, the sale of assets, mergers and the payment of
dividends.

Management believes that available cash, cash generated from operations and
borrowings under the Revolver and capitalized lease obligations will be
sufficient to finance its operations and expected growth through 1999.

During the fourth quarter of 1996, a consent decree approving the definitive
settlement agreement of a two-year old class action lawsuit against the Company
was approved by the U.S. District Court for the Middle District of Tennessee.
The settlement agreement created a settlement pool of $4.8 million for the
benefit of the class members, $700,000 for claims administration and fees and
$2.0 million for the attorneys representing the plaintiff class. The Company
accrued $1.0 million for legal and other expenses related to the settlement. An
adjustment of approximately $2.3 million was made to the original accrual in
December 1996 as a result of the lower than originally anticipated number of
claims submitted by members of the plaintiff class. After the adjustment, the
total settlement amount payable to the plaintiff class and their attorneys was
approximately $5.2 million, of which approximately $ 445,000 was to be paid
through the issuance of shares of the


                                       19

<PAGE>   20


Company's Common Stock and the remaining amounts were to be paid in cash. In
1996, the Company expended approximately $1.4 in cash towards this settlement.
As of December 28, 1997, substantially all of the required payments under this
settlement had been paid.

NEW ACCOUNTING PRONOUNCEMENTS

In December 1997, the AICPA Accounting Standards Executive Committee (AcSEC)
approved for issuance the Statement of Position (SOP), Reporting on the Costs of
Start-Up Activities. This SOP must be approved by the Financial Accounting
Standards Board (FASB) prior to final issuance. Issuance of this SOP is expected
during 1998, and will be effective for financial statements issued for fiscal
years beginning after December 15, 1998. The SOP requires that costs incurred
during a startup activity be expensed as incurred. Currently, the Company
capitalizes its preopening cost and amortizes these costs over a 12-month
period. At December 28, 1997, the Company had $1.3 million in unamortized
preopening costs. Assuming this SOP is issued in its current form and expected
effective date, the Company will recognize in the first quarter of 1999, as a
cumulative effect of a change in accounting principle, a charge equal to the
after tax effect of the unamortized pre-opening costs at the date of adoption.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14. This pronouncement is effective for fiscal years
beginning after December 15, 1997. Management is evaluating the impact of
reporting information about operating segments in the Company's financial
statements.

YEAR 2000

A business issue exists with regard to existing software applications and the
ability of these applications to process date values. Specifically, many
computer applications are written in two digits rather than four to define the
applicable year. Beginning in the year 2000, these applications will need to be
capable of recognizing four digit dates in order to properly distinguish the
year 2000 from prior periods.

Management of the Company has considered the impact of the year 2000 issues on
its computer systems and applications and has developed a remediation plan. The
plan provides for the remediation to be completed by 1999. The Company expenses
all costs associated with these system changes as the costs are incurred.
Management will also be making formal inquiries of its suppliers and other
third-party entities with which it has business relations, as the Company may be
vulnerable as the result of the failure of such entities to remediate their own
year 2000 issues. Management does not believe the impact of the year 2000 issue
will have a significant impact on the Company's operations or liquidity.

IMPACT OF INFLATION

The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect the Company's operations. A majority
of the Company's employees are paid hourly rates related to federal and state
minimum wage laws. As a result of increased competition and the low unemployment
rates in the markets in which the Company's restaurants are located, the Company
has continued to increase wages and benefits in order to attract and retain
management personnel and hourly coworkers. In addition, most of the Company's
leases require the Company to pay taxes, insurance, maintenance, repairs and
utility costs, and these costs are subject to inflationary pressures. The
Company may attempt to offset the effect of inflation through periodic menu
price increases, economies of scale in purchasing and cost controls and
efficiencies at existing restaurants.


                                       20

<PAGE>   21


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS
                                O'CHARLEY'S INC.

<TABLE>
<CAPTION>
                                                                      Page
                                                                      ----
<S>                                                                   <C>
Independent Auditors' Report ........................................  22

Balance Sheets at December 29, 1996 and December 28, 1997 ...........  23

Statements of Operations for the Years Ended December 31, 1995,
  December 29, 1996, and December 28, 1997 ..........................  24

Statements of Shareholders' Equity for the Years Ended December 31,
  1995, December 29, 1996, and December 28, 1997 ....................  25

Statements of Cash Flows for the Years Ended December 31, 1995,
  December 29, 1996, and December 28, 1997 ..........................  26

Notes to Financial Statements .......................................  27

</TABLE>



                                       21


<PAGE>   22

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
O'Charley's Inc.:

We have audited the balance sheets of O'Charley's Inc. as of December 28, 1997
and December 29, 1996, and the related statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of O'Charley's Inc. as of December
28, 1997 and December 29, 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 28, 1997, in
conformity with generally accepted accounting principles.


/s/ KPMG Peat Marwick LLP

Nashville, Tennessee
February 6, 1998


                                       22


<PAGE>   23


                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   December 28,  December 29,
(Dollars in Thousands)                                                 1997         1996
---------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>
ASSETS
CURRENT ASSETS:
     Cash                                                            $  1,965      $  1,616
     Accounts receivable, less allowance for doubtful
         accounts of $72 in 1997 and $58 in 1996                        2,204         1,546
     Inventories                                                        4,600         4,505
     Preopening costs                                                   1,340         1,097
     Deferred income taxes                                                807         2,334
     Other current assets                                               2,231         1,357
                                                                     ----------------------
         Total current assets                                          13,147        12,455

PROPERTY AND EQUIPMENT, NET                                           136,051       103,281

OTHER ASSETS                                                            1,317         1,423
                                                                     ----------------------
                                                                     $150,515      $117,159
                                                                     ----------------------


LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                $  5,529      $  5,022
     Accrued payroll and related expenses                               4,603         3,365
     Accrued expenses                                                   6,463         9,162
     Federal, state and local taxes                                     3,240         2,461
     Current portion of long-term debt and capitalized leases           4,621         3,309
                                                                     ----------------------
         Total current liabilities                                     24,456        23,319

DEFERRED INCOME TAXES                                                   2,958         1,295

LONG-TERM DEBT                                                         13,679        29,822

CAPITALIZED LEASE OBLIGATIONS                                          14,039        11,797

SHAREHOLDERS' EQUITY:
     Common stock-No par value; authorized, 50,000,000
         shares; issued and outstanding, 10,176,614 in 1997 and
         7,854,369 in 1996                                             65,249        29,592
     Additional paid-in capital                                           652           652
     Retained earnings                                                 29,482        20,682
                                                                     ----------------------
         Total shareholders' equity                                    95,383        50,926
                                                                     ----------------------
                                                                     $150,515      $117,159
                                                                     ----------------------
</TABLE>


See notes to financial statements.


