UNITED STATES
                       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

           [ ]  TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                        for the transition period from to

                           Commission File No. 0-24502

                          ROCK BOTTOM RESTAURANTS, INC.
             (Exact name of registrant as specified in its charter)

                               Delaware 84-1265838
          (State of incorporation) (I.R.S. Employer Identification No.)

          248 Centennial Parkway, Suite 100, Louisville, Colorado 80027
               (Address of principal executive offices) (Zip code)

                                 (303) 664-4000
              (Registrant's telephone number, including area code)

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

               Securities registered pursuant to Section 12(g) of the Act:

                                (Title of Class)
                          Common Stock ($.01 par value)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___

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

     At March 26, 1998, 8,059,506 shares of common stock were outstanding.

     At March 26, 1998, the aggregate  market value of the voting and non-voting
common equity held by non-affiliates was approximately $33,403,000.

                      DOCUMENTS INCORPORATED BY REFERENCE.

     Portions of the Registrant's Definitive Proxy Statement for the 1998 Annual
Meeting  of  Stockholders,  to be  filed  on  or  before  April  28,  1998,  are
incorporated by reference into Part III of this Form 10-K.


<PAGE>


                                      INDEX
<TABLE>
<CAPTION>


                                                                                             Page
<S>           <C>                                                                           <C>

                                     PART I

Item 1.        Business                                                                        1
Item 2.        Properties                                                                     10
Item 3.        Legal Proceedings                                                              11
Item 4.        Submission of Matters to a Vote of Security Holders                            11

                                     PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder Matters          11
Item 6.        Selected Financial Data                                                        12
Item 7.        Management's Discussion and Analysis of Financial Condition and
               Results of Operations                                                          13
Item 8.        Financial Statements and Supplementary Data                                    23
Item 9.        Changes in and Disagreements with Accountants on Accounting and
               Financial Disclosure                                                           42

                                    PART III

Item 10.       Directors and Executive Officers of the Registrant                             42
Item 11.       Executive Compensation                                                         42
Item 12.       Security Ownership of Certain Beneficial Owners and Management                 42
Item 13.       Certain Relationships and Related Transactions                                 42

                                     PART IV

Item 14.       Exhibits, Financial Statement Schedules, and Reports on Form 8-K               42


</TABLE>

<PAGE>


                                     PART I

ITEM 1:  Business

General

     Rock Bottom  Restaurants,  Inc. (the  "Company") was  incorporated in April
1994 and currently  operates 19 Rock Bottom  Restaurant & BrewerySM  restaurants
and 40 Old  Chicago(R)  restaurants in 18 states  throughout  the country.  Rock
Bottom Restaurant & Brewery  restaurants and Old Chicago  restaurants are casual
dining  restaurants  that feature  high  quality,  moderately  priced food and a
distinctive  selection of microbrewed and specialty  beers. A key element of the
Company's  strategy is to  capitalize  on the growing  interest of  consumers in
higher  quality,  more flavorful  beer,  including  microbrewed and domestic and
imported specialty beers.

     The Company  also owns an  indirect  50% equity  interest  in Trolley  Barn
Brewery, Inc. ("Trolley Barn") which it acquired in 1996 in exchange for 452,073
shares of the Company's  common stock.  Trolley Barn  currently  operates  eight
restaurants in the southeastern United States (see "Business -- Trolley Barn").

Business Strategy

     The Company's  objective is to provide its  customers  with an exciting and
entertaining  casual dining  experience.  Key elements of the Company's business
strategy used in achieving this objective include:

     Employee  Selection  and  Training.  The Company  firmly  believes that the
quality  of its  employees  is a key  factor in its  operations.  Employees  are
selected for employment on the basis of  congeniality  and willingness to accept
responsibility for fulfilling customer expectations.  Employees are then trained
to make broad based decisions at the customer level,  thereby enhancing customer
experiences and the friendly atmosphere of the Company's restaurants. Management
believes that its employee  selection and training  strategy not only results in
exceptional customer  experiences,  but also improves productivity and serves as
an effective employee recruitment tool.

     Customer Service Commitment. At each of its restaurants,  the Company seeks
to provide an exceptional dining experience that exceeds the expectations of its
customers. Each employee having direct contact with customers is responsible and
accountable for the experiences of his or her customers.

     Diverse Menu. Each of the Company's  restaurant  concepts offer a menu with
numerous  selections designed to appeal to a wide variety of tastes and budgets.
The menu items are created by culinary  trained  chefs or  professional  kitchen
managers to satisfy customers' demand for quantity, quality and diversity and to
build and maintain a loyal clientele.

     Microbrewed  and  Specialty  Beer.  Both Rock Bottom  Restaurant  & Brewery
restaurants and Old Chicago  restaurants feature  hand-crafted,  microbrewed and
other  specialty  beer that the Company  believes  appeal to a growing  consumer
interest in higher quality,  more flavorful beer. The Company  believes that its
diverse and high quality beer  selection  encourages  the trial of new beer and,
over time, helps to create more  knowledgeable and sophisticated  beer drinkers.
Rock Bottom Restaurant & Brewery restaurants brew their own beer on-premises and
offer a selection of five to seven  distinctive  hand-crafted  beers  ranging in
taste from light ales to  chocolate  stout.  Old Chicago  restaurants  present a
changing and diverse selection of 110 or more microbrewed, imported and domestic
beers from  around the world and  strive to be one of the first  restaurants  in
their markets to introduce new, hard-to-find or specialty beer.


<PAGE>


     Distinct  Appearance  and  Atmosphere.  The  Company  strives  to  create a
distinctive,   highly  entertaining,  and  unique  atmosphere  at  each  of  its
restaurants  through a flexible  design  layout  suitable  for a wide variety of
restaurant sites. The Company's Rock Bottom Restaurant & Brewery restaurants are
generally located in high traffic  metropolitan areas and are designed to create
an open,  visually  stimulating  environment  featuring  stainless steel brewing
tanks and equipment.  Each Old Chicago restaurant highlights Chicago memorabilia
or other  interesting  artifacts  throughout  the  restaurant  and  displays the
restaurant's  variety of specialty beers along the bar with an attractive  array
of different bottled beers and colorful tap handles for draught beer.

The Microbrewed and Specialty Beer Market

     The beer brewing  industry  generally is divided into large  breweries with
annual brewing  capacities of over 1,000,000  barrels,  regional  breweries with
capacities in excess of 15,000 barrels,  and  microbreweries  with capacities of
less than  15,000  barrels.  A brewpub is a  restaurant-brewery  that brews beer
on-premises and sells at least 50% of the beer brewed in an adjacent  restaurant
or bar.

     Consumer  interest in higher  quality,  more  flavorful  beer  continues to
result in  significant  growth in the  micro-brewed  and specialty beer markets.
According to the Institute for Brewing Studies, a division of the Association of
Brewers,   micro-brewed  and  U.S.   specialty  beer  sales  (in  barrels)  have
experienced  significant  growth in the last six  years,  yet such  sales  still
represent   only   approximately   3.1%  of  total  U.S.   barrel   consumption.
Additionally,  the number of microbreweries  has grown from 21 in 1985 to 425 in
1997,  while the number of brewpubs has  increased  to 851 in 1997,  an increase
from only eight brewpubs in 1985.

Rock Bottom Restaurant & Brewery Restaurants

     Design and Layout.  Rock Bottom  Restaurant & Brewery  restaurants range in
size from  8,000 to 14,000  square  feet and are  designed  to create a dramatic
visual impact on their customers.  Each restaurant features warm lighting,  high
ceilings and wood-finished interiors complemented by an array of stainless steel
brewing tanks and equipment.  The on-premises brewing equipment,  which consists
of  strategically  placed rows of stainless steel  fermenting  tanks and serving
vessels,  is an integral  aspect of the  restaurant's  design and  enhances  the
overall visual impact.  Television  sets throughout the bar area allow customers
to watch sporting and other special events.

     The dining and bar areas are spacious and the kitchens  feature  partial or
complete  exhibition style cooking.  Total seats in the restaurants'  dining and
bar areas  range  between  190 and 400 and the  layout is  flexible,  permitting
tables to be rearranged  to  accommodate  customer  demand.  To  complement  the
overall  design  and dining  experience,  restaurants  in nearly  all  locations
provide live music, outdoor patio seating or separate areas with pool tables.

     Menu and Pricing.  The menu at Rock Bottom Restaurant & Brewery restaurants
includes  approximately 50 bistro style items  consisting of appetizers,  soups,
meal-sized salads, and entrees featuring meat, fish, pastas and regional cuisine
as well as a range of desserts.  In addition,  the menu is supplemented by daily
specials that are created at the  discretion of each culinary  trained chef. The
daily specials  typically include a pasta or meat dish, and a fresh fish entree.
The menu is designed  to offer a broad range of prices that convey  value to the
customer.  Entrees  typically  range in price  from  $6.95 to  $19.95  with most
entrees priced below $10.00.  Management  analyzes menu items for popularity and
profitability and adapts new items to local market preferences.

     Hand-crafted Beer. The Rock Bottom Restaurant & Brewery restaurants feature
hand-crafted  beer brewed  on-premises by each restaurant's head brewer, as well
as a wide  selection  of  quality  wines  and a full  range of  cocktails.  Each
restaurant  offers five to seven different  types of  hand-crafted  beer ranging
from a light golden ale to a full bodied stout, as well as  cask-conditioned  or
other limited production seasonal beers, such as Rocktoberfest Bier. Many of the
restaurants'  recipes are created to complement the various  hand-crafted beers.
For example,  signature items such as asiago cheese dip, alder smoked salmon and
stout  cheesecake  are flavored to increase their  compatibility  with beer. The
hand-crafted  beer  selection  ranges in price from $3.25 to $3.75 per pint,  or
$5.95 for a sampler which  includes one four ounce taster of each beer brewed at
the restaurant. During 1997, alcoholic beverages accounted for approximately 41%
of Rock Bottom  Restaurant & Brewery  restaurant  sales,  with beer constituting
approximately 61% of total alcoholic beverage sales.


<PAGE>


     Customers.  The  Company  believes  its Rock  Bottom  Restaurant  & Brewery
restaurants  appeal to a wide range of customers and draw their  clientele  from
throughout  the  metropolitan  area in which each  restaurant  is located.  Each
restaurant  generally  is open seven days a week from 11:00 a.m.  and  typically
remains active across the lunch, happy hour, dinner and late-night time periods.

     Sales and  Marketing.  The Company  strives to provide its  customers  with
dining experiences that encourage repeat business,  and has historically  relied
on word of mouth  advertising  and local  restaurant  promotions  to attract new
customers.  To supplement these marketing efforts, the Company sells Rock Bottom
Restaurant & Brewery merchandise such as jackets, T-shirts, sweatshirts, shorts,
hats and other items bearing the restaurant's name and logo as well as the names
of certain of the restaurants' more popular  hand-crafted beers. The restaurants
also support charitable and civic  organizations and utilize a limited amount of
targeted print advertising and radio.

     Site  Selection and  Location.  The Company seeks to locate its Rock Bottom
Restaurant & Brewery restaurants in visible,  high-traffic sites in metropolitan
areas which are  recognized as  established  restaurant,  theater,  sporting and
shopping  destination  locations.  The Company currently operates 19 Rock Bottom
Restaurant & Brewery  restaurants  located in  Campbell,  Long Beach and Fresno,
California;   Denver,  Boulder  and  Englewood,   Colorado;  Chicago,  Illinois;
Indianapolis,  Indiana;  Des  Moines,  Iowa;  Bethesda,  Maryland;  Minneapolis,
Minnesota;  Cleveland and Cincinnati,  Ohio; Portland,  Oregon;  Addison, Texas;
Seattle,  Washington;  Milwaukee,  Wisconsin,  and  Washington  D.C. The Company
operates its brewery restaurants in Boulder and Englewood under the name "Walnut
Brewery". Additionally, a brewery restaurant in Denver and the one in Washington
D.C. are operated under the names "Denver ChopHouse and BreweryTM" and "District
ChopHouse and Brewery", respectively.  Fourteen of the Company's restaurants are
located near pedestrian malls, theaters,  convention centers,  sports arenas, or
downtown  shopping areas.  The other five restaurants are located in destination
restaurant  and bar or shopping  districts in Campbell  and Fresno,  California;
Englewood,  Colorado;  Des Moines,  Iowa and  Addison,  Texas.  During the first
quarter  of 1998,  the  Company  closed  the Rock  Bottom  Restaurant  & Brewery
restaurants  located in Houston,  Texas and Overland  Park,  Kansas due to lower
than expected sales and profitability (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview").

     Restaurant Economics.  The Company believes that its Rock Bottom Restaurant
& Brewery  restaurants  produce  competitive  unit economics.  In 1997, the Rock
Bottom  Restaurant & Brewery  restaurants  operating for the entire fiscal year,
excluding the two  restaurants  closed in the first  quarter of 1998,  generated
average revenues of  approximately  $4.7 million,  with per restaurant  revenues
ranging from $2.8 million to more than $7 million,  and average  earnings before
interest,  taxes,  depreciation  and  amortization  ("EBITDA") of  approximately
$898,000 (19.0% of revenues).  As most of the brewery  restaurants opened during
1997 were designed to perform at a slightly lower capacity,  the Company expects
average revenues per restaurant to decrease in 1998.  Additionally,  the average
cash  investment for the seven  restaurants  opened in 1997 totaled $2.6 million
for  leasehold  improvements,   furniture,   fixtures,  restaurant  and  brewing
equipment and pre-opening  costs (see  "Management's  Discussion and Analysis of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources").  There can be no assurance,  however, that the Company's restaurant
economics can be maintained.

Old Chicago Restaurants

     Design and Layout.  Old Chicago  restaurants  typically  range in size from
5,000 to 8,500 square feet.  Each  restaurant  is decorated to create a familiar
and  neighborly  atmosphere  for customers  that is unique to the locations they
serve,  and is  designed  to  separate  the dining  area from the bar area in an
effort to make all  customers  feel  comfortable  and welcome.  The  restaurants
feature a variety  of  Chicago  memorabilia,  a  prominent  display of rows of a
variety of bottled  beers,  a long row of colorful tap handles for draught beer,
and  televisions  placed  strategically  throughout  the  restaurant for viewing
sporting  or other  special  events.  The  table  layout at each  restaurant  is
flexible to accommodate groups and special seating requests, with total seats in
the dining  and bar areas  ranging  from 175 to 360.  Certain  restaurants  also
feature outdoor patio seating and a limited number of pool tables.

     Menu and Pricing. The menu at Old Chicago restaurants is designed to appeal
to a variety of tastes and budgets and  features  more than 40 items,  including
the  Company's  signature   Chicago-style  deep  dish  pizza,  thin-crust  pizza
(introduced during 1997), appetizers, pastas, burgers, sandwiches, large salads,
and several  desserts.  Menu items are prepared daily with  high-quality,  fresh
ingredients  from  original  recipes.  Pizza is a  featured  section in the menu
allowing  customers  to build  their  own by  choosing  from a  selection  of 36
different  toppings,  or to sample one of the specialty pizza  combinations that
include such  non-traditional  toppings as  artichokes,  black beans,  barbecued
chicken,  shrimp  or  marinated  sirloin  steak.  All new menu  items  and pizza
combinations are tested and selected based on uniqueness, sales popularity, ease
of  preparation  and  profitability.  Entrees range in price from  approximately
$5.29 for a hamburger to $19.99 for the most  expensive  large pizza that serves
four.
<PAGE>

     Wide Beer Selection.  Old Chicago restaurants provide a constantly evolving
selection of 110 or more imported, domestic and microbrewed beers. Bottled beers
are prominently displayed in rows behind the bar along with an array of up to 36
colorful tap handles for draught beer. Beer selectors at Old Chicago restaurants
change the beer selection on a regular basis,  and strive to be the first eating
and drinking  establishment  in their area to offer newly  introduced or hard to
find beer selections.  The beer selection in each restaurant generally ranges in
price from  $2.25 for a  domestic  draught  beer to $3.95 for a  microbrewed  or
imported  beer.  Alcoholic  beverages  accounted  for  approximately  43% of Old
Chicago  restaurant sales during 1997, with beer constituting  approximately 78%
of alcoholic beverage sales according to Company estimates.

     Customers.  Old Chicago  restaurants appeal to a wide variety of customers,
including  regulars who frequent the restaurants  several times a week and those
who  visit for the fun and  congenial  atmosphere,  as well as for the  frequent
special  events.  Old Chicago  restaurants are open seven days a week from 11:00
a.m. and generally have customers throughout the day and into the evening hours.

     Sales and Marketing. The Company's sales and marketing strategy for the Old
Chicago restaurants emphasizes promotions to encourage repeat visits by patrons.
One of the  restaurants'  most  effective  promotions  has been the  World  Beer
TourSM,  established  in 1984,  which  encourages  exploration  over time of 110
different brands of beer available at each Old Chicago  restaurant.  Patrons who
sample 110 beers are  eligible for food and bar  discounts  and prizes along the
way and are then  inducted  into the Hall of FoamSM with their names listed on a
large plaque  displayed near the bar.  Other  promotions are designed to promote
civic and charitable  events in each  restaurant's  local  community and include
such local restaurant marketing programs as Rolling Stoves and Pizza PalzSM. The
Company also uses  extensive  print  advertising,  and radio  advertising to the
extent a market is media efficient, for certain seasonal promotional events.

     Site Selection and Location.  The Company currently operates 40 Old Chicago
restaurants,  34 of which are  located in various  cities  throughout  Colorado,
Minnesota,  Kansas, Oregon,  Nebraska and Idaho, and one each in Addison, Texas;
Madison, Wisconsin;  Columbia,  Missouri;  Bettendorf, Iowa; Tucson, Arizona and
Rockford,  Illinois.  The Old Chicago  concept is flexible  and  adaptable  to a
variety of markets and  demographics  primarily  because the design and decor of
each  site  is  tailored  to  the  specific  location,   thereby  enhancing  its
neighborhood  appeal.  Old Chicago  restaurants have been successful in downtown
and suburban  locations,  in metropolitan areas and in smaller cities and towns.
During the first quarter of 1998, the Company closed the Old Chicago restaurants
located  in  Gladstone,  Missouri  and  Evergreen,  Colorado  due to lower  than
expected sales and profitability (see  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations Overview").

     Restaurant Economics. The Company believes that its Old Chicago restaurants
produce  competitive  unit  economics.  In  1997,  the Old  Chicago  restaurants
operating for the entire fiscal year,  excluding the two Old Chicago restaurants
closed  during  the  first  quarter  of  1998,  generated  average  revenues  of
approximately  $1.9  million,  with per  restaurant  revenues  ranging from $1.5
million to $2.5 million, and average EBITDA of approximately  $302,000 (16.1% of
revenues).  Additionally,  the average cash investment for the seven restaurants
opened in 1997  totaled  $1.0  million for  leasehold  improvements,  furniture,
fixtures,   restaurant   equipment  and  pre-opening  costs  (see  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity  and  Capital  Resources").  There  can  be no  assurance  that  these
restaurant economics can be maintained in the future.