                                       23

<PAGE>   24


                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           Year Ended
                                                         ------------------------------------------
                                                         December 28,    December 29,   December 31,
(In Thousands, Except Per Share Data)                        1997            1996            1995
---------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>             <C>
REVENUES:
     Restaurant sales                                      $197,554        $162,235        $138,098
     Commissary sales                                         2,819           2,264           9,429
     Franchise revenue                                           30              31              30
                                                           ----------------------------------------
                                                            200,403         164,530         147,557
COSTS AND EXPENSES:
     Cost of restaurant sales:
         Cost of food, beverage and supplies                 68,584          58,184          50,687
         Payroll and benefits                                60,431          50,227          41,511
         Restaurant operating costs                          28,563          24,504          20,884
     Cost of commissary sales                                 2,642           2,156           8,986
     Advertising, general and administrative expenses        12,932           9,370           8,187
     Depreciation and amortization                           10,331           8,141           6,164
     Asset revaluation                                           --           5,110              --
                                                           ----------------------------------------
                                                            183,483         157,692         136,419
                                                           ----------------------------------------
INCOME FROM OPERATIONS                                       16,920           6,838          11,138

OTHER (INCOME) EXPENSE:
     Interest expense, net                                    3,459           2,588           1,920
     Litigation                                                  --           6,200           1,000
     Other, net                                                (225)             (6)         (8,444)
                                                           ----------------------------------------
                                                              3,234           8,782          (5,524)
                                                           ----------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES                          13,686          (1,944)         16,662

INCOME TAX EXPENSE (BENEFIT)                                  4,886            (797)          5,785
                                                           ----------------------------------------

NET EARNINGS (LOSS)                                        $  8,800        $ (1,147)       $ 10,877
                                                           ----------------------------------------

PRO FORMA DATA:
     Earnings before income taxes as reported                                              $ 16,662
     Pro forma income tax expense                                                             6,071
                                                                                           --------
     Pro forma net earnings                                                                $ 10,591
                                                                                           --------

EARNINGS (LOSS) PER COMMON SHARE - BASIC(1)                $   1.06        $  (0.15)       $   1.37
                                                           ----------------------------------------

EARNINGS (LOSS) PER  COMMON SHARE - DILUTED(1)             $   0.99        $  (0.15)       $   1.27
                                                           ----------------------------------------
</TABLE>

(1)      Earnings per common share for 1995 represent pro forma amounts (see
         Note 2 in Notes to Financial Statements).


See notes to financial statements.


                                       24

<PAGE>   25


                       STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                           Common Stock       Additional
                                                        -------------------     Paid-in      Retained
(In Thousands)                                          Shares       Amount     Capital      Earnings        Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>       <C>            <C>            <C>
Balance, December 25, 1994                               7,699      $28,467      $ 576       $ 11,761       $ 40,804

     1995 net earnings                                      --           --        809         10,068         10,877
     Cash distribution to Shoex, Inc. shareholders          --           --       (418)            --           (418)
     Exercise of employee stock options including
         tax benefits                                       55          320         --             --            320
     Shares issued under CHUX Ownership Plan                17          204         --             --            204
                                                        ------------------------------------------------------------


Balance, December 31, 1995                               7,771       28,991        967         21,829         51,787

     1996 net loss                                          --           --         --         (1,147)        (1,147)
     Cash distribution to Shoex, Inc. shareholders          --           --       (315)            --           (315)
     Exercise of employee stock options including
         tax benefits                                       65          446         --             --            446
     Shares issued under CHUX Ownership Plan                18          155         --             --            155
                                                        ------------------------------------------------------------


Balance, December 29, 1996                               7,854       29,592        652         20,682         50,926

     1997 net earnings                                      --           --         --          8,800          8,800
     Shares of common stock sold                         2,232       34,726         --             --         34,726
     Litigation shares issued                               31          445         --             --            445
     Exercise of employee stock options including
         tax benefits                                       47          336         --             --            336
     Shares issued under CHUX Ownership Plan                13          150         --             --            150
                                                        ------------------------------------------------------------

Balance, December 28, 1997                              10,177      $65,249      $ 652       $ 29,482       $ 95,383
                                                        ------------------------------------------------------------
</TABLE>





See notes to financial statements.


                                       25

<PAGE>   26


                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                          Year Ended
                                                                      -----------------------------------------------
                                                                      December 28,      December 29,     December 31,
(In Thousands)                                                            1997              1996             1995
---------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings (loss)                                                $  8,800         $ (1,147)        $ 10,877
     Adjustments to reconcile net earnings (loss) to net cash
         provided by operating activities:
            Depreciation and amortization                                  7,920            5,982            4,875
            Amortization of preopening costs                               2,411            2,159            1,289
            Deferred income taxes                                          3,190           (2,595)             936
            Loss (gain) on sale of assets                                     73             (157)          (7,448)
            Asset revaluation                                                 --            5,110               --
     Changes in assets and liabilities:
            Accounts receivable                                             (658)            (302)             (84)
            Due from related parties                                          --              108              281
            Inventories                                                      (95)            (725)             699
            Additions to preopening costs                                 (2,654)          (2,211)          (1,970)
            Other current assets                                            (874)            (386)            (120)
            Accounts payable                                                 507              599              981
            Accrued payroll and other accrued expenses                      (237)           4,297            2,241
                                                                        ------------------------------------------
                Net cash provided by operating activities                 18,383           10,732           12,557


CASH FLOWS FROM INVESTING ACTIVITIES:
     Additions to property and equipment                                 (34,621)         (27,744)         (20,439)
     Proceeds from sale of property and equipment                          1,025            1,341            6,100
     Proceeds from sale of unconsolidated partnership                         --               --            7,894
     Other, net                                                               85             (516)             (85)
                                                                        ------------------------------------------
                Net cash used by investing activities                    (33,511)         (26,919)          (6,530)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from long-term debt                                         16,400           18,503            6,000
     Payments on long-term debt and capitalized
         lease obligations                                               (36,135)          (3,563)         (11,284)
     Distribution to shareholders of acquired entity                          --             (315)            (418)
     Net proceeds from sale of common stock                               34,726               --               --
     Exercise of employee incentive stock options                            486              602              524
                                                                        ------------------------------------------
                Net cash provided (used) by financing activities          15,477           15,227           (5,178)
                                                                        ------------------------------------------

Increase (Decrease) in Cash                                                  349             (960)             849

Cash at Beginning of the Period                                            1,616            2,576            1,727
                                                                        ------------------------------------------

Cash at End of the Period                                               $  1,965         $  1,616         $  2,576
                                                                        ------------------------------------------
</TABLE>



See notes to financial statements.


                                       26


<PAGE>   27

                          NOTES TO FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

O'CHARLEY'S INC. (the "Company") owns, operates and franchises 83 (at December
28, 1997) full-service restaurant facilities in 10 southeastern and midwestern
states under the trade name of "O'Charley's." The financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company's
fiscal year ends on the last Sunday in December. Fiscal years 1997 and 1996 were
comprised of 52 weeks while fiscal year 1995 was comprised of 53 weeks.