Trolley Barn

     During  1996,  the  Company  acquired an  indirect  50% equity  interest in
Trolley Barn in exchange for 452,073 shares of common stock. The Company has the
option to  purchase  the  remaining  50%  interest  in Trolley  Barn at any time
between July 2000 and July 2002 at a  predetermined  multiple of earnings,  plus
cash  and less  debt.  Trolley  Barn  currently  operates  eight  casual  dining
restaurants,  four under the name Big River Grille & Brewing WorksTM,  two under
the name Rock Bottom Restaurant & Brewery,  one Ragtime Tavern,  and one A1A Ale
Works.  All of Trolley  Barn's  restaurants  feature  hand-crafted  beer  brewed
on-premises,  and a menu  similar  to  the  Rock  Bottom  Restaurant  &  Brewery
restaurants  in both  selection  and variety of items and in pricing.  Big River
Grille & Brewing Works  restaurants  are located in  Chattanooga  and Nashville,
Tennessee; Greenville, South Carolina and at Disney's Boardwalk adjacent to WALT
DISNEY  WORLD in Lake Buena  Vista,  Florida.  Rock Bottom  Restaurant & Brewery
restaurants  are located in  Atlanta,  Georgia and  Charlotte,  North  Carolina.
Ragtime Tavern and A1A Ale Works are located in Jacksonville and St.  Augustine,
Florida, respectively. Trolley Barn's development plans for 1998 include opening
a total of three  brewery  restaurants,  two of which were  acquired  during the
first quarter of 1998. The License & Development Agreement requires that Trolley
Barn develop three  restaurants  during  fiscal 1998,  four during 1999 and five
during 2000.
<PAGE>

Expansion Strategy

     From January 1995 through December 1997, the Company opened 44 restaurants,
including  28 Old Chicago  restaurants  and 16 Rock Bottom  Restaurant & Brewery
restaurants.  During  the first  quarter  of 1998,  the  Company  closed two Old
Chicago  restaurants and two Rock Bottom Restaurant & Brewery restaurants opened
previously (see "Management's Discussion and Analysis of Financial Condition and
Results of  Operations  -  Overview"),  and as of March 26,  1998,  the  Company
operated 40 Old Chicago  restaurants  and 19 Rock  Bottom  Restaurant  & Brewery
restaurants.

     During  July 1997,  the Company  announced  a strategic  plan to reduce its
future  restaurant  expansion  by opening six Rock Bottom  Restaurant  & Brewery
restaurants and no Old Chicago  restaurants during fiscal 1998, and to defer its
plans for  franchising  the Old  Chicago  concept.  As a result,  the  Company's
expansion  strategy  for  1998  is  focused  on  opening  company-owned  brewery
restaurants.  The Company  anticipates  resuming  expansion  for the Old Chicago
concept once  management  believes it has an effective  plan in place to improve
sales  and  profits  in  certain  restaurants,  and  to  reduce  new  restaurant
development costs.

     Expansion  during 1998 for the brewery  restaurants will focus primarily on
building out existing markets in California,  Ohio, Illinois and Washington. New
restaurant  locations currently planned for 1998 and the estimated opening dates
are as follows:

                        1998 Planned Restaurant Openings

       Location                           Estimated Opening Date
       --------                           ----------------------
       La Jolla, CA                         April 1998
       Cleveland, OH                        May 1998
       Irvine, CA                           July 1998
       Warrenville, IL                      September 1998
       Phoenix, AZ                          October 1998
       Bellevue, WA                         November 1998

     While the Company is evaluating  new markets for possible  expansion in the
future,  there can be no  assurance  that  either the Rock Bottom  Restaurant  &
Brewery or Old Chicago  concept  will be  successful  outside  their  historical
markets where regional tastes and restaurant  preferences  may be different.  In
addition,  the Company has expanded the geographic  location of its restaurants,
and  there  can be no  assurance  that  the  Company  will be  able  to  operate
profitable restaurants dispersed in a larger geographic area.

     The Company's  ability to open  additional  restaurants  will depend upon a
number of factors,  including,  among  others,  the  employment  and training of
restaurant management,  staff and other personnel,  the cost and availability of
suitable  locations,   regulatory  limitations  regarding  common  ownership  of
breweries and  restaurants in certain  states,  acceptable  leasing or financing
terms, cost effective and timely construction of restaurants (which construction
can be delayed due to, among other  factors,  labor  disputes,  local zoning and
licensing  matters and weather  conditions),  securing of required  governmental
permits and approvals and the Company's  ability to generate funds from existing
operations.  There can be no assurance that the Company will be able to open its
planned restaurants in a timely or cost effective manner, if at all.


<PAGE>


Restaurant Operations and Management

     The  Company  seeks  to  attract  and  retain  high  quality,   experienced
restaurant   managers  by  providing  them  with  responsibility  and  financial
incentives.  The management team of a typical restaurant consists of one general
manager, up to four department heads (service,  kitchen, bar and, if applicable,
brewing) and up to four assistant  managers.  Each restaurant also has either an
executive chef or  professional  kitchen manager and up to three assistant chefs
or assistant kitchen managers. The Company presently employs a vice president of
operations for each  restaurant  division,  four regional  managers for the Rock
Bottom  Restaurant & Brewery  division and seven  regional  managers for the Old
Chicago  division.  The Company  provides  financial  incentives  to general and
regional  managers  based  on  certain  performance   measures  including:   (i)
profitability  of the restaurant,  (ii) adherence to standard hiring  practices,
and (iii)  completion of personnel  reviews on a timely basis.  General managers
are also  reviewed  on the basis of the  advancement  and  growth  of  assistant
managers,  restaurant  cleanliness and safety,  involvement in the community and
awareness of the market.

     The Company  strives to maintain  quality  and  consistency  at each of its
restaurants  by assisting its personnel in achieving  higher levels of execution
in service,  food/beverage  preparation,  brewing quality assurance and facility
maintenance.   Through  weekly  sales  meetings,  monthly  department  meetings,
"brew-chats"  and  quarterly  employee  roundtable  focus  groups,  the  Company
involves  each  employee  in  the  evaluation  and   improvement  of  restaurant
operations.  The Company seeks to develop and refine its performance measurement
system on an on-going basis, seeking new and innovative ways to provide feedback
to its employees to focus their  attention on improving  restaurant  performance
and profitability.

     The Company  devotes  significant  resources  to  management  training  and
development.  The  Company has  established  a team of  full-time  professionals
including  a vice  president  of  training,  a director  of  recruiting  and two
directors  of  training to manage the  recruitment  and  training of  management
personnel for the Company's new and existing  restaurants.  In addition,  as the
staff is the key ingredient to the Company's  customer service  commitment,  the
Company devotes substantial resources to the recruiting,  hiring and training of
these  individuals,  and employs three training  coordinators  for designing and
implementing  staff training programs such as "Train the Trainer," which ensures
that trainers at each  restaurant  are  communicating  a correct and  consistent
message, and "Big Brother/Big Sister," which provides all new staff members with
a designated individual for answering questions or providing assistance.

     The  Company  maintains  an  alcohol  awareness  training  program  for all
restaurant-level  Company  employees who interact with customers,  which must be
completed  during  the  first 90 days of  employment.  The  Company  employs  30
accredited  trainers  who  educate  and  train  Company  staff to serve  alcohol
responsibly.

Internal Controls

     The Company maintains internal controls for each of its restaurants through
use  of  centralized   accounting  and  management   information  systems.  Each
restaurant  has the ability to compile  their sales and labor  information  on a
daily basis through  utilization of  point-of-sale  terminals.  Certain  brewery
restaurants also have  sophisticated  computer payroll  scheduling  systems that
have allowed management to manage and control labor costs efficiently as well as
transmit payroll information  directly to the Company.  During 1997, the Company
implemented a new accounting and financial  reporting software package that has,
among  other  things,  provided  the  ability  to  integrate  daily  information
generated by each restaurant's  point-of-sale and labor scheduling  systems with
the central accounting system and easily prepare  consolidated or other selected
management  reports  (see  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources").  Cash is
controlled  either  through daily  deposits of sales proceeds into the Company's
principal depository account,  maintained in Colorado, or is transferred twice a
week from bank accounts out of state into the Colorado depository  account.  The
Company stresses the interaction  with restaurant  management to ensure accurate
and efficient reporting.


<PAGE>


Brewing Operations

     The  breweries  at the Rock Bottom  Restaurant  & Brewery  restaurants  are
designed to produce  between  1,600 and 5,000  barrels per year.  Each system is
custom  designed  to be  integrated  into  the  restaurant  layout  in the  most
efficient  and  aesthetic  manner  and  emphasizes  ease  of  control,  use  and
flexibility.  Each Rock Bottom  Restaurant & Brewery  restaurant  employs a head
brewer and one or more  apprentice  brewers.  The  Company  also  employs a vice
president of brewing  operations,  two brewers  responsible  for  designing  and
installing all brewing systems in new restaurants, and six brewers (four of whom
also serve as head brewers) who act as quality control supervisors.

     All of the  Company's  brewers  strive to ensure  that every  batch of beer
brewed is of the highest  quality and  consistent  with prior  batches.  Beer is
produced from malted barley,  hops,  yeast and water.  Malted  barley,  the main
ingredient of beer,  is produced when barley is moistened,  allowed to germinate
and then dried.  The malted  barley is then crushed and mixed with hot water and
strained,  producing a clear amber liquid  called  wort.  Wort is boiled in brew
tubs and hops are added which add bitterness and flavor to the brew. The mixture
is then  strained  and  placed  in a tank  where  yeast is added and the beer is
allowed to ferment.  When the fermentation  process produces the desired result,
the beer is then  transferred to aging tanks where the flavor is developed.  The
brewing  process from the  conversion of raw materials to the serving of beer is
typically  completed  in seven to 14 days,  depending  on the type of beer being
brewed.

Purchasing Operations

     The Company's  management  negotiates  directly with suppliers for key food
and beverage products to assure uniform quality and freshness of products in its
restaurants,  and to obtain  competitive  prices.  These  products  and  certain
supplies used by the Company's  restaurants  are purchased  from  specified food
producers,  independent  wholesale  distributors  and  manufacturers.  Food  and
beverage  products and supplies are shipped  directly to the  restaurants as the
Company  does not  maintain a central  product  warehouse.  The  Company has not
experienced any significant delays in receiving restaurant products, supplies or
equipment.

     The Company directs and participates in a volume buying group consisting of
14 other  restaurants,  two  hotels and one  brewery,  all of which are owned in
whole or in part by affiliates of the Company. During fiscal 1997, the Company's
single largest supplier,  Nobel Sysco, Inc.,  accounted for approximately 88% of
food and other products  purchased by the Company.  The master  agreement  under
which the Company operates with this supplier is terminable upon 30 days' notice
by either  party.  The Company  believes  that food and  beverage  products  are
readily available from alternate suppliers.

Competition

     The restaurant industry is intensely competitive.  Rock Bottom Restaurant &
Brewery restaurants  compete with other casual dining restaurants,  brewpubs and
other  restaurants  primarily on the basis of service,  atmosphere  and quality,
among other factors.  Old Chicago  restaurants  compete with other casual dining
restaurants and with local, neighborhood taverns on the basis of the price-value
relationship,  service, location, quality, beer selection and atmosphere,  among
other  factors.  Many  competitors  for both of the Company's  concepts are well
established and have  substantially  greater  financial and other resources than
does the Company.

     The  restaurant  industry  generally,  and the  Company in  particular,  is
affected by changes in consumer  tastes,  national,  regional or local  economic
conditions,  weather conditions,  demographic  trends,  traffic patterns and the
type,  number and location of competing  restaurants.  The Company  believes its
ability to compete effectively will continue to depend upon its ability to offer
superior   service  with  high  quality   menu  items  in   distinctive   dining
environments.

Government Regulations

     General.  The  Company's  restaurants  are subject to regulation by federal
agencies and to licensing and regulation by state and local health,  sanitation,
safety, fire and other departments  relating to the development and operation of
restaurants.  These  regulations  include  matters  relating  to  environmental,
building and zoning requirements, the preparation and sale of food and alcoholic
beverages,  designation of non-smoking  and smoking areas and  accessibility  of
restaurants to disabled  customers.  Various federal and state labor laws govern
the  Company's   relationship   with  its  employees,   including  minimum  wage
requirements,   overtime,   working  conditions  and  immigration  requirements.
Significant  additional  government-imposed  increases  in minimum  wages,  paid
leaves of absence and mandated health  benefits,  or increased tax reporting and
tax payment requirements for employees who receive

<PAGE>


gratuities, could have an adverse effect on the Company's results of operations.
Delays  or  failures  in  obtaining  the  required  construction  and  operating
licenses,  permits  or  approvals  could  delay or  prevent  the  opening of new
restaurants.  Management  believes  the  Company  is  operating  in  substantial
compliance with applicable laws and regulations governing its operations.

     Alcoholic Beverage Regulation. Each of the Company's restaurants is subject
to licensing and regulation by a number of governmental authorities. The Company
operates its Rock Bottom  Restaurant & Brewery  restaurants  in compliance  with
federal  licensing  requirements  imposed by the Bureau of Alcohol,  Tobacco and
Firearms  of the  United  States  Department  of the  Treasury,  as  well as the
licensing  requirements of states where its  restaurants are located.  Alcoholic
beverage control regulations require each of the Company's  restaurants to apply
to a state authority and, in certain locations,  county or municipal authorities
for a license and permit to brew and/or sell  alcoholic  beverages  on premises.
Typically, licenses must be renewed annually and may be revoked or suspended for
cause at any time.  Alcoholic  beverage control  regulations  relate to numerous
aspects of the daily operations of the Company's restaurants,  including minimum
age of  patrons  and  employees,  hours  of  operation,  advertising,  wholesale
purchasing,  inventory control and brewing, and handling, storage and dispensing
of alcoholic  beverages.  The Company  believes it has all  material  regulatory
permits and licenses  necessary to operate its  restaurants and the breweries at
the Rock Bottom  Restaurant  & Brewery  restaurants.  Failure on the part of the
Company to comply  with  federal,  state or local  regulations  could  cause the
Company's  licenses to be revoked and force it to cease the brewing  and/or sale
of alcoholic beverages at its restaurants.  In addition, changes in legislation,
regulations or administrative interpretation of liquor laws after the opening of
restaurants in a jurisdiction  may prevent or hinder the Company's  expansion or
operations in that  jurisdiction.  The failure to receive or retain, or delay in
obtaining,  a liquor or brewpub license in a particular location could adversely
affect the Company's ability to obtain such a license elsewhere.

     Certain states have  restrictions on the number of barrels of beer that can
be brewed annually by a brewpub. These various state liquor laws are continually
changing, and the Company may be hindered or prohibited from opening Rock Bottom
Restaurant  & Brewery  restaurants  in certain  markets.  The  Company  does not
believe that federal or state liquor laws will have a material adverse effect on
the opening or  operation of the Rock Bottom  Restaurant  & Brewery  restaurants
planned for 1998.

     The United States federal government currently imposes an excise tax of $18
per barrel on each  barrel of beer  produced  for  domestic  consumption  in the
United States.  However, each brewer with production under 2,000,000 barrels per
year is  granted a small  brewer's  excise  tax  credit in the amount of $11 per
barrel on its first 60,000 barrels produced  annually.  In 1997, the Company was
able to take  advantage  of a  $359,458  credit  from the  production  of 32,678
barrels pursuant to this exemption. The Company is not aware of any plans by the
federal government to reduce or eliminate the small brewer's credit.  Individual
states also impose excise taxes on alcoholic beverages in varying amounts, which
also are subject to change.  It is possible  that excise taxes will be increased
by both the  federal  government  and a number of the states.  Increased  excise
taxes on alcoholic  beverages  have been  considered by the U.S.  Congress as an
additional  source of tax revenue in connection with various proposals and could
be included in future legislation. Certain states have special taxes on the sale
or production of alcoholic beverages.  Increases in taxes on malt beverages,  if
enacted, could have a material adverse effect on the Company.

     The  Company  is  subject to  "dram-shop"  laws in most  states in which it
currently  operates and will be subject to such statutes in certain other states
for  future  sites.  These  laws  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  which it  believes  is  consistent  with  coverage  carried  by other
entities in the restaurant  industry.  However,  a judgment  against the Company
under a dram-shop  statute in excess of the Company's  liability  coverage could
have a material adverse effect on the Company.



<PAGE>


Employees

     At December 28, 1997, the Company had 5,295  employees,  of which 86 served
in administrative capacities (including home office, brewery, administrative and
executive personnel),  330 served as restaurant  management  personnel,  and the
remainder of whom were hourly personnel.  No employee is covered by a collective
bargaining  agreement,  and the Company has never  experienced an organized work
stoppage,  strike or labor dispute.  The Company believes its working conditions
and  compensation  are  competitive  with those offered by its  competitors  and
considers relations with its employees to be excellent.

Intellectual Property

     The Company owns a number of  trademarks  and service  marks that have been
registered  with the United States Patent and  Trademark  Office,  including Old
Chicago, Rock Bottom Restaurant & Brewery,  World Beer Tour, Hall of Foam, Pizza
Palz,  You've Hit Rock Bottom,  Denver ChopHouse and Brewery and the Old Chicago
Fresh Pasta & Pizza design.  The Company regards its Old Chicago and Rock Bottom
Restaurant & Brewery and other marks as having substantial value and as being an
important factor in the marketing of its Old Chicago restaurants and Rock Bottom
Restaurant & Brewery restaurants. The Company's policy is to pursue registration
of its marks whenever  possible and to oppose vigorously any infringement of its
marks. The Company is aware, however, of a use by an unaffiliated third party of
the name Old Chicago in California  which could limit the ability of the Company
to use its Old Chicago mark in parts of the California  market,  and of a use by
an  unaffiliated  third  party of the name  Rock  Bottom  in New  Hampshire  and
Nebraska  which  could  limit the  ability of the Company to use its Rock Bottom
Restaurant & Brewery mark in parts of New Hampshire and Nebraska.


<PAGE>


ITEM 2:  Properties

     As of December 28, 1997, the Company operated 63 restaurants,  including 21
Rock Bottom Restaurant & Brewery restaurants and 42 Old Chicago restaurants, and
owned a 50% equity  interest in six  restaurants  operated by Trolley Barn.  The
following   table  sets  forth  the   locations   of  these   restaurants.   See
"Business-Expansion Strategy" for a discussion of planned restaurant openings in
1998:

                           Existing Restaurant Locations as of December 28, 1997
<TABLE>
<CAPTION>
                                  Rock Bottom Restaurant &
                                          Brewery              Old Chicago          Trolley Barn
          <S>                     <C>                          <C>                  <C>
           Arizona                           --                      1                   --
           California                         3                     --                   --
           Colorado (a)                       4                     17                   --
           District of Columbia               1                     --                   --
           Florida                           --                     --                   1
           Georgia                           --                     --                   1
           Idaho                             --                      2                   --
           Illinois                           1                      1                   --
           Indiana                            1                     --                   --
           Iowa                               1                      1                   --
           Kansas (a)                         1                      3                   --
           Maryland                           1                     --                   --
           Minnesota                          1                      7                   --
           Missouri (a)                      --                      2                   --
           Nebraska                          --                      3                   --
           Ohio                               2                     --                   --
           Oregon                             1                      3                   --
           North Carolina                    --                     --                   1
           South Carolina                    --                     --                   1
           Tennessee                         --                     --                   2
           Texas (a)                          2                      1                   --
           Washington                         1                     --                   --
           Wisconsin                          1                      1                   --
                                             --                     --                   --
             Total restaurants               21                     42                   6
                                             ==                     ==                   =
</TABLE>

         (a)  During  the first  quarter  of 1998,  the  Company  closed two Old
         Chicago  restaurants  located in  Colorado  and  Missouri  and two Rock
         Bottom  Restaurant  & Brewery  restaurants  located in Kansas and Texas
         (see "Management's  Discussion and Analysis of Financial  Condition and
         Results of Operations - Overview").