FINANCIAL STATEMENTS and these accompanying notes have been restated to reflect
the combined operations of the Company and Shoex, Inc., a merger accounted for
as a pooling-of-interests (see also Note 2).

INVENTORIES are valued at the lower of cost (first-in, first-out method) or
market and consist primarily of food, beverages and supplies.

PREOPENING COSTS represent costs incurred prior to a restaurant opening. These
costs are capitalized and amortized over a 12-month period commencing the date
the restaurant opens.

PROPERTY AND EQUIPMENT are stated at cost and depreciated on a straight-line
method over the following estimated useful lives: buildings and improvements-30
years; furniture, fixtures and equipment-3 to 10 years. Leasehold improvements
are amortized over the lesser of the asset's estimated useful life or the lease
term. Equipment under capitalized leases is amortized to its expected value to
the Company at the end of the lease term. Property leased to others includes
land, buildings and improvements that are depreciated over the Company's
standard estimated useful lives for these assets. Gains or losses are recognized
upon the disposal of property and equipment, and the asset and related
accumulated depreciation and amortization are removed from the accounts.
Maintenance, repairs and betterments that do not enhance the value of or
increase the life of the assets are expensed as incurred.

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, which is included in
other assets, is amortized over 20 years using the straight-line method. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the asset balance over its remaining useful life can
be recovered through undiscounted future operating cash flows of the acquired
operations. The amount of asset impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average costs of funds. The assessment of the
recoverability of the asset will be impacted if estimated future operating cash
flows are not achieved.

ADVERTISING COSTS. The Company expenses advertising costs as incurred, except
for certain advertising production costs that are expensed the first time the
advertising takes place. Advertising expense for fiscal years 1997, 1996, and
1995 totaled $5,456,000, $3,956,000 and $2,326,000, respectively.

DEFERRED REVENUE, which is included in accrued expenses, includes deferred gift
certificate revenue. The Company records a deferred liability as certificates
are sold at an amount equal to the anticipated redemption value. The deferred
liability is reduced and revenue is recorded as restaurant sales when gift
certificates are redeemed.

INCOME TAXES are accounted for in accordance with the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statement
of operations in the period that includes the enactment date.

STOCK OPTION PLAN. Prior to January 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, the compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based


                                       27

<PAGE>   28


awards on the date of the grant. Alternatively, FAS 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in FAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of FAS 123.

FRANCHISE REVENUES. Initial franchise fees are recognized when all material
services have been substantially performed by the Company and the restaurant has
opened for business. Franchise royalties, which are based on a percentage of
monthly sales, are recognized as income on the accrual basis. Costs associated
with franchise operations are expensed as incurred.

PER SHARE DATA. The Company adopted Statement of Financial Accounting Standards
No. 128 ("FAS 128"), Earnings Per Share, during the fourth quarter of 1997. All
prior period earnings (loss) per share ("EPS") data have been restated to
reflect the implementation of FAS 128. FAS 128 establishes standards for both
the computing and presentation of basic and diluted EPS on the face of the
statement of operations. Basic earnings per common share have been computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding during each year presented. Diluted earnings per common share have
been computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding plus the dilutive effect of options outstanding during
the applicable periods.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has adopted Statement of
Financial Accounting Standards No. 107 ("FAS 107"), Disclosures about Fair Value
of Financial Instruments, which requires disclosure of the fair values of most
on-and-off balance sheet financial instruments for which it is practicable to
estimate that value. The scope of FAS 107 excludes certain financial instruments
such as trade receivables and payables when the carrying value approximates the
fair value, employee benefit obligations, lease contracts, and all nonfinancial
instruments such as land, buildings, and equipment. The fair values of the
financial instruments are estimates based upon current market conditions and
quoted market prices for the same or similar instruments as of December 28,
1997. Book value approximates fair value for substantially all of the Company's
assets and liabilities that fall under the scope of FAS 107.

IMPAIRMENT OF LONG-LIVED ASSETS. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of carrying amount or fair value less costs to
sell.

USE OF ESTIMATES. Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.

CERTAIN RECLASSIFICATIONS have been made to the accompanying financial
statements for the previous fiscal years to conform to the 1997 presentation.

2. BUSINESS ACQUISITION

On January 5, 1996, the shareholders of the Company approved an Agreement and
Plan of Merger, dated October 9, 1995, to merge with Shoex, Inc. (Shoex), a
franchisee of the Company which owned and operated six O'Charley's restaurants
in Alabama. The transaction was accounted for as a pooling-of-interests. The
Company exchanged 666,666 shares of Company stock valued at approximately $9.5
million. The Company assumed approximately $1.9 million in net obligations of
Shoex, Inc. (defined as long-term debt, capitalized lease obligations and
working capital deficit). As a result of the merger, O'Charley's owns the six
restaurants and the rights to develop other O'Charley's restaurants in Alabama,
Mississippi and specific locations in Florida and Georgia. All comparative
financial statements presented reflect the combined results of the Company and
Shoex for all periods presented.


                                       28

<PAGE>   29


Revenues, net earnings and changes in shareholders' equity of the separate
companies for the periods preceding the acquisition were as follows:

<TABLE>
<CAPTION>
                                                                                                       Changes in
                                                                                        Net           Shareholders'
(In Thousands)                                                     Revenues          Earnings            Equity
-------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>              <C>
Fiscal year ended December 31, 1995:
     O'Charley's, as previously reported                          $ 136,605          $ 10,068                -
     Shoex                                                           14,827               809           $ (440)
     Pro forma adjustments                                           (3,875)             (286)               -
                                                               ----------------------------------------------------
     Combined                                                     $ 147,557          $ 10,591           $ (440)
                                                               ----------------------------------------------------
</TABLE>

3. ASSET REVALUATION

Operating losses at certain restaurant units prompted an evaluation of net
realizable value of certain assets in accordance with FAS 121. Accordingly, in
1996 the Company recorded a $5.1 million charge to earnings for assets impaired
under FAS 121. This amount represented the difference between fair value and net
book value for certain identifiable assets consisting primarily of buildings,
improvements and equipment. The fair value for these assets was determined
primarily by reference to market prices for similar assets and, in the case of
the units to be disposed of, management's estimate of the cost to dispose of
such units. The $5.1 million charge was comprised of the following impaired
restaurant assets: (1) $2.5 million of assets to be disposed of including
$536,000 for two restaurant units which were closed in the third quarter of 1996
and were later sold in 1996, and $2.0 million for two units which were closed in
the third quarter of 1996, one of which was sold in 1997 and the other expected
to be disposed of in 1998 having a carrying value on December 28, 1997, of
$646,000; (2) $2.6 million of assets to be held including $445,000 primarily for
restaurant computer equipment and $2.2 million for five restaurant units
expected to remain open or be relocated. The 1996 results of operations include
revenues of $4.3 million and costs and expenses of $4.9 million for the four
units closed. No impairments were identified during 1997.

4. PROPERTY AND EQUIPMENT

Property and equipment at December 28, 1997, and December 29, 1996, consist of
the following:

<TABLE>
<CAPTION>
(In Thousands)                                          1997              1996
--------------------------------------------------------------------------------
<S>                                                   <C>               <C>
Land and improvements                                 $ 32,940          $ 26,500
Buildings and improvements                              46,105            36,680
Furniture, fixtures and equipment                       35,330            26,365
Leasehold improvements                                  29,134            20,229
Equipment under capitalized leases                      25,805            19,066
Property leased to others                                  957               957
                                                     ---------------------------
                                                       170,271           129,797
Less accumulated depreciation and amortization         (34,220)          (26,516)
                                                     ---------------------------
                                                      $136,051          $103,281
                                                     ---------------------------
</TABLE>


                                       29


<PAGE>   30


5. OTHER ASSETS

Other assets at December 28, 1997, and December 29, 1996, consist of the
following:

<TABLE>
<CAPTION>
(In Thousands)                                                       1997          1996
---------------------------------------------------------------------------------------
     <S>                                                           <C>           <C>
     Excess of cost over fair value of net assets acquired,
         net of accumulated amortization of $99 in 1997
         and $83 in 1996                                           $  223        $  239
     Prepaid expenses                                                 535           647
     Trade notes receivable                                           559           537
                                                                   --------------------
                                                                   $1,317        $1,423
                                                                   --------------------
</TABLE>

6. ACCRUED EXPENSES

Accrued expenses at December 28, 1997, and December 29, 1996, include the
following:

<TABLE>
<CAPTION>
(In Thousands)                              1997          1996
--------------------------------------------------------------
<S>                                       <C>           <C>
Deferred revenue-gift certificates        $1,522        $1,151
Workers' compensation expenses             1,458         1,325
Accrued litigation                           594         4,627
Other accrued expenses                     2,889         2,059
                                          --------------------
                                          $6,463        $9,162
                                          --------------------
</TABLE>

7. LONG-TERM DEBT

Long-term debt at December 28, 1997, and December 29, 1996, consists of the
following:

<TABLE>
(In Thousands)                           1997             1996
---------------------------------------------------------------
<S>                                    <C>              <C>
Revolving line of credit               $13,000          $29,000
Secured mortgage notes payable             243              251
Installment notes payable                  580              722
                                       ------------------------
                                        13,823           29,973
Less current maturities                   (144)            (151)
                                       ------------------------
                                       $13,679          $29,822
                                       ------------------------
</TABLE>

On December 8, 1997, the Company entered into an amended and restated revolving
credit agreement (the "Credit Agreement") which increased its unsecured line of
credit facility to $100 million from $70 million. The Credit Agreement requires
monthly interest payments at a floating rate based on the bank's prime rate plus
or minus a certain percentage spread or the LIBOR rate plus a certain percentage
spread. The interest rate spread on the restructured facility is based on
certain financial ratios achieved by the Company and is recomputed quarterly. At
December 28, 1997, the $13,000,000 outstanding balance carried an interest rate
of 6.65% (LIBOR rate plus .65%). The new credit facility includes a provision to
extend its November 30, 2000 maturity annually by one year beginning on the
first anniversary of the facility. The Credit Agreement also requires the
Company to meet certain financial and other covenants.

The secured mortgage note payable at December 28, 1997, bears interest at 10.6%
and is payable in monthly installments, including interest, through June 2010.
This debt is collateralized by land and buildings having a depreciated cost of
approximately $1,055,000 at December 28, 1997.


                                       30

<PAGE>   31


The installment notes payable at December 28, 1997, bear interest at 9.1% and
are payable in monthly installments, including interest, through October 2002.
Debt of $539,000 is secured by an airplane with a depreciated cost of
approximately $571,000 at December 28, 1997. The remaining debt of $41,000,
issued in connection with the 1993 merger of Burbet Foods, Inc. is unsecured.

The annual maturities of long-term debt as of December 28, 1997, are:
$144,000-1998; $113,000-1999; $13,124,000-2000; $135,000-2001; $125,000-2002;
and $182,000 thereafter.

8. LEASE COMMITMENTS

The Company has various leases for certain restaurant land and buildings under
operating lease agreements. Under these leases, the Company pays taxes,
insurance and maintenance costs in addition to the lease payments. Certain
leases also provide for additional contingent rentals based on a percentage of
sales in excess of a minimum rent. The Company leases certain equipment and
fixtures under capital lease agreements having lease terms from five to seven
years. The Company expects to exercise its options under these agreements to
purchase the equipment in accordance with the provisions of the lease
agreements.

As of December 28, 1997, approximately $25,805,000 cost less $6,068,000
accumulated amortization of the Company's property and equipment is under
capitalized lease obligations. Interest rates on capitalized lease obligations
range from 6.5% to 10.5%. Future minimum lease payments at December 28, 1997,
are as follows:

<TABLE>
<CAPTION>
                                         Capitalized
                                          Equipment      Operating
(In Thousands)                             Leases         Leases
------------------------------------------------------------------
<S>                                      <C>             <C>
1998                                      $ 5,725         $ 4,347
1999                                        5,003           4,347
2000                                        4,988           4,183
2001                                        3,529           4,199
2002                                        2,156           4,170
Thereafter                                    272          42,168
                                          -------         -------
Total minimum rentals                      21,673         $63,414
                                                          -------
Less amount representing interest          (3,157)
                                          -------
Net minimum lease payments                 18,516
Less current maturities                    (4,477)
                                          -------
Capitalized lease obligations             $14,039
                                          -------
</TABLE>

Rent expense for the fiscal years ending in December for operating leases is as
follows:

<TABLE>
<CAPTION>
(In Thousands)             1997          1996          1995
--------------------------------------------------------------
<S>                       <C>           <C>           <C>
Minimum rentals           $4,022        $3,766        $3,525
Contingent rentals           479           417           428
                         --------------------------------------
                          $4,501        $4,183        $3,953
                         --------------------------------------
</TABLE>


                                       31

<PAGE>   32



9. COMMITMENTS AND CONTINGENCIES

On February 15, 1994, a class action suit was filed in the United States Federal
District Court against the Company and certain of the Company's executive
officers and directors. The suit alleged racially discriminatory practices by
the defendant parties in violation of federal law. During the fourth quarter of
1996, the Court approved a consent decree that approved a definitive settlement
agreement. The settlement agreement provided for a settlement pool of $4.8
million for the benefit of present and past African-American employees of
O'Charley's (the "Class") whose claims arose on or after March 31, 1992,
reserved $700,000 for claims administration and fees, and included $2.0 million
for the attorneys representing the Class. Based on the relatively low number of
class members electing to participate in the settlement, the original $7.5
million total settlement amount was reduced to approximately $5.2 million. As of
December 28, 1997, the Company has paid substantially all of its commitment to
the plaintiff class that included approximately $445,000 paid with the issuance
of shares of the Company's common stock.