     The Company either owns or leases the  furnishings,  fixtures and equipment
in each of its restaurants. Generally, each lease entered into by the Company is
conditioned  upon the ability of the Company to obtain the permits and  licenses
necessary  to  operate  the  restaurant   identified  for  such  site.  Existing
restaurant  building  leases have  expiration  dates ranging from August 1998 to
February  2038  (excluding  existing  renewal  options).  The  Company  does not
anticipate  any  difficulties  in renewing its  existing  leases as they expire;
however,  there can be no assurance  that the Company will be able to renew such
leases.  See  Note  10  of  Notes  to  Consolidated   Financial  Statements  for
information  regarding  aggregate minimum rentals paid by the Company for recent
periods  and  information  regarding  the  Company's  obligation  to pay minimum
rentals in future years.

     The Company  owns the land and  building  for the Old  Chicago  restaurants
located in Greeley,  Longmont and Grand Junction,  Colorado;  Addison, Texas and
Salem,  Oregon, and for the Rock Bottom Restaurant & Brewery restaurants located
in Chicago, Illinois; Addison, Texas and Des Moines, Iowa. The Company completed
a sale/leaseback  transaction in early 1998 for the property owned in Des Moines
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources"). The Property owned in Chicago is
encumbered  by a  long-term  mortgage  (see  Note  6 of  Notes  to  Consolidated
Financial Statements).  The Company also leases approximately 23,000 square feet
of office space in Louisville, Colorado.



<PAGE>


ITEM 3:  Legal Proceedings

     The Company is a party to certain legal proceedings arising in the ordinary
course  of its  business.  Management  believes  that any  resulting  liability,
individually or in the aggregate, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.

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

     Not applicable.
                                     PART II

ITEM 5:  Market for Registrant's Common Equity and Related Stockholder Matters

     The table below sets forth for the fiscal  quarters  indicated the reported
high and low last  sale  prices  per share of the  Company's  Common  Stock,  as
reported  on The Nasdaq  Stock  Market SM. The last sale price of the  Company's
common stock on March 26, 1998, was $5.875 per share.

<TABLE>
<CAPTION>

                                             High          Low
<S>      <C>                               <C>          <C>
1996
         First quarter                     $ 13.00       $ 8.75
         Second quarter                      14.88         9.50
         Third quarter                       13.75        10.88
         Fourth quarter                      12.50         9.25

1997
         First quarter                     $ 12.00       $ 8.63
         Second quarter                      12.00         9.25
         Third quarter                       10.00         7.25
         Fourth quarter                      11.75         5.75
</TABLE>

     As of March 26,  1998,  there  were 295  record  holders  of Common  Stock,
although the Company believes that the number of beneficial owners of its Common
Stock is substantially greater.

     The Company anticipates that for the foreseeable  future, all earnings,  if
any,  will be retained for the  operation and expansion of its business and that
it will not pay cash dividends.  The payment of dividends, if any, in the future
will be at the discretion of the Board of Directors and will depend upon,  among
other things, future earnings,  capital  requirements,  restrictions in existing
financing agreements, the general financial condition of the Company and general
business conditions.


<PAGE>


ITEM 6:  Selected Financial Data

     The selected  data  presented  below for, and as of the end of, each of the
years in the  five-year  period ended  December  28, 1997,  are derived from the
Consolidated  Financial  Statements  of the Company,  which have been audited by
Arthur  Andersen  LLP,  independent   accountants.   The  Selected  Consolidated
Financial Data should be read in  conjunction  with the  Consolidated  Financial
Statements and related notes thereto and  "Management's  Discussion and Analysis
of Financial  Condition and Results of  Operations"  included  elsewhere in this
Form 10-K. The financial data presented  prior to 1994 represents the historical
combined operations of certain predecessor corporations.  See Note 1 of Notes to
Consolidated Financial Statements.

<TABLE>
<CAPTION>

                                                                                Years Ended
                                              -----------------------------------------------------------------------------
                                               December 26,    December 25,    December 31,      December 29,   December 28,
                                                 1993               1994             1995             1996          1997
                                                 ----               ----             ----             ----          ----
                                                                  (In thousands, except per share data)
<S>                                            <C>               <C>            <C>             <C>             <C>
Income Statement Data:
Revenues:
  Old Chicago restaurants                       $15,641           $22,201        $40,499          $ 58,328       $  73,117
  Rock Bottom Restaurant & Brewery
   restaurants                                    9,126            16,652         33,465            50,902          77,131
                                                -------            ------         ------          --------        --------
         Total revenues                          24,767            38,853         73,964           109,230         150,248
                                                 ------            ------         ------           -------         -------
Operating Expenses:
  Cost of sales                                   6,777             9,785         18,509            27,100          37,672
  Restaurant salaries and benefits                8,113            12,727         24,739            35,552          51,086
  Operating expenses                              5,201             8,044         15,135            23,529          30,627
  Selling expenses                                  942             1,272          2,855             4,272           5,773
  General and administrative                      1,434             2,468          4,577             5,620           9,073
  Depreciation and amortization                     565             1,325          4,200             7,802          12,136
  Restructuring charge                               --                --             --                --           9,707
                                                -------           -------        -------          --------        --------
         Total operating expenses                23,032            35,621         70,015           103,875         156,074
                                                 ------            ------         ------           -------         -------
Income (Loss) From Operations                     1,735             3,232          3,949             5,355          (5,826)
Equity in joint venture earnings                     --                --             --               223             330
Interest income (expense), net                     (174)             (106)           831               (74)         (1,763)
Other income (expense), net                        (148)                8             40                (1)             --
                                                --------          -------        -------         ---------       ---------
Income (Loss) Before Taxes                        1,413             3,134          4,820             5,503          (7,259)
Net Income (Loss) (1)                          $    880           $ 1,924       $  3,270          $  4,025        $ (4,691)
                                                 ======            ======         ======            ======          ======
Diluted Net Income (Loss) Per Share            $    .29           $   .47       $    .45          $    .52        $   (.58)
                                                 ======            ======         ======            ======          ======
Diluted Weighted Average
    Shares Outstanding (2)                        3,062             4,072          7,264             7,725           8,027
                                                  =====             =====          =====             =====           =====
Balance Sheet Data (at end of period):
  Working capital (deficit)                     $(3,072)          $ 1,113        $ 9,335          $   (732)       $ (5,567)
  Total assets                                    5,757            26,359         64,169            84,948         108,195
  Long-term debt (including current
    portion)                                      1,825               706            641            11,564          28,940
  Obligations under capital leases
    (including current portion)                     292             1,794          1,667             1,372           2,861
  Stockholders' equity                              940            17,924         55,341            65,337          61,219

</TABLE>

(1)      The Company was taxed as an S  corporation  through  July 10, 1994 and,
         therefore,  the income statement data includes  certain  adjustments to
         reflect  a  provision  for  income  taxes  through  that date as if the
         Company had been taxed as a C Corporation.

(2)      Weighted average common shares outstanding include (a) 3,000,000 shares
         of  Common  Stock  issued  to  stockholders   of  certain   predecessor
         corporations and (b) 62,375 additional shares deemed issued at December
         26, 1993, to fund undistributed S corporation earnings at that date.


<PAGE>


ITEM 7: Management's  Discussion and Analysis of Financial Condition and Results
of Operations

     The  following  discussion  of the  results  of  operations  and  financial
condition should be read in conjunction with the Company's audited  Consolidated
Financial Statements and notes thereto appearing in Item 8 in this Form 10-K.

Cautionary Statement Under "Safe Harbor" Provision of the
Private Securities Litigation Reform Act of 1995

     Certain  statements  contained in this report are not historical facts, and
are  forward-looking  statements  that  involve  known  and  unknown  risks  and
uncertainties  which may cause actual  results or  performance of the Company to
differ materially from such forward-looking  statements. Such statements include
statements regarding:

              -Restaurant expansion plans for 1998;
              -Estimated capital expenditures in 1998;
              -Estimated average construction cost for new restaurants opening
               during 1998;
              -Trolley Barn's development plans during the next three years;
              -The Company's expansion strategy;
              -Ability of the Company to renew existing leases;
              -Ability to complete sale-leaseback transactions for prototype
               brewery restaurants;
              -Availability of food and beverage products from alternate
               suppliers;
              -Ability of the Company to compete effectively within the
               restaurant industry;
              -Changes in federal or state liquor or tax laws;
              -Impact on financial  condition,  results of operations or
               liquidity from legal  proceedings  arising in the ordinary
               course of business;
              -Ability of brewery restaurants to achieve operating efficiencies;
              -Timing and results of cost reduction efforts;
              -Estimated amounts accrued for restaurant closings;
              -Ability to generate  sufficient  cash from operations to complete
               financing of 1998 restaurant expansion.

     Factors that could cause actual results to differ materially include, among
others: availability of suitable restaurant locations; availability of financing
on acceptable terms to fund future growth;  increasing costs associated with new
restaurant  construction,  or developing a significant number of new restaurants
over a  relatively  short  period of time;  delays in opening  new  restaurants;
ability to hire and train increasing numbers of restaurant management, staff and
other personnel for new restaurants; ability of Trolley Barn to open restaurants
or conduct operations as anticipated; fluctuations in consumer demand and tastes
including a decrease in consumers' preference for higher quality, more flavorful
beer;  acceptance  in new  markets;  competitive  conditions  in  the  Company's
markets;  general economic  conditions;  adverse weather  conditions;  operating
restrictions  and costs  associated with  governmental  regulations;  regulatory
limitations  regarding  common ownership of breweries and restaurants in certain
states;  greater than expected costs  associated with closing  restaurants,  and
other  risks  detailed in the  Company's  reports  and other  filings  under the
Securities  Exchange  Act of 1934.  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.
In addition,  the Company  disclaims  any intent or  obligation  to update these
forward-looking  statements,  whether  as a result  of new  information,  future
events, or otherwise.


<PAGE>


Overview

     As of December 28, 1997, the Company  operated 21 Rock Bottom  Restaurant &
Brewery  restaurants  and  42  Old  Chicago  restaurants,   an  increase  of  14
restaurants from the end of the preceding fiscal year. The following table lists
the Company's new restaurant openings by quarter during 1997:

<TABLE>
<CAPTION>

                                                          New Restaurant Openings

                                                    Qtr. Ended   Qtr. Ended   Qtr. Ended   Qtr. Ended      Total
                                                      3/30/97      6/29/97      9/28/97     12/28/97        1997
          <S>                                       <C>          <C>          <C>          <C>             <C>
           Old Chicago restaurants                       2            4            1           --            7
           Rock Bottom Restaurant & Brewery
             restaurants                                 2            3            2           --            7
                                                         -            -            -           --            -
                Total restaurants                        4            7            3            0            14
                                                         =            =            =            =            ==
</TABLE>

     The Old Chicago  restaurants  opened during 1997 are  primarily  located in
existing markets throughout the west and mid-west.  The Rock Bottom Restaurant &
Brewery restaurants opened during 1997 are located in Campbell,  Fresno and Long
Beach, California;  Englewood,  Colorado; Des Moines, Iowa; Milwaukee, Wisconsin
and the District of Columbia.  Due to the  maturation of the Company's  existing
restaurant base and the possible  effects of opening  additional  restaurants in
close proximity,  revenues of certain of the Company's  restaurants may be lower
in future periods than previously experienced.


     During 1997,  the Company  approved a strategic  plan to reduce  restaurant
expansion,  suspend  development of new Old Chicago  restaurants,  and close two
Rock Bottom  Restaurant & Brewery  restaurants  and two Old Chicago  restaurants
during early 1998.  Such steps were part of an overall  restructuring  effort to
improve  restaurant  operating  profits.  As a result  of these  decisions,  the
Company incurred a pre-tax  restructuring  charge of approximately $9.7 million.
Such charge includes the estimated costs accrued to close these four restaurants
of  approximately  $3.9  million,  write-downs  of  certain  assets to their net
realizable value totaling  approximately  $5.5 million,  and expenses related to
the elimination of certain  corporate office overhead in response to the planned
reduction  in future  growth  totaling  approximately  $272,000.  Subsequent  to
yearend,  the Company closed the Old Chicago  restaurants  located in Evergreen,
Colorado  and  Gladstone,  Missouri,  and the Rock Bottom  Restaurant  & Brewery
restaurants located in Houston, Texas and Overland Park, Kansas.

     Restaurant  openings planned for 1998 include six Rock Bottom  Restaurant &
Brewery restaurants.  All leases for new restaurants are either signed or in the
final stages of negotiation.  Future operating results may be adversely affected
by costs associated with developing a significant number of new restaurants over
a relatively short time period.  Additionally,  new restaurants  typically incur
certain  increased  costs in the process of achieving  operational  efficiencies
during  the first  several  months of  operation.  Preopening  costs,  which are
incurred  prior to  opening a new  restaurant  but  amortized  over the first 12
months after opening,  and  restaurant  salaries and benefits are one example of
these increased costs.

     The Accounting  Standards  Executive  Committee of the AICPA has issued for
comment a proposed  statement of position ("SOP") titled "Reporting on the Costs
of Start-up  Activities." If issued as proposed,  the new standard would require
the Company to prospectively  expense preopening costs as incurred. As currently
proposed,  the new SOP would not require  restatement of prior periods and would
be applied  as of the  beginning  of the  fiscal  year in which the SOP is first
adopted,  which  would be 1998 for the  Company.  Initial  application  would be
reported as a cumulative effect of a change in accounting principle.



<PAGE>


     The Company  operates on a 52 or 53 week fiscal year ending the last Sunday
in December.  Fiscal years 1996 and 1997 each  contained 52 weeks,  while fiscal
1995 contained 53 weeks.

Results of Operations

     The following table sets forth, for the periods  indicated,  the percentage
relationship to restaurant revenues of certain income statement data and certain
restaurant data:
<TABLE>
<CAPTION>
                                                                                      Percentage of Revenues
                                                                                      ----------------------
                                                                                             Years Ended
                                                                                             -----------
                                                                              December 31,   December 29,    December 28,
                                                                                  1995           1996            1997
                                                                                  ----           ----            ----
<S>                                                                          <C>            <C>             <C>
Income Statement Data:
Revenues:
  Old Chicago restaurants                                                         54.8%          53.4%           48.7%
  Rock Bottom Restaurant & Brewery restaurants                                    45.2           46.6            51.3
                                                                                 -----          -----           -----
         Total revenues                                                          100.0          100.0           100.0
                                                                                 -----          -----           -----
Operating Expenses:
  Cost of sales                                                                   25.0           24.8            25.1
  Restaurant salaries and benefits                                                33.4           32.6            34.0
  Operating expenses                                                              20.5           21.5            20.4
  Selling expenses                                                                 3.9            3.9             3.8
  General and administrative                                                       6.2            5.1             6.0
  Depreciation and amortization                                                    5.7            7.2             8.1
  Restructuring charge                                                             --              --             6.4
                                                                                 -----          -----           -----
         Total operating expenses                                                 94.7           95.1           103.8
                                                                                 -----          -----           -----
Income (Loss) From Operations                                                      5.3            4.9            (3.8)
Equity in joint venture earnings                                                    --            0.2             0.2
Interest income                                                                    1.5            0.2              --
Interest expense                                                                  (0.3)          (0.3)           (1.2)
Other income (expense), net                                                         --             --              --
                                                                                 -----          -----           -----
Income Before Taxes                                                                6.5            5.0            (4.8)
Net Income (Loss)                                                                  4.4%           3.7%           (3.1)%
                                                                                 =====          =====           =====
Restaurant Data:
  Restaurants open (end of period):
    Old Chicago restaurants                                                       23              35               42
    Rock Bottom Restaurant & Brewery restaurants                                  10              14               21
                                                                                 ---             ---              ---
         Total                                                                    33              49               63
                                                                                 ===             ===              ===
  Restaurant operating weeks:
    Old Chicago restaurants                                                      983           1,541            2,058
    Rock Bottom Restaurant & Brewery restaurants                                 369             588              949
                                                                              ------          ------           ------
         Total                                                                 1,352           2,129            3,007
                                                                               =====           =====            =====
  Average sales per restaurant (open for full period)
    (in thousands):
    Old Chicago restaurants                                                   $2,144           $1,902         $ 1,834
    Rock Bottom Restaurant & Brewery restaurants                               4,705            4,466           4,393
</TABLE>

Fiscal 1997 Compared to Fiscal 1996

     Revenues.  Revenues  increased  $41.0 million  (37.6%) to $150.2 million in
fiscal  1997 from  $109.2  million  in  fiscal  1996.  Revenues  from the 14 new
restaurants  which opened during 1997 accounted for $24.5 million (22.4%) of the
increase. The balance of the increase primarily resulted from the 16 restaurants
opened  during  1996  contributing  a full  year of sales  in  1997.  Comparable
restaurant  sales for the year ended  December 28, 1997 were down  slightly more
than one percent. When computing comparable  restaurant sales,  restaurants open
for at least six full quarters are compared from year to year.


<PAGE>


     Revenues from the Company's Rock Bottom  Restaurant & Brewery  restaurants,
as a percentage of total revenues, increased significantly to 51.3% in 1997 from
46.6% in 1996.  Although the Company opened seven brewery  restaurants and seven
Old  Chicago  restaurants  during the last 12 months,  the  brewery  restaurants
generate greater average weekly sales ("AWS")  resulting in the increase to this
percentage.  The Company  expects  revenues  from the Rock Bottom  Restaurant  &
Brewery  restaurants  to comprise an even greater  percentage  of the  Company's
total revenues in 1998, as there are no Old Chicago restaurant  openings planned
for 1998.

     AWS for the Old Chicago restaurants during 1997 were $35,528 as compared to
$37,850 during fiscal 1996 (a decrease of 6.1%). Comparable restaurant sales for
the Old Chicago restaurants were down 2.6% for the year ended December 28, 1997.
These  decreasing  trends  in AWS and  comparable  restaurant  sales for the Old
Chicago restaurants  continue to reflect the ever-increasing  competitive nature
of the  restaurant  industry.  Management  also  believes  that the uneven sales
performance  among its Old  Chicago  restaurants,  which  have  fiscal  1997 AWS
currently ranging from approximately $28,000 to $49,000,  indicates inconsistent
execution of the concept at certain locations. During the third quarter of 1997,
the  Company  began  implementing  an  extensive  analysis  of its  Old  Chicago
restaurants to direct  management's  efforts towards improving overall execution
in each restaurant by increasing AWS in certain restaurants while achieving more
consistent  profitability.  Such  analysis  covers  all  aspects  of  operations
including  hiring  and  training  of  new  staff,   restaurant  maintenance  and
cleanliness, local restaurant marketing promotions, menu merchandising,  service
standards  and food quality and  consistency.  The Company has begun to see some
benefits  from  focusing on these areas  including  improved AWS and  comparable
restaurant  sales  trends  during the fourth  quarter of 1997 as compared to the
fourth quarter of 1996. However, management expects that complete implementation
of this program will not occur system wide until mid 1998.

     AWS for the Rock Bottom Restaurant & Brewery  restaurants  during 1997 were
$81,277  as  compared  to  $86,568  during  fiscal  1996 (a  decrease  of 6.5%).
Comparable  restaurant sales for the brewery  restaurants were flat for the year
ended December 28, 1997. The Company  anticipated the decrease in AWS as most of
the  brewery  restaurants  opened  during  1997 were  designed  to  operate at a
slightly lower capacity than the Company's previous restaurants. AWS during 1997
for this group of restaurants were approximately  $71,000 as compared to $84,000
for the 14  restaurants  opened prior to 1997.  As the Company will  continue to
design  certain  of its  new  brewery  restaurants  with  this  lower  capacity,
decreases in AWS are expected to continue in the future.

     Cost of  Sales.  Cost of  sales,  which  consists  of  food,  beverage  and
merchandise  costs,  increased  $10.6 million (39.0%) to $37.7 million in fiscal
1997 from  $27.1  million in fiscal  1996,  and  increased  as a  percentage  of
revenues to 25.1% in fiscal 1997 from 24.8% in fiscal 1996. The increase in cost
of sales as a percentage of revenues was due primarily to new menus  implemented
in both  concepts  in late  third  quarter  and early  fourth  quarter  of 1997.
Management   believes  such  cost   increases  are  temporary  and  result  from
inefficiencies associated with rolling out new menus. Additionally, although the
Company benefited from greater purchasing  efficiencies  during 1997,  including
certain non-recurring  benefits in the third quarter of 1997, these cost savings
were  offset by  greater  than  expected  food costs  during  1997 for the seven
brewery  restaurants opened during the year. New brewery  restaurants  typically
incur  significantly  higher food costs  during  their first  several  months of
operation due to complexity of the menu items. As new brewery  restaurants begin
to achieve operational efficiencies, the Company expects that cost of sales as a
percentage  of revenues  may  decrease  slightly  over time.  Additionally,  the
Company has engaged an outside consultant to assist in reengineering the brewery
menu and streamlining food preparation procedures.  Cost savings from such steps
are not expected until mid-1998.

     Restaurant Salaries and Benefits.  Restaurant salaries and benefits,  which
consist of restaurant  management and hourly employee wages,  payroll taxes, and
group health  insurance,  increased  $15.5  million  (43.7%) to $51.1 million in
fiscal 1997 from $35.6 million in fiscal 1996.  Restaurant salaries and benefits
as a percentage of revenues  increased to 34.0% in 1997 from 32.6% in 1996.  The
increase in labor costs as a percentage  of revenues is primarily  attributed to
two  factors:  significantly  higher labor costs  associated  with the seven new
brewery restaurants opened during 1997, and decreases in AWS for the Old Chicago
restaurants.

     Although  labor costs as a percentage  of revenues for brewery  restaurants
opened prior to 1997  decreased  during  fiscal 1997 as compared to fiscal 1996,
labor costs in the new brewery restaurants, most of which operate in higher cost
labor  markets,  more than offset this  savings.  Labor costs in the new brewery
restaurants  improved  significantly  during the fourth quarter of 1997 from the
third quarter of 1997, and additional cost savings are anticipated over the next
several  months  as these  restaurants  achieve  operational  efficiency.  Other
increases in labor are due to greater costs for  management and kitchen labor in
the Old Chicago restaurants. As the majority of these labor costs are fixed, the
decrease  in AWS  resulted in an  increase  to these  costs as a  percentage  of
revenues.



<PAGE>


     Federal legislation  effective September 1, 1997 increased the minimum wage
rate $.40 per hour to $5.15 per hour.  This  legislation  also  provided  for an
additional  increase to the Federal tip credit by the same  amount,  so that the
federal  minimum wage paid to tipped  employees did not increase.  Additionally,
certain states passed  minimum wage  legislation to increase rates to amounts in
excess of the  Federal  minimum  wage.  Although  a  majority  of the  Company's
restaurants  operate in states that have wage laws  consistent  with the Federal
minimum  wage  laws,   the  Company   implemented  a  menu  price   increase  of
approximately  2% in both  restaurant  concepts late during the third quarter of
1997 to help mitigate the anticipated impact of such legislation.

     Operating  Expenses.  Operating  expenses,  which include  occupancy costs,
utilities,  repairs,  maintenance  and linen,  increased $7.1 million (30.2%) to
$30.6 million in fiscal 1997 from $23.5 million for fiscal 1996. As a percentage
of revenues,  such expenses  decreased to 20.4% in 1997 from 21.5% in 1996. This
decrease was  principally  due to a reduction in 1997  insurance  premium rates,
particularly workmen's compensation  insurance,  as well as a continued emphasis
on cost control measures in numerous areas of restaurant operations.

     General and  Administrative  ("G&A").  G&A expenses  increased $3.5 million
(61.5%) to $9.1  million in fiscal 1997 from $5.6  million in fiscal  1996,  and
increased as a percentage of revenues from 5.1% in fiscal 1996 to 6.0% in fiscal
1997.  The  significant  increase in dollars is primarily  due to (1)  personnel
additions in the areas of marketing, training, information systems, supervision,
accounting and finance, and senior management necessary to support the Company's
expansion program,  and (2) approximately $1.3 million in non-recurring  charges
incurred during the fourth quarter of 1997 for executive severance pay and costs
associated with the Company's exploration of strategic alternatives.

     Depreciation and  Amortization.  Depreciation and  amortization,  including
amortization  of preopening  expenses,  increased $4.3 million  (55.5%) to $12.1
million for fiscal 1997 from $7.8  million in fiscal 1996.  As a  percentage  of
revenues, depreciation expense and amortization of intangible assets, other than
preopening  costs,  was  5.1%  during  1997 as  compared  to 4.4% in  1996,  and
preopening expense amortization was 3.0% in 1997 as compared to 2.8% in 1996.

     The increase in depreciation  expense and amortization of intangible assets
as a  percentage  of  revenues is due  primarily  to  decreases  in AWS for both
concepts,  increased  depreciation  expense  associated with a greater number of
corporate assets resulting from the Company's  expansion program,  and increased
amortization  of  intangible  assets  including  goodwill  associated  with  the
Company's  investment in Trolley Barn.  Amortization of preopening  expense as a
percentage of revenues  fluctuates  with the number and type of restaurant  (Old
Chicago or Rock Bottom Restaurant & Brewery) opened in any given period.  During
1997,  preopening  expense  was  amortized  for a larger  number of Rock  Bottom
Restaurant  & Brewery  restaurants  than in 1996,  resulting  in the increase to
preopening expense amortization as a percentage of revenues.

     Restructuring  Charge. The Company incurred a pre-tax  restructuring charge
during 1997 of approximately $9.7 million ($5.2 million during the third quarter
of 1997 and $4.5 million during the fourth quarter of 1997) related primarily to
write-downs of certain assets to their net realizable  value,  costs  associated
with  downsizing  the corporate  office,  and estimated  costs  associated  with
closing  four  restaurants  during  1998.  See Note 7 of  Notes to  Consolidated
Financial Statements.

     Equity in Joint  Venture  Earnings.  The equity in joint  venture  earnings
represents  the  Company's  50% equity  interest  in net  after-tax  earnings of
Trolley Barn (see Note 5 of Notes to  Consolidated  Financial  Statements).  The
increase from 1996 of approximately  $107,000 is due to the Company  recording a
full year of  earnings  during  1997 as  compared to only six months of earnings
during 1996. Additionally, although Trolley Barn operated six restaurants at the
end of 1997  as  compared  to four  restaurants  at the end of  1996,  increased
earnings   from  these   restaurants   were   offset  by  greater   general  and
administrative expenses associated with Trolley Barn's expansion program.

     Interest  Expense / Interest  Income.  Interest  expense for the year ended
December 28, 1997  increased  $1.5 million  from 1996,  excluding  approximately
$378,000 of interest expense  capitalized to construction costs. The increase in
interest expense is primarily attributable to an increase in long-term debt from
the end of 1996,  principally  additional  net borrowings of $17.9 million under
the  Company's  line of credit.  See Note 6 of Notes to  Consolidated  Financial
Statements. Interest income during 1996 primarily represents amounts earned from
the temporary  investment of cash proceeds from the Company's follow-on offering
in the first quarter of 1995.



<PAGE>


     Net Income  (Loss) and  Diluted Net Income  (Loss) Per Share.  Net loss and
diluted net loss per share for the year ended December 28, 1997 was $4.7 million
and $.58,  respectively.  Net income and diluted net income per share, exclusive
of the restructuring  charge and certain other  non-recurring  G&A expenses,  is
summarized as follows:

         Pre-tax loss                                      $ (7,258,894)
         Add:   Restructuring charge                          9,706,554
                Non-recurring  G&A expenses                   1,300,000
                                                              ---------
                Pro forma pre-tax income excluding
                  non-recurring charges                       3,747,660
                Allocable income tax expense                 (1,305,154)
                                                              ---------
                Pro forma net income                       $  2,442,506
                                                              =========
                Pro forma  diluted  net income per share   $        .30

     Income Tax Provision (Benefit).  The effective tax rate associated with the
income tax benefit in 1997 was 35.4% as compared to the  effective  tax rate for
the income tax provision in 1996 of 26.9%. The difference  between the two rates
is primarily due to income tax credits  generated during each fiscal year net of
any  related  valuation  allowance.  Such net  credits  are used to  reduce  the
effective  combined  federal and state tax rate. Due to alternative  minimum tax
limitations  and the  relatively  volatile  nature of the  restaurant  industry,
during  fiscal 1997 the Company  recorded a valuation  allowance for 100% of the
FICA tax credits generated, as compared to fiscal 1996 when the Company recorded
a valuation allowance for approximately 30% of tax credits generated. See Note 8
of Notes to Consolidated Financial Statements.

Fiscal 1996 Compared to Fiscal 1995

     Revenues.  Revenues  increased  $35.3 million  (47.7%) to $109.2 million in
fiscal  1996  from  $74.0  million  in  fiscal  1995.  Revenues  from the 16 new
restaurants  which opened during 1996 accounted for $19.9 million (26.9%) of the
increase. The balance of the increase primarily resulted from the 14 restaurants
opened  during 1995  contributing  a full year of sales in 1996,  as  comparable
restaurant  sales were flat for the year. When computing  comparable  restaurant
sales, restaurants open for at least six full quarters are compared from year to
year.

     Revenues from the Company's Rock Bottom  Restaurant & Brewery  restaurants,
as a  percentage  of total  revenues,  increased  slightly to 46.6% in 1996 from
45.2% in 1995.  Although the Company  opened only four Rock Bottom  Restaurant &
Brewery  restaurants  during the last 12 months as  compared  to 12 Old  Chicago
restaurants,  the brewery  restaurants  generate  greater  average  weekly sales
("AWS") resulting in the increase to this percentage.

     AWS for the Rock Bottom Restaurant & Brewery  restaurants  during 1996 were
$86,568 as compared to $90,690 during fiscal 1995. The decrease in AWS of $4,122
(4.5%) is due primarily to the impact the Company's  restaurant in Denver has on
the AWS computation.  This restaurant generates AWS of approximately $135,000 as
compared to the Company's  targeted  restaurant  model of $86,000 in AWS. Due to
additional restaurant openings,  this restaurant  contributed only approximately
14% to total brewery revenues in 1996 as compared to approximately  22% of total
brewery revenues in 1995.

     AWS during 1996 for the Old Chicago restaurants were $37,850 as compared to
$41,199  during  fiscal  1995.  The  decrease  in AWS of  $3,349  (8.1%)  is due
primarily to six  restaurants  that  generate AWS below the  Company's  targeted
restaurant model.  These  restaurants,  all of which were opened or selected for
opening during 1995,  incurred AWS of $29,966 during 1996 as compared to $34,404
during 1995.

     Cost of  Sales.  Cost of  sales,  which  consists  of  food,  beverage  and
merchandise  costs,  increased  $8.6 million  (46.4%) to $27.1 million in fiscal
1996 from $18.5 million in fiscal 1995,  but decreased  slightly as a percentage
of  revenues  to 24.8% in fiscal 1996 from 25.0% in fiscal  1995.  Although  the
Company experienced significant increases in certain commodity prices during the
latter  part  of the  second  quarter  and  into  the  third  quarter  of  1996,
particularly  cheese and chicken,  these cost increases were offset by increased
purchasing  efficiencies,  and increased  training and development of restaurant
management to focus on controlling food and beverage waste and yields. Commodity
prices for cheese and chicken have since  returned to their  pre-inflation  1996
levels.



<PAGE>


     Restaurant Salaries and Benefits.  Restaurant salaries and benefits,  which
consist of restaurant  management and hourly employee wages,  payroll taxes, and
group health  insurance,  increased  $10.8  million  (43.7%) to $35.6 million in
fiscal  year 1996 from $24.7  million in fiscal  year 1995.  Such  salaries  and
benefits  decreased as a percentage  of revenues  from 33.4% in 1995 to 32.6% in
1996. This decrease is due primarily to sophisticated  labor scheduling  systems
installed in the Rock Bottom  Restaurant & Brewery  restaurants  during the last
part of 1995 and early  1996,  and  procedures  implemented  in the Old  Chicago
restaurants  during the first part of 1996 to address labor scheduling on a more
real-time basis.

     Operating  Expenses.  Operating  expenses,  which include  occupancy costs,
utilities,  repairs,  maintenance  and linen,  increased $8.4 million (55.5%) to
$23.5  million in fiscal year 1996 from $15.1 million for fiscal year 1995. As a
percentage of revenues,  such expenses  increased to 21.5% in 1996 from 20.5% in
1995. This increase is primarily a result of higher occupancy costs including an
increase  in the level of  insurance  coverage  carried by the  Company,  higher
property  taxes in certain  markets and  increases  in certain  fixed costs as a
percentage of revenues due to decreases in AWS for both concepts.

     General and  Administrative  ("G&A").  G&A expenses  increased $1.0 million
(22.8%) to $5.6  million in fiscal  year 1996 from $4.6  million in fiscal  year
1995 and decreased  significantly  as a percentage of revenues from 6.2% in 1995
to 5.1% in 1996. The increase in dollars primarily reflects personnel  additions
in  the  areas  of  marketing,   training,   information  systems,  supervision,
accounting  and finance and senior  management  as well as  increases in overall
corporate  infrastructure  resulting  from the  Company's  continuing  expansion
program.  The decrease of 1.1% as a percentage  of revenues is due  primarily to
efficiencies gained in administering a larger number of restaurants and reflects
results  from an  extensive  cost  containment  program  initiated  in the first
quarter of 1996.

     Depreciation and  Amortization.  Depreciation and  amortization,  including
amortization  of preopening  expenses,  increased  $3.6 million  (85.8%) to $7.8
million  for  fiscal  year 1996 from $4.2  million  in fiscal  year  1995.  As a
percentage of revenues, depreciation expense was 4.4% during 1996 as compared to
3.2 % in 1995,  and  preopening  expense was 2.8% in 1996 as compared to 2.5% in
1995.

     The  increase  in  depreciation  expense as a  percentage  of  revenues  is
attributable  primarily  to two Old  Chicago  restaurants  and three Rock Bottom
Restaurant  & Brewery  restaurants  opened  during the last part of 1995.  These
restaurants  experienced higher construction costs than restaurants opened prior
to July  1995,  including  land  and  building  purchases  for  three  of  these
restaurants.  The increase in preopening  expense as a percentage of revenues is
attributable  primarily to an increase in average  preopening  costs for certain
Old Chicago restaurants. This increase is principally due to opening restaurants
in new markets  outside of Colorado,  which  requires a greater  investment  for
travel expense, training and other personnel related costs.

     Equity in Joint Venture Earnings. The 1996 equity in joint venture earnings
represents  the  Company's 50% equity  interest in Trolley  Barn's net after-tax
earnings.

     Interest  Expense / Interest  Income.  Interest  expense for the year ended
December 29, 1996, increased $51,856 from 1995.  Additionally,  interest expense
of approximately  $195,000 was capitalized to construction  costs. This increase
in interest expense is primarily attributable to proceeds from long-term debt of
$11  million  during  1996.  See  Note  6 of  Notes  to  Consolidated  Financial
Statements.  Interest  income  primarily  represents  amounts  earned  from  the
temporary  investment of cash proceeds from the Company's  follow-on offering in
the  first  quarter  of  1995.   Such  proceeds  were  used  primarily  for  the
construction  of new  restaurants in 1996,  resulting in lower  interest  income
during 1996 as compared to 1995.

     Provision for Income Taxes.  The 1996  provision for income taxes  reflects
utilization of  approximately  $1.1 million in tax credits  attributable to FICA
tax paid on certain tips to hourly restaurant employees (the "FICA Credit"), and
to  rehabilitation  costs  incurred  for certain  owned  restaurant  property in
Chicago.  The 1995 tax  provision  included a FICA Credit of only  approximately
$502,000. These credits in both years reduced the effective combined federal and
state tax rate. As of December 29, 1996,  the Company had tax credits  available
totaling $1.5 million to reduce  income taxes  payable in future  years.  Due to
alternative minimum tax limitations and the relatively volatile nature of the


<PAGE>


restaurant  industry,  the Company  recorded a valuation  allowance  in 1996 for
approximately  22% of  these  credits.  See  Note  8 of  Notes  to  Consolidated
Financial Statements.

Liquidity and Capital Resources

     The  Company   requires   capital   principally  for  the  development  and
construction  of new  restaurants  and  for  capital  expenditures  at  existing
restaurants.  The Company has financed its  expansion  over the last three years
principally  through cash flow from operations,  proceeds from public offerings,
borrowings on long-term debt and capital lease obligations.  As is common in the
restaurant  industry,  the Company has generally  operated with negative working
capital.  The following table presents a summary of the Company's cash flows for
fiscal year 1995, 1996, and 1997:

<TABLE>
<CAPTION>
                                                                             Fiscal Year Ended
                                                             ----------------- ---------------- ---------------
                                                               December 31,       December       December 28,
                                                                   1995           29, 1996           1997
                                                             ----------------- ---------------- ---------------
         <S>                                                 <C>               <C>              <C>
          Net cash provided by operating activities           $  3,762,046      $  6,827,645     $ 13,275,857
          Net cash used in investing activities                (38,623,814)      (21,525,687)     (28,631,473)
          Net cash provided by financing activities             33,303,434        11,142,701       16,978,153
          (Decrease) increase in cash and cash equivalents      (1,558,334)       (3,555,341)       1,622,537
</TABLE>

         Net  cash  used in  investing  activities  during  1995,  1996 and 1997
included net capital  expenditures  of $30.7  million,  $29.0  million and $28.6
million,  respectively.  These  capital  expenditures  were  primarily  for  the
construction of new restaurants,  routine  expenditures and remodels of existing
restaurants,  and for  leasehold  improvements,  furniture  and equipment in the
corporate  office.  The average  cash  investment  for  leasehold  improvements,
furniture,  fixtures,  restaurant  equipment,  brewing  equipment and preopening
costs for restaurants opened during these periods is as follows:

                                          Average Cash Investment per Restaurant
<TABLE>
<CAPTION>
                                          1995                          1996                       1997
                              --------------------------    --------------------------   -----------------------
                                  #of                          #of                          #of
                              restaurants      Average     restaurants      Average     restaurants      Average
                                opened       Investment       opened      Investment       opened      Investment
                                ------       ----------       ------      ----------       ------      ----------
<S>                          <C>           <C>            <C>           <C>            <C>           <C>
Old Chicago                       9          $  936,000        12        $1,017,000          7        $1,025,000
Rock Bottom Restaurant &          5          $3,174,000         4        $2,900,000          7        $2,633,000
  Brewery
</TABLE>

     In certain  instances,  the Company has received landlord  contributions in
the  form of  tenant  finish  allowances,  reducing  the cost of  opening  a new
restaurant. There can be no assurance, however, that landlord contributions will
be available in the future. Investing activities also include a $7.8 million use
of cash in 1995 for the purchase of  short-term  investments.  Such  investments
were sold in 1996 and the proceeds included as a source of cash.