As of December 28, 1997, the company is a party in a civil action in the United
States District Court for the Middle District of Tennessee involving a former
general manager of the Company. In September 1995, the Company filed an action
against the former employee alleging wrongful conversion of Company funds and
fraudulent misrepresentation. The former employee has moved to amend his answer
in the civil action filed by the Company claiming damages of $30.0 million
relating to counterclaims alleging malicious prosecution and intentional
infliction of emotional distress and $600,000 relating to counterclaims alleging
breach of contract and race discrimination. To date the Court has not ruled on
whether it will allow the former employee to pursue any of the foregoing
counterclaims. The Company believes the counterclaims are without merit, intends
to vigorously prosecute its claims and vigorously defend any counterclaims.
Based on the advice of counsel, the Company believes that to the extent the
counterclaims relating to malicious prosecution and intentional infliction are
allowed to proceed, it is likely that these counterclaims will be dismissed upon
the Company's motion for summary judgement. The Company does not believe the
outcome of this proceeding will materially affect its financial condition or
results of operations.

The Company is involved in other legal actions incidental to its business. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's operating results or financial
position.

10. INCOME TAXES

The total income tax expense (benefit) for the fiscal years ending in December
is allocated as follows:

<TABLE>
(In Thousands)                                           1997            1996            1995
---------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>            <C>
Earnings                                               $4,886           $(797)         $5,785
Shareholders' equity, tax benefit derived from
     non-statutory stock options exercised               (120)           (200)            (77)
                                                     -----------------------------------------
                                                       $4,766           $(997)         $5,708
                                                     -----------------------------------------
</TABLE>

Effective January 5, 1996, the Company merged with Shoex, Inc. which was
accounted for as a pooling-of-interests. Shoex, Inc. was an S Corporation
whereby its income was taxable at the shareholder level. Had Shoex been subject
to income taxes, additional income tax expense of $286,000 in 1995, would have
been recorded. The pro forma data presented on the face of the statements of
operations reflect these amounts.

Income tax expense (benefit) related to earnings for the fiscal years ending in
December consists of:

<TABLE>
<CAPTION>
(In Thousands)         1997             1996           1995
------------------------------------------------------------
<S>                   <C>             <C>             <C>
Current               $1,696          $ 1,798         $4,849
Deferred               3,190           (2,595)           936
                      --------------------------------------
                      $4,886          $  (797)        $5,785
                      --------------------------------------
</TABLE>


                                       32


<PAGE>   33



Income tax expense (benefit) attributable to earnings differs from the amounts
computed by applying the applicable U.S. federal income tax rate to pretax
earnings from operations as a result of the following:

<TABLE>
<CAPTION>
                                                                  1997           1996         1995
----------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>           <C>
Federal statutory rate                                            35.0%         (34.0%)       35.0%
Increase (decrease) in taxes due to:
     State income taxes, net of federal tax benefit                3.7           (1.8)         3.9
     Utilization of tax credits                                   (3.5)         (21.3)        (2.8)
     Adjustment to deferred tax assets and liabilities for
         change in tax status of Shoex                              --           12.1           --
     Earnings attributable to S Corporation                         --             --         (1.7)
     Other                                                         0.5            4.0          0.3
                                                                ------------------------------------
                                                                  35.7%         (41.0%)       34.7%
                                                                ------------------------------------
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at each of the
respective fiscal year ends are as follows:

<TABLE>
<CAPTION>
(In Thousands)                                                         1997           1996
--------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
Deferred tax assets:
     Accrued expenses, principally due to accruals for workers'
         compensation, employee health and retirement benefits         $1,526        $ 1,161
     Accrued litigation                                                    95          1,827
     Other                                                                 23             27
                                                                       ---------------------
         Total gross deferred tax assets                                1,644          3,015

Deferred tax liabilities:
     Property and equipment, principally due to differences in
         depreciation and capitalized lease amortization                3,207          1,468
     Preopening cost, due to cost in excess of amortization               517            428
     Other                                                                 71             80
                                                                       ---------------------
         Total gross deferred tax liabilities                           3,795          1,976
                                                                       ---------------------
         Net deferred tax liability (asset)                            $2,151        $(1,039)
                                                                       ---------------------
</TABLE>

The net deferred tax liability (asset) at December 28, 1997 and December 29,
1996, are recorded as follows:

<TABLE>
<CAPTION>
(In Thousands)                                       1997            1996
---------------------------------------------------------------------------
<S>                                               <C>             <C>
Deferred income taxes, long-term liability        $ 2,958         $ 1,295
Deferred income taxes, current asset                 (807)         (2,334)
                                                  -----------------------
                                                  $ 2,151         $(1,039)
                                                  -----------------------
</TABLE>

Statement 109 requires an evaluation of the deferred tax asset components and
recognition of a valuation allowance if it is determined that more likely than
not all or some portion of the deferred asset will not be realized. Based on the
Company's history of annual increases in taxable income and management's
projections of future taxable income, the Company estimates it is more likely
than not all of the deferred assets will be realized; thus, no valuation
allowance is recorded.


                                       33

<PAGE>   34



11. SHAREHOLDERS' EQUITY

In the fourth quarter of 1997, the Company completed a secondary public offering
of its common stock in which 2,232,000 shares were sold by the Company for net
proceeds of $34.7 million. The net proceeds were used to reduce the Company's
outstanding indebtedness under its revolving credit agreement.

The Company's charter authorizes 100,000 shares of preferred stock of which the
Board of Directors may, without shareholder approval, issue with voting or
conversion rights upon the occurrence of certain events. At December 28, 1997,
no preferred shares had been issued.

12. EARNINGS PER SHARE

The following is a reconciliation of the Company's basic and diluted earnings
(loss) per share in accordance with FAS 128. Earnings (Loss) per share for 1995
represent pro forma amounts (see Note 2).

<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)                    1997           1996            1995
---------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>             <C>
Net Earnings (Loss)                                     $8,800        $(1,147)        $10,591
                                                        -------------------------------------
Basic Earnings per Share:
     Weighted shares outstanding                         8,311          7,809           7,755
     Basic earnings (loss) per share                    $ 1.06        $ (0.15)        $  1.37
                                                        -------------------------------------

Diluted Earnings per Share:
     Weighted shares outstanding                         8,311          7,809           7,755
     Incremental stock option shares outstanding           596             --             553
                                                        -------------------------------------
         Total diluted shares outstanding                8,907          7,809           8,308
     Diluted earnings (loss) per share                  $ 0.99        $ (0.15)        $  1.27
                                                        -------------------------------------
</TABLE>


During the first quarter of 1998, the Company issued 182,500 options at an
exercise price of $18 1/8.