     Although the Company has historically  leased its facilities,  during 1997,
the Company purchased  undeveloped land for two Rock Bottom Restaurant & Brewery
restaurants.  Such land was  utilized to  construct  build-to-suit  locations in
Englewood,  Colorado and Des Moines,  Iowa using the Company's newly  introduced
design prototype.  During September 1997, the Company completed a sale-leaseback
transaction for the Englewood location, resulting in a recovery of substantially
all its investment in the land and building,  or approximately  $2 million.  The
sale portion of this  transaction  is reflected in investing  activities  in the
accompanying  Consolidated  Cash Flow  Statement.  The Company also  completed a
sale-leaseback  transaction for the Des Moines location during the first quarter
of 1998,  resulting in the  recovery of an  additional  $2 million.  The Company
estimates that during 1998, the cost to construct and open a brewery  restaurant
prototype,   assuming  completion  of  a  sale-leaseback  transaction,  will  be
approximately $1.7 million to $1.9 million, as compared to the estimated $2.6 to
$3.0  million,  before  landlord  contributions,  to construct and open a leased
brewery  restaurant  converted  from  an  existing  property.  There  can  be no
assurance,  however,  that suitable locations for prototype brewery  restaurants
will be  identified,  that sale-leaseback  transactions  can be entered into on
acceptable  terms,  or that  the  costs  of  acquiring  sites  and  opening  new
restaurants  will not  increase in the future.
<PAGE>

     Net cash provided by financing  activities during 1995 primarily represents
net proceeds of $33.7 million received from the Company's public offering during
that year.  During 1996, the Company secured a $20 million bank revolving credit
facility (the "Credit Facility"),  and executed a $2.5 million first mortgage on
real property located in Chicago, Illinois. These financing instruments provided
cash sources in 1996 of $11.0 million.  The Company  amended the Credit Facility
in  February  1997 and again in July 1997 to  increase  the  maximum  borrowings
available  to  $40  million  (see  Note 6 of  Notes  to  Consolidated  Financial
Statements).  Such amended Credit Facility provided additional financing sources
during 1997 of $17.9  million.  As of December 28,  1997,  the Company had $26.4
million outstanding under the amended Credit Facility. Additionally, the Company
receives  trade  credit  based upon  negotiated  terms for  purchasing  food and
supplies, and does not have significant receivables or inventory.

     During the third quarter of 1996, the Company  financed its  acquisition of
an indirect  50% interest in Trolley Barn by  exchanging  452,073  shares of its
$.01 par  value  common  stock  (see Note 5 of Notes to  Consolidated  Financial
Statements).  The  corresponding  increase in assets and equity is excluded from
the above cash flows reflecting the non-cash nature of this transaction.

     The Company estimates that total capital  expenditures for 1998,  excluding
preopening costs and net of proceeds from sale-leaseback  transactions,  will be
approximately  $15.5  million.  This includes  $12.3 million in estimated  total
costs for the six new brewery  restaurants,  two of which will be prototypes and
four of which  will be  converted  from  existing  properties,  $2.5  million in
estimated  costs for  routine  capital  expenditures  and  remodels  of existing
restaurants,  and $700,000 for capital  expenditures  for the corporate  office.
There can be no assurance  that these  estimated  capital  expenditures  will be
sufficient  for  completion of current  development  plans or that they will not
increase in the future.

     The Company  believes that its existing cash balances,  cash flow generated
from  operations and funds  available  under the amended Credit Facility will be
sufficient to satisfy its currently  anticipated cash needs through fiscal 1998.
However,  results  of  operations  could be  negatively  affected  by changes in
consumer tastes,  national,  regional or local economic conditions,  demographic
trends and traffic patterns,  decreased  interest income and increased  interest
expense,  among  other  factors.  In the event the  impact  of such  factors  is
significant,  the Company may require additional sources of external  financing.
Additionally,  as the amended Credit Facility  expires in July 1999, the Company
may  seek  additional  sources  of debt or  equity  capital  for its  continuing
expansion.  There can be no  assurance  that such  funds  will be  available  on
favorable terms, if at all.

Year 2000 Compliance

     During  1997,  the Company  began a  comprehensive  review of its  computer
systems to identify the systems that could be affected by the "Year  2000"issue.
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the  applicable  year.  The  Company's  system
conversion during 1997 addressed a significant part of this problem,  as the new
general financial and payroll software applications implemented were represented
by the  vendors to be Year 2000  compliant.  The Company is also  developing  an
implementation  plan  for its  remaining  Year  2000  issues,  including  either
modifications or upgrades of substantially all existing restaurant point-of-sale
systems.  Total  estimated costs to resolve the Year 2000 problem are unknown at
this time,  however,  the  Company  expects  to incur  capital  expenditures  of
approximately $250,000 during 1998 to upgrade the personal computer hardware and
software in all restaurants as the next step in achieving Year 2000 compliance.


<PAGE>


Seasonality and Quarterly Results

     The Company's sales and earnings fluctuate  seasonally.  Historically,  the
Company's  highest earnings have occurred in the second and third quarters,  but
as the Company enters new markets, it may encounter different seasonal patterns.
In  addition,  quarterly  results have been and, in the future are likely to be,
substantially  affected by the timing of new restaurant openings.  Specifically,
results  of  operations  from new  restaurants  opening  in the  first or fourth
quarters will experience lower margins initially than new restaurants opening in
the  second and third  quarters.  Because of the  seasonality  of the  Company's
business and the impact of new restaurant openings,  results for any quarter are
not necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate  financial  performance for the entire year.
See Note 11 of Notes to Consolidated Financial Statements.

Impact of Inflation

     Although the Company does not believe  inflation  has  materially  affected
operating  results  during the past three years,  inflationary  pressures  could
result in  substantial  increases  in costs  and  expenses,  particularly  food,
supplies,  labor and operating expenses.  Additionally,  increasing minimum wage
rates have the potential to impact all aspects of the Company's  business due to
higher labor rates  experienced by its suppliers and vendors.  These labor rates
could  translate  into  higher  costs for goods and  services  purchased  by the
Company.  All such  increases  in costs and  expenses  could have a  significant
impact on the  Company's  operating  results to the extent  that such  increases
cannot be passed along to customers.


<PAGE>



ITEM 8:  Financial Statements and Supplementary Data

                                  ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                             Page
<S>                                                                                         <C>
Report of Independent Public Accountants                                                      24
Consolidated Balance Sheets as of December 29, 1996 and December 28, 1997                     25
Consolidated Statements of Operations for the Years Ended December 31, 1995,
   December 29, 1996, and December 28, 1997                                                   26
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
   December 29, 1996, and December 28, 1997                                                   27
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
   December 29, 1996, and December 28, 1997                                                   28
Notes to Consolidated Financial Statements                                                    29
</TABLE>

All financial  statement schedules are omitted as they are not applicable to the
Company.



<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
  Rock Bottom Restaurants, Inc. and Subsidiaries:

         We have audited the  accompanying  consolidated  balance sheets of ROCK
BOTTOM  RESTAURANTS,  INC. and SUBSIDIARIES as of December 29, 1996 and December
28, 1997 and the related  consolidated  statements of operations,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
28, 1997.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material  respects,  the consolidated  financial position of Rock
Bottom  Restaurants,  Inc. and Subsidiaries as of December 29, 1996 and December
28, 1997 and the  consolidated  results of their operations and their cash flows
for each of the three years in the period ended  December 28, 1997 in conformity
with generally accepted accounting principles.



                                            ARTHUR ANDERSEN LLP

Denver, Colorado,
  February 13, 1998.



<PAGE>



                                  ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                      ASSETS
                                                                                              December 29 and 28,
                                                                                              -------------------
                                                                                           1996               1997
                                                                                       ----------        ------------
<S>                                                                                 <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents (Note 2)                                                 $         --      $    1,622,537
  Accounts receivable                                                                     747,762             938,932
  Accounts receivable--affiliates                                                         101,342             116,543
  Preopening costs, net                                                                 2,552,185           1,520,253
  Inventories                                                                           2,206,139           2,726,983
  Prepaids and other current assets                                                     1,253,124           1,613,374
  Current deferred income taxes, net (Note 8)                                                  --             219,214
                                                                                      -----------         -----------
         Total current assets                                                           6,860,552           8,757,836
PROPERTY AND EQUIPMENT, net (Notes 2 and 4)                                             72,275,290          90,814,019
INVESTMENT IN JOINT VENTURE, net (Note 5)                                               5,348,729           5,552,632
OTHER ASSETS                                                                              463,368             735,936
DEFERRED INCOME TAXES, net (Note 8)                                                            --           2,334,809
                                                                                      -----------         -----------
TOTAL ASSETS                                                                         $ 84,947,939        $108,195,232
                                                                                      ===========         ===========

                                        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable:
     Trade                                                                          $   1,680,714      $    4,341,074
     Construction projects                                                                516,357           1,023,151
     Affiliates                                                                             9,483                  --
  Accrued payroll and payroll taxes                                                     1,605,980           2,311,990
  Accrued taxes other than income tax                                                   1,027,920           1,023,893
  Current portion of accrued restructuring charges (Note 7)                                    --           2,447,260
  Other accrued expenses                                                                  963,413           2,534,299
  Current deferred income taxes, net (Note 8)                                             515,232                  --
  Current portion of long-term debt (Note 6)                                              575,199             115,308
  Current portion of obligations under capital leases (Note 6)                            697,992             527,396
                                                                                       ----------          ----------
         Total current liabilities                                                      7,592,290          14,324,371
REVOLVING LINE OF CREDIT (Note 6)                                                       8,500,000          26,450,000
LONG-TERM DEBT (Note 6)                                                                 2,488,420           2,374,533
OBLIGATIONS UNDER CAPITAL LEASES (Note 6)                                                 673,987           2,333,645
ACCRUED RESTRUCTURING CHARGES (Note 7)                                                         --           1,493,610
DEFERRED INCOME TAXES, net (Note 8)                                                       356,510                  --
                                                                                      -----------          ----------
         Total liabilities                                                             19,611,207          46,976,159
                                                                                     ------------        ------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 10)
STOCKHOLDERS' EQUITY (Note 9):
  Preferred stock--$.01 par value, 5,000,000 shares authorized,
    no shares issued and outstanding                                                           --                  --
  Common stock--$.01 par value, 15,000,000 shares authorized,
    7,905,451 and 8,059,506 shares issued and outstanding, respectively                    79,055              80,595
  Additional paid-in capital                                                           56,774,747          58,320,330
  Retained earnings                                                                     8,482,930           3,791,586
  Deferred compensation                                                                        --            (973,438)
                                                                                      -----------        ------------
         Total stockholders' equity                                                    65,336,732          61,219,073
                                                                                      -----------        ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $ 84,947,939        $108,195,232
                                                                                      ===========         ===========
</TABLE>

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


<PAGE>


                                  ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                      For the Years Ended
                                                                                    December 31, 29 and 28,
                                                                                    -----------------------
                                                                          1995               1996                1997
                                                                      --------------     ------------         -----------
<S>                                                                 <C>                <C>                <C>
REVENUES:
  Old Chicago restaurants                                             $ 40,498,773       $ 58,328,162       $  73,116,613
  Rock Bottom Restaurant & Brewery restaurants                          33,464,742         50,901,983          77,131,617
                                                                       -----------       ------------        ------------
         Total revenues                                                 73,963,515        109,230,145         150,248,230
                                                                       -----------        -----------         -----------

OPERATING EXPENSES:
  Cost of sales                                                         18,509,320         27,099,911          37,671,802
  Restaurant salaries and benefits                                      24,739,012         35,552,068          51,085,653
  Operating expenses                                                    15,135,430         23,529,265          30,627,422
  Selling expenses                                                       2,854,877          4,272,132           5,773,094
  General and administrative                                             4,576,499          5,619,612           9,073,514
  Depreciation and amortization                                          4,199,694          7,802,033          12,136,018
  Restructuring charges (Note 7)                                               --                 --            9,706,554
                                                                       -----------        -----------         -----------
         Total operating expenses                                       70,014,832        103,875,021         156,074,057
                                                                       -----------        -----------         -----------

INCOME FROM OPERATIONS                                                   3,948,683          5,355,124          (5,825,827)
Equity in joint venture earnings (Note 5)                                       --            222,941             330,000
Interest income                                                          1,079,982            227,235               9,507
Interest expense                                                          (248,688)          (300,544)         (1,772,592)
Other income (expense), net                                                 40,056             (1,364)                 18
                                                                        ----------         ----------         -----------
INCOME BEFORE TAXES                                                      4,820,033          5,503,392          (7,258,894)

INCOME TAX PROVISION (BENEFIT)  (Notes 2 and 8)                          1,550,005          1,478,309          (2,567,550)
                                                                      ------------       ------------       -------------
NET INCOME                                                          $    3,270,028     $    4,025,083      $   (4,691,344)
                                                                      ============       ============       =============

BASIC NET INCOME (LOSS)
PER SHARE                                                           $          .47     $          .53      $        (0.58)
                                                                       ===========        ===========         ===========

BASIC WEIGHTED AVERAGE
   SHARES OUTSTANDING                                                    6,936,000          7,626,000           8,027,000
                                                                       ===========       ============       =============

DILUTED NET INCOME (LOSS)
PER SHARE                                                            $         .45      $         .52      $       (0.58)
                                                                       ===========        ===========         ===========

DILUTED WEIGHTED AVERAGE
   SHARES OUTSTANDING                                                    7,264,000          7,725,000           8,027,000
                                                                      ============       ============         ===========
</TABLE>

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



<PAGE>


                                 ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                     Common Stock (Note 1)
                                   ------------------------
                                                               Additional                                   Total
                                   Number of                     Paid-in      Retained      Deferred     Sockholders'
                                     Shares         Amount       Capital      Earnings    Compensation      Equity
                                   ----------     ---------     ----------    ---------    -----------     ----------
<S>                               <C>         <C>            <C>           <C>           <C>            <C>
BALANCES, December 25, 1994         5,300,000  $     53,000   $ 16,683,352  $ 1,187,819   $         --   $ 17,924,171
  Proceeds from follow-on public
    offering, net of offering
    costs                           2,015,000        20,150     33,672,771           --             --     33,692,921
  Proceeds from exercise of stock
    options                            30,482           305        246,051           --             --       246,356
  Tax benefit resulting from the
    exercise of stock options              --            --        207,568           --             --       207,568
  Net income                               --            --             --    3,270,028             --     3,270,028
                                   ----------    ----------    -----------   ----------    -----------     ---------
BALANCES, December 31, 1995         7,345,482        73,455     50,809,742    4,457,847             --    55,341,044
  Proceeds from exercise of stock
    options                           107,896         1,079        864,589           --             --       865,668
  Issuance of common stock in
    exchange for joint venture
    interest (Note 5)                 452,073         4,521      4,995,479           --             --     5,000,000
  Tax benefit resulting from the
    exercise of stock options              --            --        104,937           --             --       104,937
  Net income                               --            --             --    4,025,083             --     4,025,083
                                   ----------   -----------    -----------  -----------   ------------   -----------
BALANCES, December 29, 1996         7,905,451        79,055     56,774,747    8,482,930             --    65,336,732
  Proceeds from exercise of stock
    options                            39,333           393        317,997           --             --       318,390
  Issuance of restricted stock
    (Note 9)                          169,145         1,691      1,762,815           --     (1,764,506)           --
  Amortization of deferred
    compensation on restricted             --            --             --           --        321,235       321,235
    stock
  Cancellation of restricted
    stock                             (54,423)         (544)      (569,456)          --        469,833      (100,167)
  Tax benefit resulting from the
    exercise of stock options              --            --         34,227           --             --        34,227
  Net loss                                 --            --             --   (4,691,344)            --    (4,691,344)
                                  -----------   -----------   ------------   -----------   -----------   -----------
BALANCES, December 28, 1997         8,059,506      $ 80,595   $ 58,320,330  $  3,791,586   $  (973,438) $ 61,219,073
                                   ==========    ==========     ==========    ==========    ==========    ==========
</TABLE>


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



<PAGE>


                                  ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                   For the Years Ended
                                                                                 December 31, 29 and 28,
                                                                                 -----------------------
                                                                      1995                 1996               1997
                                                                  -----------          -----------        ------------
<S>                                                           <C>                  <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                $  3,270,028         $  4,025,083        $ (4,691,344)
  Adjustments to reconcile net income (loss)
      to net cash provided by operating activities--
       Equity in joint venture earnings                                    --             (222,941)           (330,000)
       Depreciation and amortization                                4,199,694            7,802,033          12,136,018
       Amortization of deferred compensation, net of cancellations         --                   --             221,068
       Deferred income tax provision (benefit)                        317,442              218,732          (3,425,765)
       Tax benefit from exercise of stock options                     207,568              104,937              34,227
       Loss on disposition of assets                                   13,725                   --                  --
       Non-cash portion of restructuring charge                            --                   --           9,409,879
       Increase in accounts receivable                               (374,803)            (266,304)           (191,170)
       Expenditures for preopening costs                           (2,847,458)          (3,522,152)         (3,430,440)
       Increase in inventories                                       (760,177)            (727,566)           (630,708)
       Increase in prepaids and other assets                         (616,572)            (533,959)         (1,265,929)
       (Decrease) increase in accounts payable                       (660,007)            (806,114)          3,167,154
       Increase in accrued expenses                                 1,012,606              755,896           2,272,869
                                                                  -----------         ------------         -----------
          Net cash provided by operating activities                 3,762,046            6,827,645          13,275,857
                                                                  -----------         ------------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment                             (30,739,840)         (29,046,644)        (30,582,096)
  Proceeds from sale of property                                           --                   --           1,975,307
  Advances to officers and affiliates, net                            (93,532)             (77,357)            (24,684)
  (Purchases) sales of short-term investments, net                 (7,790,442)           7,790,442                  --
  Joint venture acquisition costs                                          --             (192,128)                 --
                                                                  -----------          -----------         -----------
         Net cash used in investing activities                    (38,623,814)         (21,525,687)        (28,631,473)
                                                                  -----------          -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from long-term debt                                             --           11,000,000          17,950,000
  Repayments of long-term debt                                        (65,278)             (77,095)           (573,778)
  Repayments of capital lease obligations                            (570,565)            (645,872)           (716,459)
  Issuance of common stock                                         33,939,277              865,668             318,390
                                                                  -----------         ------------         -----------
         Net cash provided by financing activities                 33,303,434           11,142,701          16,978,153
                                                                  -----------         ------------         -----------

(DECREASE) INCREASE IN CASH
  AND CASH EQUIVALENTS                                             (1,558,334)          (3,555,341)          1,622,537
CASH AND CASH EQUIVALENTS, beginning of year                        5,113,675            3,555,341                  --
                                                                 ------------        -------------        ------------
CASH AND CASH EQUIVALENTS, end of year                          $   3,555,341       $           --       $   1,622,537
                                                                 ============        =============        ============
</TABLE>


SUPPLEMENTAL CASH FLOW DISCLOSURES:  See Note 2.

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



<PAGE>


                 ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997

(1)  ORGANIZATION AND NATURE OF BUSINESS

     Rock  Bottom  Restaurants,  Inc.  ("Rock  Bottom"  or the  "Company")  is a
Delaware  corporation  incorporated in April 1994.  Prior to consummation of the
Company's  initial  public  offering and  pursuant to an  agreement  (the "Share
Exchange Agreement") entered into on July 10, 1994 among the Company and each of
the   stockholders   of  certain   predecessor   companies   (the   "Predecessor
Subsidiaries"),  Rock Bottom (i) exchanged  3,000,000 shares of its common stock
for all of the  outstanding  capital stock of the Predecessor  Subsidiaries  and
(ii)  consolidated  ownership of all the Predecessor  Subsidiaries'  restaurants
into Rock  Bottom  ("Share  Exchange").  Under  the terms of the Share  Exchange
Agreement,  each Stockholder  received, in consideration for the exchange of the
outstanding  capital  stock of the  Predecessor  Subsidiaries,  shares of common
stock of Rock Bottom. The Share Exchange was accounted for at historical cost in
a manner similar to  pooling-of-interest  accounting as the entities included in
the Share Exchange were under common control.

     As of December  28,  1997,  the Company  owned and  operated 42 Old Chicago
restaurants  and 21 Rock Bottom  Restaurant & Brewery  restaurants.  Old Chicago
restaurants feature  "deep-dish"  Chicago-style  pizza,  burgers and sandwiches,
pasta specialties,  salads and a full bar emphasizing a selection of 110 or more
different types of beer from around the world.  Rock Bottom Restaurant & Brewery
restaurants  feature  eclectic  menus  and  on-premises  microbrewed  beer.  The
Company's  restaurants  are located in  Arizona,  California,  Colorado,  Idaho,
Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota,  Missouri, Nebraska, Ohio,
Oregon, Texas, Washington, Wisconsin and the District of Columbia.

     The Company is subject to the risks associated with an aggressive expansion
strategy and a highly competitive industry.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation and Accounting Period

     The   accompanying   consolidated   financial   statements   represent  the
consolidation of Rock Bottom and its eight wholly-owned  subsidiaries.  Although
intercompany  transactions are minimal,  all material  intercompany amounts have
been eliminated in consolidation.  Also consolidated is Rock Bottom Kansas,  LLC
("RBK").  Rock  Bottom  owns  50% of RBK  but  has  100%  control  of the  daily
operations.  The other  investor is entitled to a maximum  return of $12,500 per
year on the  investment.  Subsequent  to  yearend,  the  Company  purchased  the
remaining 50% of RBK (see Note 7).

     The Company  operates on a 52 or 53 week fiscal year ending the last Sunday
in December.  Fiscal years 1996 and 1997 each contain 52 weeks; fiscal year 1995
contains 53 weeks.

Cash and Cash Equivalents

     Cash and  cash  equivalents  include  cash and  investments  with  original
maturities of three months or less and which are not subject to significant risk
from changes in interest  rates.  As of December 28, 1997, the Company held only
cash.

     At December  29,  1996,  the Company  had a negative  book cash  balance of
approximately  $570,000  which is  classified as accounts  payable-trade  in the
accompanying 1996 consolidated balance sheet. Such negative balance results from
the Company's cash management program whereby all excess cash is either invested
or used to repay long-term borrowings.



<PAGE>


Preopening Costs

     Direct  incremental  costs incurred prior to the opening of new restaurants
are  capitalized  and amortized  over a period of one year after the  restaurant
commences  operations.  These  costs  consist  primarily  of  payroll,  employee
recruiting and training,  and initial opening expenses.  Amortization expense of
$1,826,989,  $2,989,251 and $4,421,666 in 1995, 1996 and 1997, respectively,  is
included in  depreciation  and  amortization  in the  accompanying  consolidated
statements of operations.

     The Accounting  Standards  Executive  Committee of the AICPA has issued for
comment a proposed  statement of position ("SOP") titled "Reporting on the Costs
of Start-up  Activities." If issued as proposed,  the new standard would require
the Company to prospectively  expense preopening costs as incurred. As currently
proposed,  the new SOP would not require  restatement of prior periods and would
be applied  as of the  beginning  of the  fiscal  year in which the SOP is first
adopted,  which  would be 1998 for the  Company.  Initial  application  would be
reported as a cumulative effect of a change in accounting principle.

Inventories

     Inventories,  which consist of restaurant food items,  alcoholic beverages,
clothing  emblazoned with restaurant names and logos, and related paper supplies
are valued at the lower of first-in, first-out cost or net realizable value.

Property and Equipment

     Property  and  equipment  additions  are  capitalized  at cost and  include
acquisitions  of property and equipment,  costs incurred in the  development and
construction of new restaurants, and major renewals and improvements to existing
restaurants' property and equipment.  Repairs and maintenance costs which do not
improve or extend the life of the  respective  assets  are  expensed  currently.
Depreciation  and  amortization  is  provided  over the lesser of the  estimated
useful lives of the assets or the remaining lease terms using the  straight-line
method. Estimated useful lives are as follows:

 Buildings                                                       25-30 years
 Leasehold and building improvements                             10-30 years
 Furniture, fixtures and equipment                                3-20 years

  Income Taxes

     The Company  records  income  taxes  pursuant  to  Statement  of  Financial
Accounting  Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS  109,  deferred  tax  assets  or  liabilities  are  computed  based  on the
difference  between the  financial  statement and income tax basis of assets and
liabilities and carryforwards using enacted tax laws.  Valuation  allowances are
established,  if  necessary,  to reduce  deferred  tax assets to the amount that
will, more likely than not, be realized.

Net Income (Loss) Per Common Share

     Effective  December  1997 , the  Company  adopted  Statement  of  Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128,
earnings per share is computed  using both the basic and diluted  methods.  When
computing  diluted earnings per share,  weighted average shares  outstanding are
adjusted to consider  the dilutive  effect of the  Company's  stock  options and
restricted  stock  using  the  treasury  stock  method.  Earnings  per share and
weighted average shares outstanding have been restated for all periods to comply
with the provisions of SFAS 128.

Supplemental Disclosures of Cash Flow Information

     Cash paid during the year for interest,  including the amount  capitalized,
was $249,354, $385,540 $2,150,629 in 1995, 1996 and 1997, respectively, and cash
paid for income taxes was $1,330,500,  $1,485,458,  and $1,787,885 in 1995, 1996
and 1997, respectively. The Company acquired equipment of $443,841, $350,536 and
$169,711 in 1995,  1996 and 1997,  respectively,  and  restaurant  buildings and
improvements of $2,035,810 in 1997 under capital lease  obligations,  and issued
452,073  shares of common  stock in 1996 in exchange  for an indirect 50% equity
interest  in a  joint  venture  (see  Note  5).  Additionally,  an  increase  to
additional  paid-in  capital was  recorded in 1995,  1996 and 1997 of  $207,568,
$104,937 and $34,227,  respectively,  related to the tax benefit  resulting from
the exercise of nonstatutory stock options and the disqualifying dispositions of
incentive  stock  options.
<PAGE>

Use of  Estimates  in the  Preparation  of Financial Statements

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

Fair value of Financial Instruments

     Financial   instruments   include  cash  and  cash  equivalents,   accounts
receivable, accounts payable, accrued liabilities,  revolving line of credit and
long-term  debt. The carrying  amounts for cash and cash  equivalents,  accounts
receivable,  accounts  payable and accrued  liabilities  approximate  fair value
because of the short maturity of those  instruments.  The carrying amount of the
revolving  line of credit  and  long-term  debt  approximates  fair value as the
pricing  and terms of those  instruments  are  indicative  of current  rates and
credit risk.

Asset Impairment

     The Company reviews its assets for impairment whenever events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  For assets which are held and used in operations,  the asset would
be impaired if the  undiscounted  future cash flows related to the asset did not
exceed the net book value.  During 1997, the Company  recorded asset  impairment
charges totaling $5.5 million which are included in restructuring  charge in the
accompanying consolidated statement of operations (see Note 7).

Stock-Based Compensation Plans

     The  Company  accounts  for  its  stock-based   compensation   plans  under
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees" ("APB No. 25"). Effective in 1995, the Company adopted the disclosure
option of Statement of Financial  Accounting  Standards No. 123, "Accounting for
Stock-Based  Compensation"  ("SFAS 123"). SFAS 123 requires that companies which
do not choose to account  for  stock-based  compensation  as  prescribed  by the
statement  shall disclose the pro forma effects on net income and net income per
share as if SFAS 123 had been adopted.  Additionally,  certain other disclosures
are required  with respect to stock  compensation  and the  assumptions  used to
determine the pro forma effects of SFAS 123.

Restricted Stock

     Restricted stock grants are recorded as equity on the date of issuance with
a corresponding amount recorded as deferred compensation.  Deferred compensation
is equal to the fair value of the related  common stock on the date of issuance,
and is amortized over the related restricted stock vesting period.

 (3)  RELATED PARTY TRANSACTIONS

     The Company  leases  building  space and certain  equipment,  furniture and
improvements  for four Old Chicago  restaurants,  the Rock Bottom  Restaurant  &
Brewery  restaurant  in  Englewood,  Colorado  (see Note 6) and the Rock  Bottom
Restaurant  & Brewery  restaurant  in Boulder,  Colorado  from  partnerships  or
corporations  in which certain  directors and  stockholders  of the Company,  or
their affiliates,  have partial or complete ownership interests.  Certain leases
also include provisions for additional rent based on the difference between base
rent  and 6% of  gross  retail  revenues.  Total  rent  expense  paid  to  these
partnerships or corporations was $600,029, $603,695 and $634,332, which included
additional rents of $173,929  $153,845 and $95,686,  during 1995, 1996 and 1997,
respectively.  Management  believes  these  terms are no less  favorable  to the
Company than could be obtained from third parties.

     Prior to August 1996, the Company  obtained its employee  health  insurance
coverage with Concept  Restaurants,  Inc.  (Concept"),  a restaurant  management
company wholly owned by two stockholders of the Company,  who in turn contracted
with a third party  insurance  company.  Premiums  paid were  determined  by the
insurance  company  and were based on total  number of  employees.  Included  in
restaurant  salaries and benefits  were premiums paid to Concept of $277,893 and
$231,011 during 1995 and 1996, respectively. Premiums paid to Concept for health
insurance  coverage of  administrative  and  supervisory  staff were included in
general and administrative  expenses,  and were $113,700 and $96,528 during 1995
and 1996, respectively.  In August 1996, the Company began administering its own
self-funded employee health insurance plan (see Note 10).
<PAGE>

     During 1996 and 1997, the Company paid $100,000 to a corporation owned by a
director and  stockholder  for consulting  services  performed  relating to site
selection  and design for the Company's  new  restaurants.  No fees were paid to
this  corporation  during  1995.  Management  believes  all such  payments  were
reasonable  based on the  services  received  and were no less  favorable to the
Company than could be obtained from an unrelated party.

     During  1995,  1996 and 1997,  the  Company  paid  approximately  $413,000,
$601,000 and $464,000,  respectively,  to a company  owned by a stockholder  and
director for certain food products used in the Company's restaurants. Management
believes all such payments were  reasonable and no less favorable to the Company
than could be obtained from an unrelated party.

     During 1995, the Company purchased for $280,000 a 37,500 square foot parcel
of land in Colorado to use as a parking  lot for an existing  restaurant  from a
company  wholly-owned by a stockholder  and director of the Company.  Management
believes  the purchase  price is no less  favorable to the Company than could be
obtained from a third party.

     During 1995, 1996 and 1997, two separate  companies,  each  wholly-owned by
two  different  directors  of  the  Company,  provided  strategic  planning  and
development  consulting  services to Rock Bottom,  and advertising and marketing
services,  respectively, to the Old Chicago and Rock Bottom Restaurant & Brewery
restaurants.  Fees paid to the former  company  totaling  $78,753,  $71,688  and
$24,413,  respectively,  are included in general and administrative expenses and
fees paid to the latter totaling $93,734,  $13,996 and $816,  respectively,  are
included in selling  expenses in the  accompanying  consolidated  statements  of
operations.

(4)  PROPERTY AND EQUIPMENT

     Property and  equipment as of December 29, 1996 and December 28, 1997 is as
follows:
<TABLE>
<CAPTION>
                                                                                           1996             1997
                                                                                       ----------        ----------
        <S>                                                                        <C>                <C>
         Land                                                                       $   5,021,927      $  5,885,711
         Buildings                                                                      3,653,660         4,447,161
         Leasehold and building improvements                                           38,380,894        51,237,826
         Furniture, fixtures and equipment                                             30,460,508        43,919,404
         Construction-in-progress                                                       4,700,360         2,719,135
         Less:  Accumulated depreciation and amortization                              (9,942,059)      (17,395,218)
                                                                                        ---------       -----------
                                                                                     $ 72,275,290      $ 90,814,019
                                                                                       ==========        ==========
</TABLE>

(5)  INVESTMENT IN JOINT VENTURE

     In July 1996,  the  Company  acquired an  indirect  50% equity  interest in
Trolley Barn Brewery,  Inc.  ("Trolley  Barn") in exchange for 452,073 shares of
the Company's common stock. The Company also received the option to purchase the
remaining  50% of  Trolley  Barn from the  selling  shareholders.  The option is
exercisable  at any time  between  July 2000 and July 2002,  or upon a change in
control of the  ownership  of the 50% of Trolley  Barn  retained  by the selling
shareholders.  The  purchase  price for this option is based on earnings  before
interest, taxes,  depreciation and amortization,  as defined. In connection with
the  acquisition,  the  Company  agreed to  certain  licensing  and  development
arrangements  whereby  Trolley  Barn  may  develop  restaurants  throughout  the
southeastern  United States under the names Rock Bottom Restaurant & Brewery and
Old Chicago.  As of December  28, 1997,  Trolley  Barn  operated  six  brewery
restaurants,  four under the name Big River Grille & Brewing Works and two under
the name Rock  Bottom  Restaurant  & Brewery,  all  located in the  southeastern
United States.

     The Company's  investment in Trolley Barn is accounted for under the equity
method. At closing, the investment in joint venture carrying amount exceeded the
Company's equity in Trolley Barn's  underlying net assets by approximately  $4.5
million.  This amount represents  goodwill at the date of the acquisition and is
being amortized over 35 years. Accumulated amortization at December 29, 1996 and
December 28, 1997 of $66,340 and $201,479,  respectively,  is netted against the
investment.  The  Company  and the  selling  shareholders  also  agreed  to each
guarantee  one-half  of  Trolley  Barn's  bank  financing  up to a maximum of $5
million  each,  and may  guarantee  certain  other debt of  Trolley  Barn in the
future.  Trolley Barn had approximately $8.1 million outstanding under this bank
financing at December 28, 1997.



<PAGE>


(6)  LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES

         Long-term  debt as of  December  29, 1996 and  December  28, 1997 is as
follows:
<TABLE>
<CAPTION>

                                                                                          1996             1997
                                                                                     -------------    -------------
        <S>                                                                        <C>                <C>
         Mortgage note  payable to a bank,  interest at 9%,  secured by land and
           building in Chicago, Illinois,  assignment of rents thereon and other
           assets,  principal and interest  payable in monthly  installments  of
           $25,615, balloon payment of $2,015,320 due at maturity in July 2001.       $ 2,466,826       $ 2,381,866
         Mortgage note payable to a trust company, interest at 9%,
           secured by building in Greeley, Colorado, principal and
           interest due in July 1997.                                                     466,331                --
         Note payable to landlord of $196,605, interest
           at 12.5%, principal and interest payable in
           quarterly installments, maturing October 2001.                                 127,632           107,975
         Other                                                                              2,830                --
                                                                                      -----------       -----------
                                                                                        3,063,619         2,489,841
         Less--current portion                                                           (575,199)         (115,308)
                                                                                      -----------        ----------
                                                                                      $ 2,488,420       $ 2,374,533
                                                                                       ==========        ==========
</TABLE>

     In July 1996,  the  Company  closed a $20  million  bank  revolving  credit
facility  (the "Credit  Facility")  secured by  substantially  all assets of the
Company. Interest accrues on the average outstanding balance at either the prime
rate or LIBOR  plus  1.5%,  depending  on the  Company's  election,  and is paid
quarterly in arrears  (weighted  average  interest rate of 7.58% during 1996 and
7.57% at December 29, 1996). The Credit Facility  converts to a three-year fully
amortizing term loan after two years, and a commitment fee of .25% on the unused
availability  is due quarterly  during the revolving  credit  period.  Under the
terms of this agreement,  the Company is subject to certain financial  covenants
and ratios, restrictions on investments and acquisitions and other restrictions.

     The Company  amended the Credit Facility in February 1997 and again in July
1997 (the "Amended  Credit  Facility").  Revised terms under the Amended  Credit
Facility include (i) an increase in maximum borrowings available to $40 million,
(ii) modification of certain financial covenants and ratios,  (iii) extension of
the revolving  credit period to July 28, 1999, (iv) elimination of the provision
to convert the facility to a term loan, and (v) inclusion of a sliding  interest
rate schedule based on the Company's ratio of total debt to cash flow. All other
terms,  conditions and restrictions  remained  substantially the same.  Interest
accrues under the Amended Credit  Facility at either prime to prime plus .5%, or
at the  Company's  election,  at LIBOR  plus 1.5% to LIBOR  plus 2.5%  (weighted
average  interest rate of 7.48% during 1997 and 8.04% at December 28, 1997). The
minimum and maximum borrowings outstanding under the Credit Facility and Amended
Credit Facility during 1997 were $8.5 million and $27.7 million, respectively.

     During  1996 and 1997,  interest  expense  of  approximately  $195,000  and
$378,000,  respectively,  was  capitalized  in total  construction  costs of new
restaurants.

     Principal payments due on the outstanding balance of long-term debt and the
Amended Credit Facility as of December 28, 1997 are as follows:

          1998                                  $    115,308
          1999                                    26,577,312
          2000                                       139,945
          2001                                     2,107,276
                                                  ----------
            Total                               $ 28,939,841
                                                  ==========


<PAGE>


     The Company has entered into capital  lease  obligations  for buildings and
improvements, and furniture and equipment used in restaurant operations, and for
certain  computer  hardware and software  used in the corporate  office.  Future
minimum lease payments  required under these capital  leases,  together with the
present value of the net minimum lease  payments at discount  rates ranging from
8% to 18%, are as follows as of December 28, 1997:

         1998                                              $   799,423
         1999                                                  572,487
         2000                                                  230,777
         2001                                                  230,779
         2002                                                  238,421
         Thereafter                                          2,753,147
                                                             ---------
         Minimum lease payments                              4,825,034
         Less: Amount representing interest                 (1,963,993)
                                                            ----------
         Present value of net minimum lease payments         2,861,041
         Less: Current portion                                (527,396)
                                                            ----------
                                                           $ 2,333,645
                                                            ==========

     The above  payments  include a capital  lease  obligation  for the  brewery
restaurant located in Englewood,  Colorado. During 1997, the Company constructed
this restaurant on land previously acquired,  then entered into a sale-leaseback
transaction  with a  partnership  in  which  a  director  of the  Company  has a
beneficial ownership interest. The sales price of this property approximated the
Company's  carrying  amount of the  investment.  As of December  28,  1997,  the
present  value  of net  minimum  lease  payments  for  this  obligation  totaled
$2,029,006.