13. STOCK OPTION AND PURCHASE PLANS

The Company has four incentive stock option plans: the 1985 Stock Option Plan,
the 1989 Consultant Stock Program, the 1990 Employee Stock Plan and the 1991
Stock Option Plan for Outside Directors. Options under these plans include both
statutory and nonstatutory stock options and are issued to officers, key
employees, nonemployee directors and consultants of the Company. The Company has
reserved 3,737,500 shares of common stock for these plans under which the
options are granted at 100% of the fair market value of common stock on the date
of the grant, expire 10 years from the date of the grant and are exercisable at
various times as previously determined by the Board of Directors. The Company
applies APB Opinion No. 25 in accounting for its plan, and accordingly, no
compensation cost has been recognized.

If compensation cost for these plans had been determined consistent with FAS
123, the Company's net earnings and earnings per share would have been reduced
to the following pro forma amounts:

<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)                                     1997           1996            1995
---------------------------------------------------------------------------------------------------------------
<S>                          <C>                                         <C>           <C>             <C>
Net Earnings (Loss):         As reported (pro forma in 1995)             $8,800        $(1,147)        $10,591
                             Pro forma, as adjusted under FAS 123         8,387         (1,493)         10,304

Basic Earnings (Loss) per
     Common Share:           As reported (pro forma in 1995)             $ 1.06        $ (0.15)        $  1.37
                             Pro forma, as adjusted under FAS 123          1.01          (0.19)           1.33

Diluted Earnings (Loss) per
     Common Share:           As reported (pro forma in 1995)             $ 0.99        $ (0.15)        $  1.27
                             Pro forma, as adjusted under FAS 123          0.94          (0.19)           1.24
</TABLE>

Because the FAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.


                                       34

<PAGE>   35



The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average assumptions used for
grants in 1997 were: risk-free interest rate of 5.8%; expected life of 7.8
years; expected volatility of 50.5%. For grants in 1996 and 1995, the weighted
average assumptions used were: risk-free interest rate of 6.7%; expected life of
7.4 years; expected volatility of 41.6%

A summary of stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
                                     Number of     Weighted Average
                                       Shares       Exercise Price
-------------------------------------------------------------------
<S>                                  <C>           <C>
Balance at December 25, 1994         1,618,225         $ 7.16
     Granted                           457,475          11.75
     Exercised                         (69,741)          4.91
     Forfeited                         (54,790)          8.97
                                   -----------------------------

Balance at December 31, 1995         1,951,169           8.22
     Granted                           195,250          12.36
     Exercised                         (65,670)          3.91
     Forfeited                        (241,140)         10.15
                                   -----------------------------

Balance at December 29, 1996         1,839,609           8.53
     Granted                           165,500          15.14
     Exercised                         (49,550)          4.79
     Forfeited                         (54,285)         12.03
                                   -----------------------------

Balance at December 28, 1997         1,901,274         $ 9.14
                                   -----------------------------
</TABLE>


The following table summarizes information about stock options outstanding at
December 28, 1997:

<TABLE>
<CAPTION>
                                             Options Outstanding
                           ---------------------------------------------------------              Options Exercisable
                                                 Weighted Avg.                           ----------------------------------
                                                   Remaining         Weighted Avg.                            Weighted Avg.
Exercise Price                Number           Contractual Life     Exercise Price            Number         Exercise Price
------------------------------------------------------------------------------------     ----------------------------------
<S>                         <C>                <C>                  <C>                  <C>                 <C>
$2.00 to 3.99                 164,801               2.2 years             $ 2.85             164,801               $ 2.85
$4.00 to 7.99                 197,100               4.3                     5.25             181,710                 5.16
$8.00 to 9.99                 872,358               5.6                     8.50             561,536                 8.47
$10.00 to 13.99               491,853               7.3                    11.87             129,319                11.97
$14.00 to 17.00               175,162               9.2                    15.14              14,350                14.10
------------------------------------------------------------------------------------     ----------------------------------
$2.00 to 17.00              1,901,274               5.9                   $ 9.14           1,051,716               $ 7.52
------------------------------------------------------------------------------------     ----------------------------------
</TABLE>


At December 28, 1997, and December 29, 1996, the number of options exercisable
was 1,051,716 and 827,480, respectively, and the weighted average exercise price
of those options was $7.52 and $7.10, respectively.

The Company has established the CHUX Ownership Plan for the purpose of providing
an opportunity for eligible employees of the Company to become shareholders in
O'Charley's. The Company has reserved 450,000 common shares for this plan. The
CHUX Ownership Plan is intended to be an employee stock purchase plan which
qualifies for favorable federal income tax treatment under Section 423 of the
Internal Revenue Code. The Plan allows participants to purchase common stock at
85% of the lower of 1) the closing


                                       35

<PAGE>   36


market price per share of the Company's Common Stock on the last trading date of
the plan year or 2) the average of the closing market price of the Company's
Common Stock on the first and the last trading day of the plan year.
Contributions of up to 15% of base salary are made by each participant through
payroll deductions. The Plan year is from October 1 to September 30. As of
December 28, 1997, 67,000 shares have been issued under this Plan.

14. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) salary reduction and profit-sharing plan called the
CHUX Savings Plan. Under the Plan, employees can make contributions up to 15% of
their annual compensation. The Company contributes annually to the Plan an
amount equal to 40% of employee contributions, subject to certain limitations.
Additional contributions are made at the discretion of the Board of Directors.
Company contributions vest at the rate of 20% each year beginning after the
employee's initial year of employment. Company contributions were approximately
$140,000 in 1997, $105,000 in 1996 and $72,000 in 1995.

15. RELATED-PARTY TRANSACTIONS

As discussed in the Business Acquisition footnote, the Company merged with
Shoex, Inc. on January 5, 1996. An officer and a director of the Company each
had an interest in Shoex and, accordingly, received their respective pro rata
share of the Company's Common Stock that was issued to the shareholders of
Shoex. Previous to the merger, the Company's commissary sold food products and
supplies to Shoex, and the Company also received a fee for providing accounting
and administrative services. The merger with Shoex was accounted for as a
pooling-of-interests; therefore, all related-party transactions previously
reported have been eliminated through the restatement of the financial
statements.

An officer of the Company, a principal shareholder, and certain directors own a
certain percentage of partnerships which have lease agreements with the Company
for eight of its restaurant facilities. The leases expire at various times
through 2012, with options to renew for a term of 10 years. The lease agreements
grant the Company an option to purchase the properties at fair market value at
any time during the term of the lease.