(7)  RESTRUCTURING CHARGE

     During 1997,  the Company  approved a strategic  plan to reduce  restaurant
expansion,  suspend  development of new Old Chicago  restaurants,  and close two
Rock Bottom  Restaurant & Brewery  restaurants  and two Old Chicago  restaurants
during early 1998.  Such steps were part of an overall  restructuring  effort to
improve  restaurant  operating  profits.  As a result  of these  decisions,  the
Company incurred a pre-tax  restructuring  charge of approximately $9.7 million.
Such charge includes the estimated costs accrued to close these four restaurants
of  approximately  $3.9  million,  write-downs  of  certain  assets to their net
realizable value totaling  approximately  $5.5 million,  and expenses related to
the elimination of certain  corporate office overhead in response to the planned
reduction in future growth totaling approximately $272,000.

     Subsequent  to  yearend,  the Company  closed the Old  Chicago  restaurants
located in  Evergreen,  Colorado and  Gladstone,  Missouri,  and the Rock Bottom
Restaurant & Brewery  restaurants  located in Houston,  Texas and Overland Park,
Kansas. The four restaurants  incurred losses from operations totaling $422,000,
$862,000  and $1.0 million  during  fiscal  1995,  1996 and 1997,  respectively.
Additionally,  as the Overland Park restaurant was the only restaurant  owned by
RBK, the Company  purchased the  remaining 50% interest in RBK,  pursuant to the
partnership agreement, for $70,000.

(8)  INCOME TAXES

         The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>

                                 1995               1996                1997
                             -----------        ------------       ------------
        <S>                 <C>                 <C>              <C>
         Federal             $ 1,213,211         $ 1,197,386      $ (2,118,577)
         State                   336,794             280,923          (448,973)
                            ------------        ------------        ----------
                  Total      $ 1,550,005         $ 1,478,309      $ (2,567,550)
                              ==========          ==========        ===========

         Current             $ 1,232,563         $ 1,259,577     $     895,208
         Deferred                317,442             218,732        (3,462,758)
                            ------------        ------------        ----------
                  Total      $ 1,550,005         $ 1,478,309      $ (2,567,550)
                              ==========          ==========        ===========
</TABLE>


<PAGE>


Deferred  tax assets and  liabilities  as of December  29, 1996 and December 28,
1997 consist of the following primary components:
<TABLE>
<CAPTION>
                                                                          1996            1997
                                                                      ----------       ---------
        <S>                                                        <C>              <C>
         Current deferred tax assets (liabilities):
           Preopening costs                                         $  (696,777)     $  (448,490)
           Accrued restructuring costs                                       --          332,281
           Capitalized inventory costs and other                        181,545          335,423
                                                                        -------          -------
         Net current deferred tax assets (liabilities)              $  (515,232)     $   219,214
                                                                       =========         =======

         Long-term deferred tax assets (liabilities):
           FICA and rehabilitation tax credits                      $ 1,495,558      $ 2,478,765
           Valuation allowance against tax credits                     (331,181)      (1,254,257)
           AMT tax credit                                                    --          277,774
           Accrued restructuring costs                                       --          566,974
           Property, equipment and other                             (1,520,887)         220,406
           Restricted stock                                                  --           45,147
                                                                      ----------       ---------
         Net long-term deferred tax assets (liabilities)            $  (356,510)     $ 2,334,809
                                                                      ==========       =========
</TABLE>

         At December 28, 1997,  the Company had federal FICA and  rehabilitation
tax credit  carryforwards of $2,478,765.  The carryforwards will begin to expire
in  2009.  The  valuation  allowance  relates  to a  portion  of the tax  credit
carryforwards.  It is the opinion of management that due to alternative  minimum
tax limitations and the relatively  volatile nature of the restaurant  industry,
it is more likely than not that a portion of these tax credit carryforwards will
expire before the Company is able to realize their benefit.

          The following table  reconciles the federal  statutory income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>

                                                                                1995           1996         1997
                                                                                ----           ----         ----
         <S>                                                                  <C>             <C>         <C>
           Provision (benefit) for income taxes at federal statutory rate        34.0%         34.0%       (34.0)%
           Permanent differences and other                                        4.1           2.9          2.2
           Tax credits                                                          (10.4)        (20.4)       (12.7)
           Valuation allowance against tax credits                                 --           6.0         12.7
           State income taxes, net of federal benefit                             4.4           4.4         (3.6)
                                                                                -----         -----        -----
           Effective income tax rate                                             32.1%         26.9%       (35.4)%
                                                                                =====         =====        =====
</TABLE>


 (9)  STOCKHOLDERS' EQUITY

Public Offering

     On March 7, 1995,  the  Company  closed its  follow-on  public  offering of
2,100,000  shares of common stock (of which 400,000  shares were sold by certain
existing  stockholders)  at $18.00 per  share,  and on March 13,  1995,  sold an
additional   315,000  shares  at  $18.00  per  share  in  connection   with  the
underwriters'  exercise of their over-allotment option. Net proceeds received by
the Company after deducting  offering  expenses and underwriting  discounts were
$33,692,921.

Executive Bonus Plans

     In April 1996, the Company adopted an Executive Bonus Plan. Under the plan,
certain  executive  officers  received a bonus  equal to a  percentage  of their
yearly salary,  the majority of which was paid in restricted  common stock.  The
bonus was awarded based on achieving  certain  annual  financial  goals,  and in
February 1997 the Company  issued 65,145 shares of restricted  stock pursuant to
this plan. The restricted  common stock shall vest, and trading  restrictions on
those shares shall  lapse,  three years from the date of issuance,  provided the
executive  continues to be an employee of the Company.  In the event of a change
of control,  as defined,  the  Compensation  Committee (the  "Committee") of the
Company's  Board of Directors (the "Board") has the sole discretion to eliminate
all restrictions on these shares.  Subsequent to yearend, the Board amended this
bonus plan to eliminate all  restrictions  on these shares in two years from the
date of issuance if certain  fiscal 1998 earnings  targets are achieved,  and in
the event of a change of control.


<PAGE>


     In April 1997,  certain  executive  officers executed  long-term  incentive
agreements  with the  Company as a  component  of their 1997 total  compensation
package.  The agreements  provided for restricted  common stock grants  totaling
104,000 shares,  all of which vest on December 31, 2006,  provided the executive
continues to be an employee of the Company. The vesting of such stock grants may
be accelerated to December 31, 2000 if specified cumulative earnings targets are
met as of  that  date.  In  the  event  of a  change  of  control,  as  defined,
restrictions on 50% of these shares will immediately lapse.

     In December 1997, the Company canceled 54,423  restricted  shares issued to
one executive  pursuant to these bonus plans as such  indiviual was no longer an
employee of the Company.

Stock Option Plans

     Rock  Bottom  adopted  an Equity  Incentive  Plan (the  "Employees'  Plan")
effective July 21, 1994. The Employees'  Plan was amended in May 1995, June 1996
and May 1997,  to increase  the total number of shares of the  Company's  common
stock  authorized  for  issuance  from  600,000  shares  to  1,500,000   shares.
Additionally,  the Employees' Plan provides for an automatic  increase each year
in the number of shares of common  stock  authorized  equal to  one-half  of one
percent  of the  then  outstanding  shares.  As of  December  28,  1997,  75,768
additional  shares of common  stock  were  authorized  for  issuance  under this
provision.

     The  Employees'  Plan  provides for the granting of both  "incentive  stock
options"  (as  defined  in  Section  422  of  the  Internal  Revenue  Code)  and
nonstatutory stock options,  as well as restricted stock grants, and is designed
to serve as an  incentive  for  hiring and  retaining  qualified  and  competent
employees.  The Committee of the Board administers and interprets the Employees'
Plan.  Options are granted under the  Employees'  Plan on such terms and at such
prices as determined by the Committee,  except that the per share exercise price
of  incentive  stock  options  cannot be less than the fair market  value of the
common stock on the date of grant. Options granted under this plan vest annually
over three years from date of grant.

     A summary of the status of the  Employees'  Plan as of December  31,  1995,
December 29, 1996 and December  28,1997 and the changes  during those periods is
as follows:
<TABLE>
<CAPTION>

                                                             1995              1996              1997
                                                             ----              ----              ----
          <S>                                           <C>              <C>              <C>
           Outstanding at beginning of period                528,900           936,218           860,154
             Granted                                         595,000           155,200           224,650
             Exercised                                       (30,482)         (100,396)          (39,333)
             Canceled                                       (151,200)               --                --
             Forfeited                                        (6,000)         (130,868)         (148,152)
                                                             -------           -------           -------
           Outstanding at end of period                      936,218           860,154           897,319
                                                             =======           =======           =======

           Exercisable at end of period                      148,380           319,041           487,548
                                                             =======           =======           =======

           Range of exercise prices, at end of period    $8.00-$30.47      $8.00-$30.47     $8.00-$25.75
                                                         ============      ============     ============

           Weighted average exercise prices:
             At beginning of period                         $  8.24           $ 12.35          $ 12.70
             At end of period                                 12.35             12.70            11.88
             Exercisable at end of period                      8.39             11.88            11.39
             Options granted                                  18.65             11.78            10.93
             Options exercised                                 8.08              8.02             8.09
             Options canceled                                 23.49                --               --
             Options forfeited                                15.07             12.73            16.22

           Weighted average end of period
             remaining contractual life (in years)             8.99              8.14             7.62

           Weighted average fair value of options            $ 7.60            $ 6.20           $ 4.97
             granted during the period

</TABLE>

<PAGE>


     The following  summary shows, for the price range  indicated,  the weighted
average exercise price,  weighted  average price of options  exercisable and the
remaining contractual life of options granted under the Employees' Plan:
<TABLE>
<CAPTION>

                                                     1995                 1996                 1997
                                                     ----                 ----                 ----
                                                Shares     Price     Shares     Price     Shares     Price
                                                ------     -----     ------     -----     ------     -----
          <S>                                   <C>        <C>       <C>        <C>       <C>        <C>
           Range of exercise prices
           ------------------------
           Weighted average exercise price
             for options outstanding:
                $ 8.00-$ 9.99                    472,418   $ 8.03     304,288   $ 8.03     264,955   $ 8.02
                $10.00-$13.99                    256,500    13.80     369,300    12.88     504,466    12.29
                $14.00-$17.99                     64,300    15.50      78,566    15.36      66,566    15.31
                $18.00-$25.75                    143,000    22.63     108,000    23.30      61,332    21.35

           Weighted average exercise price
             for options exercisable:
                $ 8.00-$ 9.99                    138,386   $ 8.02     173,544   $ 8.03     264,955   $ 8.02
                $10.00-$13.99                      7,996    12.61      87,878    13.68     128,871    12.86
                $14.00-$17.99                      1,998    16.95      19,619    15.57      37,390    15.38
                $18.00-$25.75                         --       --      38,000    23.43      56,332    21.23

           Weighted average remaining
             contractual life (in years):        Shares      Life      Shares      Life     Shares      Life
                                                 ------      ----      ------      ----     ------      ----
                $ 8.00-$ 9.99                    472,418     8.55     304,288      7.56    264,955      6.56
                $10.00-$13.99                    256,500     9.88     369,300      9.05    504,466      8.40
                $14.00-$17.99                     64,300     9.69      78,566      7.37     66,566      6.14
                $18.00-$25.75                    143,000     8.51     108,000      7.25     61,332      7.37
</TABLE>

     The weighted  average fair value of each option grant has been estimated as
of the  date of grant  using  the  Black-Scholes  option-pricing  model  and the
following assumptions:
<TABLE>
<CAPTION>

                                                  1995                    1996                   1997
                                                  ----                    ----                   ----
          <S>                                   <C>                     <C>                    <C>

           Dividend rate                           0 %                     0 %                     0 %
           Expected volatility                    68 %                    73 %                    54 %
           Risk-free interest rate               5.85 %                  5.85 %                  5.85 %
           Expected life (in years):
                $ 8.00-$ 9.99                      3.5                     3.5                    N/A
                $10.00-$13.99                      4.0                     4.0                    5
                $14.00-$17.99                      4.5                     4.5                    N/A
                $18.00-$30.47                      5.0                     N/A                    N/A
</TABLE>

     Rock Bottom has also adopted the Nonemployee  Directors'  Stock Option Plan
(the "Directors' Plan"). The Directors' Plan was amended in May 1997 to increase
the number of shares of common stock  authorized for issuance from 75,000 shares
to 100,000  shares.  All stock options  granted  pursuant to the Directors' Plan
vest equally over a one to two-year period from the date of grant.



<PAGE>


     A summary of the status of the Company's Directors' Plan as of December 31,
1995,  December 29, 1996 and December  28,  1997,  and the changes  during those
periods is as follows.
<TABLE>
<CAPTION>

                                                          1995                1996               1997
                                                          ----                ----               ----
          <S>                                            <C>                <C>                <C>
           Outstanding at beginning of period            22,500              39,000             58,500
               Granted                                   16,500              27,000             18,000
               Exercised                                     --              (7,500)                --
                                                         ------              ------             ------
           Outstanding at end of period                  39,000              58,500             76,500
                                                         ======              ======             ======

           Exercisable at end of period                  11,250              27,750             51,000
                                                         ======              ======             ======

           Range of exercise prices, at end
           of period                                 $8.00 - $25.75      $8.88 - $25.75     $8.88 - $25.75
                                                     ==============      ==============     ==============

           Weighted average exercise prices:
             At beginning of period                       $  9.38            $13.89             $ 13.74
             At end of period                               13.89             13.74               12.79
             Exercisable at end of period                    9.38             14.58               14.07
             Options granted                                20.03             11.92                9.71
             Options exercised                                 --              8.00                  --

           Weighted average end of period
             remaining contractual life (in years)           9.01              8.10                7.67

           Weighted average fair value of options
             granted during the period                    $ 10.16           $  6.11              $ 3.93

</TABLE>

     The following  summary shows, for the price range  indicated,  the weighted
average exercise price,  weighted  average price of options  exercisable and the
remaining contractual life of options granted under the Directors' Plan:
<TABLE>
<CAPTION>
                                                         1995                    1996                    1997
                                                         ----                    ----                    ----
                                                   Shares      Price      Shares      Price       Shares      Price
                                                   ------      -----      ------      -----       ------      -----
          <S>                                   <C>          <C>         <C>        <C>          <C>        <C>
           Range of exercise prices
           ------------------------
           Weighted  average exercise price
           for options outstanding:
           $   8.00 - $ 9.99                       7,500      $ 8.00       7,500      $ 8.88      19,500      $ 9.12
           $  10.00 - $13.99                      15,000       10.08      27,000       11.14      33,000       11.04
           $  14.00 - $17.99                       6,000       16.52      13,500       15.16      13,500       15.16
           $  18.00 - $25.75                      10,500       22.04      10,500       22.04      10,500       22.04

           Weighted average exercise price
           for options exercisable:
           $   8.00 - $ 9.99                       3,750      $ 8.00          --      $   --       3,750      $ 8.88
           $  10.00 - $13.99                       7,500       10.08      15,000       10.08      27,000       11.14
           $  14.00 - $17.99                          --          --       6,000       16.52       9,750       15.58
           $  18.00 - $25.75                          --          --       6,750       22.86      10,500       22.04

           Weighted average remaining
           contractual life (in years):          Shares         Life      Shares        Life      Shares        Life
                                                 ------         ----      ------        ----      ------        ----
           $   8.00 - $ 9.99                       7,500        8.55       7,500        9.16      19,500        9.08
           $  10.00 - $13.99                      15,000        8.71      27,000        8.54      33,000        7.85
           $  14.00 - $17.99                       6,000        9.71      13,500        6.41      13,500        5.41
           $  18.00 - $25.75                      10,500        9.36      10,500        8.37      10,500        7.37

</TABLE>

<PAGE>


     The weighted  average fair value of each option grant has been estimated as
of the  date of grant  using  the  Black-Scholes  option-pricing  model  and the
following assumptions:
<TABLE>
<CAPTION>

                                                                      1995          1996         1997
                                                                      ----          ----         ----
          <S>                                                 <C>              <C>             <C>
           Dividend rate                                                0%           0%           0%
           Expected volatility                                         68%          73%          54%
           Risk-free interest rate                                    5.85%        5.85%        5.85%
           Expected life (in years):
                $ 8.00 - $ 9.99                                    3.0 - 4.0    3.0 - 4.0         3.0
                $10.00 - $13.99                                    3.0 - 4.0    3.0 - 4.0         3.0
                $14.00 - $17.99                                    3.0 - 4.0    3.0 - 4.0         N/A
                $18.00 - $25.75                                    3.0 - 4.0    3.0 - 4.0         N/A
</TABLE>

Stock-Based Compensation Plans

     The Company accounts for its stock-based  compensation  plans under APB 25,
under which no  compensation  expense is  recognized  as all  options  have been
granted at an exercise  price equal to the fair  market  value of the  Company's
common stock on the date of grant.  Effective in 1995,  the Company  adopted the
disclosure  option of SFAS 123  whereby  pro forma net income and net income per
share  information  must  be  disclosed  as if  compensation  expense  had  been
recognized  over the vesting  period of stock options.  Cumulative  compensation
cost  recognized  in pro forma net  income  with  respect  to  options  that are
forfeited prior to vesting is adjusted as a reduction of pro forma  compensation
expense in the period of  forfeiture.  For SFAS 123 purposes,  the fair value of
each  option  grant  has  been  estimated  as of the  date of  grant  using  the
Black-Scholes option-pricing model and assumptions described above.

     Using these  assumptions,  the fair value of the stock  options  granted in
1995, 1996 and 1997 was estimated to be approximately $4,690,000, $1,128,000 and
$1,188,000,   respectively,   which  under  SFAS  123  would  be   amortized  as
compensation  expense over the vesting period of the options.  Had  compensation
cost been recorded  consistent with SFAS 123 utilizing the assumptions  detailed
above, the Company's pro forma net income and diluted net income per share would
have been as follows for the years ended  December 31,  1995,  December 29, 1996
and December 28, 1997:
<TABLE>
<CAPTION>
                                                                 1995              1996              1997
                                                                 ----              ----              ----
          <S>                                                <C>              <C>              <C>
           Net income (loss):
             As reported                                      $ 3,270,028      $ 4,025,083      $ (4,691,344)
             Pro forma                                        $ 2,432,623      $ 2,745,745      $ (5,739,389)

           Basic net income (loss) per share:
             As reported                                        $ .47            $ .53            $ (.58)
             Pro forma                                          $ .35            $ .36            $ (.72)

           Diluted net income (loss)  per share:                $ .45            $ .52            $ (.58)
             As reported                                        $ .33            $ .36            $ (.72)
             Pro forma
</TABLE>

     Because the SFAS 123 method of  accounting  has not been applied to options
granted prior to December 25, 1994,  the resulting pro forma  compensation  cost
may not be representative of that to be expected in future years.

     Subsequent to year end, the Board  approved a repricing of all  outstanding
stock options.  Each option  holders'  number of options held were reduced in an
amount  necessary  to yield an  identical  fair value of options  held after the
reprice as compared to the fair value of options held immediately  prior,  based
on a  Black-Scholes  option pricing model  valuation.  Substantially  all option
holders  agreed  to have  their  options  repriced,  and also  agreed  to forego
exercising any options for six months from the date of the repricing.