On July 26, 1995, the Company sold substantially all of its interest in Logan's
Partnership, ("Logan's") upon Logan's initial public offering. An officer and a
director of the Company, at that time, had an ownership interest in Logan's. The
Company received $7.9 million net proceeds from the sale of its Logan's shares.
In addition, Logan's Partnership purchased all five of the Logan's restaurant
properties owned by the Company at their appraised fair market value of
approximately $6.1 million. As a result of the transactions, the Company
reported a one-time gain (included in other income, net) of approximately $7.4
million in 1995. During the time of the Company's ownership in Logan's, the
Company owned certain land, building and improvements and leased certain
property which was leased or subleased to Logan's Partnership. Each of the
leases was treated as an operating lease and provided for additional contingent
rentals based on a percentage of sales in excess of minimum rent. Additionally,
the Company guaranteed a line of credit and equipment leases on behalf of
Logan's Partnership, sold products from the Company's commissary and provided
accounting and administrative services to the Partnership for a fee. Previously,
the Company's commissary sold products to other restaurant entities controlled
by a director of the Company and certain of its officers.

In the opinion of management and the Company's Board of Directors, all
related-party transactions, including terms and amounts, are comparable to those
that could be obtained from unaffiliated third parties.


                                       36

<PAGE>   37


The aforementioned related-party transactions are reflected in the financial
statements as follows:

<TABLE>
<CAPTION>
(In Thousands)                                                       1997       1996           1995
---------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>          <C>
BALANCE SHEETS
Current Assets:
     Due from related parties                                          --         --        $   108

STATEMENTS OF EARNINGS
Revenues:
     Commissary sales                                                  --         --          6,463
Costs and Expenses:
     Restaurant operating costs:
         Rent expense                                                 861        843            843
         Contingent rentals                                           310        293            256
     Depreciation and amortization (property leased to others)         --         --             69
Other (Income) Expense:
     Interest income (guarantee fee)                                   --         --            (54)
     Other, net:
         Accounting and administrative fees                            --         --            (56)
         Net rental income                                             --         --           (534)
         Equity earnings in Partnership                                --         --           (273)
         Gain on sale of assets                                        --         --         (7,448)

STATEMENTS OF CASH FLOWS
Cash Flows From Investing Activities:
     Proceeds from sale of property and equipment                      --         --          6,100
     Proceeds from sale of unconsolidated partnership                  --         --          7,894
</TABLE>

16. STATEMENTS OF CASH FLOWS

Supplemental disclosure of cash flow information is as follows:

<TABLE>
<CAPTION>
(In Thousands)                                     1997          1996          1995
------------------------------------------------------------------------------------
<S>                                               <C>           <C>           <C>
Cash paid for interest                            $3,608        $3,074        $2,158
Additions to capitalized lease obligations         7,146         5,922         6,242
Income taxes paid                                  1,582         1,979         4,508
Litigation shares issued                             445            --            --
</TABLE>


                                       37

<PAGE>   38



17. SELECTED QUARTERLY DATA (UNAUDITED)

Summarized quarterly financial data for 1997 and 1996 is shown below:


<TABLE>
<CAPTION>
                                                  First              Second           Third             Fourth
                                                  Quarter            Quarter          Quarter           Quarter
(In Thousands, Except Per Share Data)           (16 weeks)         (12 weeks)       (12 weeks)        (12 weeks)
-----------------------------------------------------------------------------------------------------------------
<S>                                             <C>                <C>              <C>               <C>
Year Ended December 28, 1997
     Net revenues                                 $56,635           $46,411           $47,546          $49,811
     Income from operations                         4,500             4,001             4,077            4,342
     Net earnings                                   2,262             2,011             2,050            2,477
     Basic earnings per common share                 0.29              0.26              0.26             0.26
     Diluted earnings per common share               0.27              0.24              0.24             0.24
                                                -----------------------------------------------------------------

Year Ended December 29, 1996
     Net revenues                                 $47,079           $38,485           $39,295          $39,671
     Income (loss) from operations                  3,258            (2,425)            2,852            3,153
     Net earnings (loss)                            1,569            (7,483)            1,497            3,270
     Basic earnings (loss) per common share          0.20             (0.96)             0.19             0.42
     Diluted earnings (loss) per common share        0.19             (0.96)             0.18             0.39
                                                -----------------------------------------------------------------
</TABLE>


                                       38

<PAGE>   39


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

         Not applicable

                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Proxy Statement issued in connection with the shareholders meeting
to be held on May 7, 1998, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the caption "Election of
Directors" information required by Item 10 of Form 10-K as to directors of the
Company and is incorporated herein by reference. Pursuant to General Instruction
G(3), certain information concerning executive officers of the Company is
included in Part I of this Form 10-K, under the caption "Executive Officers."

ITEM 11.         EXECUTIVE COMPENSATION.

         The Proxy Statement issued in connection with the shareholders meeting
to be held on May 7, 1998, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the caption "Executive
Compensation" information required by Item 11 of Form 10-K and is incorporated
herein by reference.

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

         The Proxy Statement issued in connection with the shareholders meeting
to be held on May 7, 1998, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the captions "Security
Ownership of Certain Beneficial Owners" and "Election of Directors" information
required by Item 12 of Form 10-K and is incorporated herein by reference.

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The Proxy Statement issued in connection with the shareholders meeting
to be held on May 7, 1998, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the caption "Certain
Transactions" information required by Item 13 of Form 10-K and is incorporated
herein by reference.



                                       39

<PAGE>   40


                                     PART IV

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

(a)      1.       Financial Statements:     See Item 8

         2.       Financial Statement Schedules:     Not Applicable

         3.       Management Contracts and Compensatory Plans and Arrangements

<TABLE>
<S>                        <C>
                  -        O'Charley's Inc. 1985 Stock Option Plan (included as Exhibit 10.9)
                  -        O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit 10.10)
                  -        First Amendment to O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit
                           10.11)
                  -        Second Amendment to O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit
                           10.12)
                  -        O'Charley's 1991 Stock Option Plan for Outside Directors, as amended (included as
                           Exhibit 10.13)
                  -        CHUX Ownership Plan (included as Exhibit 10.14)
                  -        Severance Compensation Agreement, dated September 16, 1996, by and between
                           O'Charley's Inc. and Gregory L. Burns (included as Exhibit 10.15)
                  -        Severance Compensation Agreement, dated as of March 4, 1998, by and between
                           O'Charley's Inc. and A. Chad Fitzhugh (included as Exhibit 10.17)
                  -        Severance Compensation Agreement, dated as of March 4, 1998, by and between
                           O'Charley's Inc. and Steven J. Hislop (included as Exhibit 10.18)
</TABLE>

         4.       Exhibits:

<TABLE>
<CAPTION>
Exhibit
Number                                               Description
-------                                              -----------
<S>               <C>      <C>
 3.1              ----     Restated Charter of the Company (incorporated by reference to Exhibit 3.1 of the
                           Company's Registration Statement on Form S-1, Registration No. 33-35170)

 3.2              ----     Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2
                           of the Company's Annual Report on Form 10-K for the year ended December 30, 1990)

 4.1              ----     Form of Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 to
                           the Company's Registration Statement on Form S-1, Registration No. 33-35170)

10.1              ----     Lease dated May 1, 1987 between CWF Associates and CWF Corporation and all
                           amendments thereto for 2895 Richmond Road, Lexington, KY 40509 (incorporated by
                           reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
                           Registration No. 33-35170)

</TABLE>


                                       40

<PAGE>   41

<TABLE>
<S>               <C>      <C>
10.2              ----     Lease dated August 15, 1987 between CWF Associates and O'Charley's Inc. and all
                           amendments thereto for improvements located at 17 White Bridge Road, Nashville, TN
                           (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on
                           Form S-1, Registration No. 33-35170)

10.3              ----     Lease dated October 25, 1985 between Two Mile Partners and CWF Corporation and
                           all amendments thereto for 912 Two Mile Parkway, Goodlettsville, TN (incorporated by
                           reference to Exhibit 10.5 of the Company's Registration Statement on Form S-1,
                           Registration No. 33-35170)

10.4              ----     Lease dated December 30, 1985 between Two Mile Partners and CWF Corporation for
                           644 N. Riverside Dr., Clarksville, TN (incorporated by reference to Exhibit 10.6 of the
                           Company's Registration Statement on Form S-1, Registration No. 33-35170)

10.5              ----     Lease dated September 9, 1985 between Two Mile Partners and CWF Corporation for
                           1720 U.S. 31-W Bypass Building, Bowling Green, KY (incorporated by reference to
                           Exhibit 10.7 of the Company's Registration Statement on Form S-1, Registration No. 33-
                           35170)

10.6              ----     Lease dated December 26, 1986 between Two Mile Partners and CWF Corporation for
                           1006 Memorial Blvd., Murfreesboro, TN (incorporated by reference to Exhibit 10.8 of
                           the Company's Registration Statement on Form S-1, Registration No. 33-35170)

10.7              ----     Area Development Agreement dated July 9, 1987, between O'Charley's Inc. and
                           O'Charley's of the Carolinas, Inc. (incorporated by reference to Exhibit 10.18 of the
                           Company's Registration Statement on Form S-1, Registration No. 33-35170)

10.8              ----     License Agreement dated July 9, 1987, between O'Charley's Inc. and O'Charley's of the
                           Carolinas, Inc. (incorporated by reference to Exhibit 10.19 of the Company's
                           Registration Statement on Form S-1, Registration No. 33-35170)

10.9              ----     O'Charley's Inc. 1985 Stock Option Plan (incorporated by reference to Exhibit 10.27 of
                           the Company's Registration Statement on Form S-1, Registration No. 33-35170)

10.10             ----     O'Charley's Inc. 1990 Employee Stock Plan (incorporated by reference to Exhibit 10.26
                           of the Company's Registration Statement on Form S-1, Registration No. 33-35170)

10.11             ----     First Amendment to O'Charley's Inc. 1990 Employee Stock Plan (incorporated by
                           reference to Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year
                           ended December 29, 1991)

10.12             ----     Second Amendment to O'Charley's Inc. 1990 Employee Stock Plan (incorporated by
                           reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the year
                           ended December 26, 1993)
</TABLE>


                                       41

<PAGE>   42


<TABLE>
<S>               <C>      <C>
10.13             ----     O'Charley's Inc. 1991 Stock Option Plan for Outside Directors, As Amended
                           (incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form
                           10-K for the year ended December 27, 1992)

10.14             ----     CHUX Ownership Plan (incorporated by reference to the Company's Quarterly Report
                           on Form 10-Q for the quarter ended October 3, 1993)

10.15             ----     Severance Compensation Agreement, dated September 16, 1996, by and between
                           O'Charley's Inc. and Gregory L. Burns (incorporated by reference to Exhibit 10.21 of
                           the Company's Annual Report on Form 10-K for the year ended December 29, 1996)

10.16             ----     Amended and Restated Revolving Credit Agreement, dated as of December 8, 1997,
                           among O'Charley's Inc. and Mercantile Bank National Association, Bank One, N.A.,
                           First Union National Bank, NationsBank of Tennessee, N.A., as Co-Agent, and First
                           American National Bank, as Agent

10.17             ----     Severance Compensation Agreement, dated March 4, 1998, by and between O'Charley's
                           Inc. and A. Chad Fitzhugh

10.18             ----     Severance Compensation Agreement, dated March 4, 1998, by and between O'Charley's
                           Inc. and Steven J. Hislop

21                ----     Subsidiaries of the Company

23.1              ----     Consent of KPMG Peat Marwick, LLP

27                ----     Financial Data Schedule

</TABLE>



     (b) During the quarter ended December 28, 1997, the Company did not file
any Reports on Form 8-K.


                                       42

<PAGE>   43


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Nashville,
State of Tennessee.

                                       O'CHARLEY'S INC.


Date: March 27, 1998             By:   /s/ Gregory L. Burns
                                       ---------------------------------------
                                       Gregory L. Burns
                                       President, Chief Executive Officer, and
                                       Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
          Signature                                  Title                                 Date
----------------------------------    -------------------------------------     -------------------------
<S>                                   <C>                                       <C>

/s/ Gregory L. Burns                  President, Chief Executive Officer, and          March 27, 1998
----------------------------------    Chairman of the Board (Principal
(Gregory L. Burns)                    Executive Officer)



/s/ A. Chad Fitzhugh                  Chief Financial Officer, Secretary, and          March 27, 1998
----------------------------------    Treasurer (Principal Financial and
(A. Chad Fitzhugh)                    Accounting Officer)


/s/ John W. Stokes, Jr.               Director                                         March 27, 1998
----------------------------------
(John W. Stokes, Jr.)

/s/ Richard Reiss, Jr.                Director                                         March 27, 1998
----------------------------------
(Richard Reiss, Jr.)

/s/ G. Nicholas Spiva                 Director                                         March 27, 1998
----------------------------------
(G. Nicholas Spiva)

/s/ H. Steve Tidwell                  Director                                         March 27, 1998
----------------------------------
(H. Steve Tidwell)

/s/ C. Warren Neel                    Director                                         March 27, 1998
----------------------------------
(C. Warren Neel)

/s/ Samuel H. Howard                  Director                                         March 27, 1998
----------------------------------
(Samuel H. Howard)

/s/ Shirley A. Zeitlin                Director                                         March 27, 1998
----------------------------------
(Shirley A. Zeitlin)

/s/ Steven J. Hislop                  Director                                         March 27, 1998
----------------------------------
(Steven J. Hislop
</TABLE>


                                       42