<PAGE>


Shareholder Rights Plan

     In December  1997,  the Company's  Board adopted a Rights  Agreement  under
which the Common  Stock  holders of record as of December  12,  1997  received a
dividend in the form of Preferred Stock Purchase Rights  ("Rights").  The Rights
permit  the  holder  to  purchase  one-hundredth  of a share of  Series A Junior
Participating Preferred Stock ("a unit") at an initial exercise price of $50 per
unit under certain  circumstances.  The purchase  price,  the number of units of
Preferred Stock and the type of securities  issuable upon exercise of the Rights
are subject to adjustment  from time to time.  The Rights expire on December 12,
2007,  unless  earlier  redeemed or exchanged.  Until a Right is exercised,  the
holder has no rights as a  stockholder  of the Company,  including  the right to
vote  or  receive  dividends.   The  Rights  are  exercisable  only  in  certain
situations,  as  defined  in the  Rights  Plan,  including  (i)  acquisition  of
beneficial  ownership of 15 percent or more of the Company's  outstanding common
stock by a person  other than the  Company's  Chairman of the Board,  and (ii) a
change in the composition of the Board over a period of 18 consecutive months or
less such that 50% or more of the members of the Board who were directors at the
beginning of such 18-month  period cease to be directors  during such period and
are  replaced by  directors  that were not  unanimously  elected or nominated by
persons that were directors at the  commencement  of such 18-month  period.  The
Company  will  generally  be entitled to redeem the Rights at $.001 per Right at
any time prior to such time as a person or group has acquired 15 percent or more
of the Company's common stock.

(10)  COMMITMENTS AND CONTINGENCIES

  Lease Commitments

     The Company has entered into various  operating leases for land,  buildings
and equipment, most of which contain renewal options and provisions for payments
of real estate taxes,  insurance and  maintenance  costs.  In addition,  certain
leases contain  contingent  rentals based on a percentage of gross revenues,  as
defined. Total rent expense was $3,762,890,  $5,387,774 and $ 7,602,314 in 1995,
1996 and 1997, respectively, including additional rent of $1,013,642, $1,080,911
and $ 896,343, respectively.

     Aggregate  future  minimum  lease  payments  required  under  noncancelable
operating  leases at  December  28,  1997  (which  include  commitments  for two
restaurants opening in 1998) are as follows:

<TABLE>
<CAPTION>
                                                                     Total
                                                                     -----
          <S>                                                 <C>
           1998                                                $   6,063,799
           1999                                                    5,969,847
           2000                                                    5,970,359
           2001                                                    5,897,230
           2002                                                    5,894,894
           Thereafter                                             38,549,490
                                                                  ----------
         Total future minimum lease payments required           $ 68,345,619
                                                                  ==========
</TABLE>

Self-Funded Employee Health Insurance Plan

     Beginning August 1996, the Company began  administering its own self-funded
employee health  insurance plan (the "Plan").  Employees  contribute to the Plan
based on  pre-determined  premium  amounts and  certain  co-payment  terms.  The
Company is then  responsible  for the remaining  payment of covered claims up to
$35,000 per person per annum,  after which a third party insurer  provides "stop
loss"  insurance  protection  to the Plan for  payment of claims of any  covered
individual  in excess of $35,000,  but not to exceed $1 million per employee per
lifetime.  The Company  records  insurance  expense equal to the estimated costs
expected to result from incurred  claims plus an estimate of claims incurred but
not reported based on the best  available  information.  However,  the nature of
these  claims  is  such  that  actual   development   of  the  claims  may  vary
significantly from the estimated expenses.  All changes in expense estimates are
accounted for on a prospective basis and could have a significant  impact on the
Company's financial position or results of operations.




<PAGE>


Year 2000 Compliance

     During  1997,  the Company  began a  comprehensive  review of its  computer
systems to identify the systems that could be affected by the "Year  2000"issue.
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the  applicable  year.  The  Company's  system
conversion  during 1997 addressed a significant  part of this problem as the new
general financial and payroll software applications implemented were represented
by the  vendors to be Year 2000  compliant.  The Company is also  developing  an
implementation  plan  for its  remaining  Year  2000  issues,  including  either
modifications or upgrades of substantially all existing restaurant point-of-sale
systems.

Litigation

     The Company is a party in certain legal proceedings that have arisen out of
the  ordinary  course of  business.  Based upon  advice of the  Company's  legal
counsel,  management  believes that the costs of defending  and resolving  these
legal matters will not have a material adverse effect on the Company.

(11)  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following  table presents  selected 1996 and 1997  quarterly  financial
data:

<TABLE>
<CAPTION>

1996                                     March 31             June 30        September 29         December 29
----                                     --------             -------        ------------         -----------
<S>                                    <C>                 <C>              <C>                 <C>
Revenues                                $23,512,027         $26,414,075      $28,964,665         $30,339,378
Income from operations                      783,458           1,274,644        1,605,505           1,691,517
Income before taxes                         843,675           1,279,391        1,659,281           1,721,045
Net income                                  582,136             882,788        1,289,759           1,270,400
Diluted net income per share                    .08                 .12              .16                 .16

1997                                     March 30             June 29        September 28         December 28
----                                     --------             -------        ------------         -----------

Revenues                                $32,692,139         $37,431,711       $40,730,974        $39,393,406
Income from operations                    1,391,645           1,647,482        (3,100,475)        (5,764,479)
Income before taxes                       1,212,982           1,330,247        (3,489,154)        (6,312,969)
Net income (loss)                           860,208             941,817        (2,239,317)        (4,254,052)
Diluted net income (loss) per share             .11                 .12              (.28)              (.52)
</TABLE>

     Income from operations  during the fourth quarter of 1997 was impacted by a
restructuring  charge of $4.5  million (see Note 7), and  incremental  general &
administrative  expenses  totaling $1.3 million for executive  severance pay and
costs associated with the Company's exploration of strategic alternatives.
<PAGE>


ITEM  9:  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure

         None



                                    PART III

     Certain  information  required  by Part III is omitted  from this Report in
that  the  Registrant  will  file  a  definitive  proxy  statement  pursuant  to
Regulation 14A (the "Proxy  Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.  Only those sections of the Proxy Statement
which  specifically  address  the items set forth  herein  are  incorporated  by
reference.

ITEM 10:  Directors and Executive Officers of the Registrant

     The  information  required by this Item is incorporated by reference to the
section "Directors, Executive Officers and Key Employees" in the Company's Proxy
Statement.

ITEM 11:  Executive Compensation

     The  information  required by this Item is incorporated by reference to the
section "Directors,  Executive Officers and Key Employees"  excluding the "Board
Compensation  Committee Report on Executive  Compensation"  and the "Performance
Graph" in the Company's Proxy Statement.

ITEM 12:  Security Ownership of Certain Beneficial Owners and Management

     The  information  required by this Item is incorporated by reference to the
section "Security  Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.

ITEM 13:  Certain Relationships and Related Transactions

     The  information  required by this Item is incorporated by reference to the
section "Certain  Relationships and Related Transactions" in the Company's Proxy
Statement.


                                     PART IV

ITEM 14:  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

         (a)  Documents filed as part of this report:

                   1.  Financial Statements.

                            Report of Independent Public Accountants

                            Consolidated Balance Sheets as of December 29, 1996
                            and December 28, 1997

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

                            Consolidated  Statements of Stockholders' Equity for
                            the Years Ended  December  31,  1995,  December  29,
                            1996, and December 28, 1997

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

                            Notes to Consolidated Financial Statements

                   2.  Financial Statement Schedules.

                            All  financial  statement  schedules  are omitted as
                            they are not applicable to the Company.



<PAGE>


                   3.  Exhibits.
<TABLE>
<CAPTION>
Exhibit
  No.              Description of Exhibit
-----              ----------------------------------
<S>               <C>
2        --        Form of Share Exchange  Agreement and  Amendment among the
                   Company   and    the    Shareholders   of   the   Predecessor
                   Subsidiaries,  filed  as   Exhibit  No.  2 to  the  Company's
                   Registration   Statement  on  Form   S-1   (Registration  No.
                   33-79898) and incorporated herein by reference.

 3(i)    --        Amended and Restated  Certificate of  Incorporation of the
                   Company,   filed  as  Exhibit  No.  3(i)  to  the   Company's
                   Registration   Statement  on  Form  S-1   (Registration   No.
                   33-79898) and incorporated herein by reference.

 3(ii)   --        Bylaws of the  Company,  filed as Exhibit No. 3(ii) to the
                   Company's  Annual  Report  on Form 10-K for the  fiscal  year
                   ended   December  25,  1994,  and   incorporated   herein  by
                   reference.

4.1      --        Form of Rights Agreement,  dated as of December 12, 1997,
                   by and between the Company and American  Securities Transfer
                   &  Trust,   Incorporated,   which   includes   the  form  of
                   Certificate  of   Designations   for  the  Series  A  Junior
                   Participating  Preferred  Stock as Exhibit A and the form of
                   Right  Certificate as Exhibit B, filed as Exhibit No. 4.1 to
                   the  Company's  Registration  Statement  on  Form  8-A,  and
                   incorporate herein by reference.

10.1     --        Rock Bottom  Restaurants,  Inc.  Equity  Incentive  Plan,
                   filed  as  Exhibit  No.  4.1 to the  Company's  Registration
                   Statement  on  Form  S-8  (Registration  No.  33-94256)  and
                   incorporated herein by reference.

10.2     --        Rock  Bottom  Restaurants,  Inc.  Nonemployee  Directors'
                   Stock Option Plan, filed as Exhibit No. 4.2 to the Company's
                   Registration   Statement  on  Form  S-8   (Registration  No.
                   33-94256) and incorporated herein by reference.

10.3     --        Lease  Agreement,  dated  September  1, 1978,  between the
                   Company and  Madeline  Day,  filed as Exhibit No. 10.3 to the
                   Company's  Registration  Statement on Form S-1  (Registration
                   No.33-79898) and incorporated herein by reference.

10.4     --        Lease Agreement, dated March 15, 1986, as amended on June
                   21, 1995, between the Company and Lux/Day  Northport,  Ltd.,
                   filed as Exhibit No. 10.4 to the Company's  Annual Report on
                   Form 10-K for the fiscal year ended  December 31, 1995,  and
                   incorporated herein by reference.

10.5     --        Lease Agreement,  dated June 8, 1989, between the Company
                   and Robert Greenlee,  and Assignment,  dated March 23, 1990,
                   by Robert Greenlee to the 1123 Walnut Corporation,  filed as
                   Exhibit No. 10.5 to the Company's  Registration Statement on
                   Form S-1 (Registration No. 33-79898) and incorporated herein
                   by reference.

10.6     --        Lease  Agreement,  dated  August 29,  1990,  between  the
                   Company and C.B.  Partnership,  filed as Exhibit No. 10.6 to
                   the   Company's   Registration   Statement   on   Form   S-1
                   (Registration  No.  33-79898)  and  incorporated  herein  by
                   reference.

10.7     --        Lease Agreement,  dated May 9, 1995,  between the Company
                   and Old Chicago Colorado Springs Limited Partnership,  filed
                   as Exhibit No. 10.7 to the  Company's  Annual Report on Form
                   10-K for the  fiscal  year  ended  December  31,  1995,  and
                   incorporated herein by reference.

10.8     --        Executive  Bonus  Plan,  filed as Exhibit  No. 10 to the
                   Company's Form 10-Q for the quarterly  period ended June 30,
                   1996, and incorporated herein by reference.

10.9     --        Real Estate  Mortgage,  dated June 27, 1996,  between the
                   Company and Lakeside Bank,  together with  Promissory  Note,
                   filed as  Exhibit  No. 10 to the  Company's  Form  10-Q,  as
                   amended,  for the quarterly period ended September 29, 1996,
                   and incorporated herein by reference.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

Exhibit
 No.              Description of Exhibit
-----             ---------------------------------
<S>               <C>
10.10    --       Loan Agreement for  $20,000,000  Revolving Line of Credit
                  from  Norwest Bank  Colorado,  National  Association,  First
                  Security Bank of Idaho,  N.A.,  and West One Bank,  Idaho to
                  Rock Bottom Restaurants,  Inc., dated July 2, 1996, filed as
                  Exhibit  No.  2.1 to the  Company's  Form 8-K dated  July 2,
                  1996, and incorporated herein by reference.

10.11    --       Amendment  to  Loan  Agreement   between   Norwest  Bank
                  Colorado,  National  Association,  First  Security  Bank  of
                  Idaho,  N.A.,  and  West  one  Bank,  Idaho  to Rock  Bottom
                  Restaurants, Inc., dated February 24, 1997, filed as Exhibit
                  No. 10.1 to the Company's Form 10-Q for the Quarterly period
                  ended March 30, 1997, and incorporated herein by reference.

10.12    --       Second  Amendment  to  Loan  Agreement  for  $40,000,000
                  Revolving   Line  of  Credit  from  Norwest  Bank  Colorado,
                  National  Association,  First Security Bank, N.A., U.S. Bank
                  and  Suntrust  Bank,  Central  Florida,  N.A. to Rock Bottom
                  Restaurants, Inc., dated July 28, 1997, filed as Exhibit No.
                  10.1 to the  Company's  Form 10-Q for the  quarterly  period
                  ended  September  28,  1997,  and  incorporated   herein  by
                  reference.

10.13    --       Stock  Purchase  Agreement,  dated June 4, 1996,  between
                  Rock  Bottom,   Restaurants,   Inc.,   Trolley   Barn,   TBB
                  Acquisition  Group,  Inc., TBB Holding Company,  and the TBB
                  Shareholders, filed as Exhibit No. 2.2 to the Company's Form
                  8-K  dated  July  2,  1996,  and   incorporated   herein  by
                  reference.

10.14    --       Lease Agreement, dated June 25, 1996, between the Company
                  and Dulcet  L.L.C.,  Elaine C. Wong and  Eugene B.  Weisman,
                  filed as Exhibit No. 10.12 to the Company's Annual Report on
                  Form 10-K for the fiscal year ended  December 29, 1996,  and
                  incorporated   herein  by   reference.

10.15  --         Lease Agreement, dated September 26,1997,  between Rock Bottom
                  Restaurants,  Inc.  and Zymotic,  LLC,  filed as Exhibit No.
                  10.2 to the  Company's  Form 10-Q for the  quarterly  period
                  ended  September  28,  1997,  and  incorporated   herein  by
                  reference.

10.16    --       Form of Management Employment Agreement, filed as Exhibit
                  No. 10.1 to the Company's Form 10-Q for the quarterly period
                  ended June 29, 1997, and incorporated herein by reference.

10.17    --       Form of Management Compensation Agreement, filed as Exhibit
                  No. 10.2 to the Company's  Form 10-Q for the quarterly period
                  ended June 29, 1997, and incorporated herein by reference.

10.18    --       Form of Long Term Incentive Agreement, filed as Exhibit No.
                  10.3 to the Company's Form 10-Q for the quarterly period ended
                  June 29, 1997, and incorporated herein by reference.

10.19    --       Consulting Agreement, dated January 1, 1997, between Rock
                  Bottom Restaurants,  Inc. and FBD Management Corp., filed as
                  Exhibit No. 10.19.

10.20    --       Service and Consulting Agreement,  dated January 1, 1997,
                  between   Rock   Bottom   Restaurants,   Inc.   and  Concept
                  Management, Inc., filed as Exhibit No. 10.20.

10.21    --       License  Agreement,  dated July 12, 1997,  by and between
                  Rock Bottom  Restaurants,  Inc.,  and Frank B. Day, filed as
                  Exhibit No. 10.21.

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

Exhibit
 No.               Description of Exhibit
-----              ----------------------------------
<S>               <C>
21       --        Subsidiaries of the Company:
                     Old Chicago of Colorado, Inc., a Colorado corporation;
                     Old Chicago of Westminster,  Inc., a Colorado corporation;
                     Old Chicago of Kansas, Inc., a Kansas corporation.
                     Rock Bottom of Minneapolis,  Inc., a Colorado corporation;
                     Rock Bottom of Texas, Inc., a Texas corporation;
                     Wadsworth Old Chicago, Inc.,  a Colorado  corporation;
                     Walnut  Brewery,  Inc.,  a Colorado  corporation;
                     Rock Bottom Kansas LLC, a Kansas limited liability company.

23.1               Consent of Arthur Andersen LLP

27                 Financial Data Schedule, filed as Exhibit No. 27

         (b)      Reports on Form 8-K.

                  A current report on Form 8-K dated December 12, 1997 was filed
                  to announce  the  Company's  declaration  of a dividend of one
                  preferred   stock   purchase   right  (a  "Right")   for  each
                  outstanding share of common stock of the Company, and adoption
                  of the Rights Agreement dated December 12, 1997.

         (c)       Exhibits.

                   See Item 14(a)(3) above.

         (d)       Financial Statement Schedules.

                   All financial statement schedules are omitted as they are not
                   applicable to the Company.

</TABLE>


<PAGE>


                                   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
Louisville, State of Colorado.

                                                 ROCK BOTTOM RESTAURANTS, INC.


Date:  March 26, 1998                              By: /s/ FRANK B. DAY
                                                           Frank B. Day
                                                           President and
                                                         Chief Executive Officer

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

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

/s/  FRANK B. DAY
         Frank B. Day                 Chairman of the Board, President,                March 26, 1998
                                      Chief Executive Officer, and Director
                                      (Principal Executive Officer)

/s/  WILLIAM S. HOPPE
         William S. Hoppe             Executive Vice President, Chief                  March 26, 1998
                                      Financial Officer, Chief Administrative
                                      Officer and Treasurer
                                      (Principal Financial Officer)

/s/  THERESA D. SHELTON
         Theresa D. Shelton           Vice President Finance and                       March 26, 1998
                                      Assistant Secretary
                                      (Principal Accounting Officer)

/s/  ROBERT D. GREENLEE
         Robert D. Greenlee           Secretary and Director                           March 26, 1998

/s/  DAVID M. LUX
         David M. Lux                 Director                                         March 26, 1998

/s/  GERALD A. HORNBECK
         Gerald A. Hornbeck           Director                                         March 26, 1998

/s/  MARY C. HACKING
         Mary C. Hacking              Director                                         March 26, 1998

/s/  ARTHUR WONG
         Arthur Wong                  Director                                         March 26, 1998

/s/  DUNCAN H. COCROFT
         Duncan H. Cocroft            Director                                         March 26, 1998

</TABLE>


<PAGE>





                                                   EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit
  No.                                       Description of Exhibit
-----                                       --------------------------------
<S>                                        <C>
10.19                                       Consulting Agreement, dated January 1, 1997, between Rock Bottom
                                            Restaurants, Inc. and FBD Management Corp., filed as Exhibit No. 10.19.

10.20                                       Service and Consulting Agreement, dated January 1, 1997, between Rock
                                            Bottom Restaurants, Inc. and Concept Management, Inc., filed as Exhibit No. 10.20.

10.21                                       License Agreement, dated July 12, 1997, by and between Rock Bottom
                                            Restaurants, Inc., and Frank B. Day, filed as Exhibit No. 10.21.

23.1                                        Consent of Arthur Andersen LLP

27                                          Financial Data Schedule
</TABLE>