<TABLE>
Five-Year Summary of Selected Financial Data
Apple South, Inc.
(Dollars in thousands, except per share data)                                            
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                            5-year Compound
                                           Annual Growth Rate          1997         1996          1995           1994         1993 
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>           <C>           <C>            <C>          <C>     
Restaurant sales: 
      Applebee's                                  34.7%             $454,127      379,042       300,928        201,359      150,921
      Don Pablo's                                 63.1%              196,457      133,261        88,820         57,192       31,132
      McCormick & Schmick's                          -                67,373            -             -              -            -
      Hops                                           -                49,511            -             -              -            -
      Canyon Cafes                                   -                18,577            -             -              -            -
      Harrigan's                                  (3.3)%              19,560       21,991        22,781         23,021       23,044
      Other                                      (20.7)%               2,715       11,728        27,661         18,987       12,658
------------------------------------------------------------------------------------------------------------------------------------
           Total restaurant sales                 39.8%              808,320      546,022       440,190        300,559      217,755
------------------------------------------------------------------------------------------------------------------------------------

Restaurant operating expenses:
      Food and beverage                           38.2%              225,302      150,090       120,630         84,910       63,329
      Payroll and benefits                        41.7%              249,356      162,017       129,424         87,236       62,425
      Depreciation and amortization               44.8%               31,441       22,509        17,662         11,119        7,483
      Other operating expenses                    37.9%              187,781      125,781        98,850         69,483       51,636
------------------------------------------------------------------------------------------------------------------------------------
           Total restaurant operating expenses    39.6%              693,880      460,397       366,566        252,748      184,873
------------------------------------------------------------------------------------------------------------------------------------
Income from restaurant operations                 41.2%              114,440       85,625        73,624         47,811       32,882
                                                                        14.2%        15.7%         16.7%          15.9%        15.1%

General and administrative expenses               38.0%               39,617       26,329        22,298         15,359       11,584
Merger and asset revaluation charges                 -                     -       27,700         9,997              -            -
------------------------------------------------------------------------------------------------------------------------------------
Operating income                                  43.0%               74,823       31,596        41,329         32,452       21,298
------------------------------------------------------------------------------------------------------------------------------------
                                                                         9.3%         5.8%          9.4%          10.8%         9.8%
Other income (expense):
      Interest expense                            56.5%              (20,575)     (11,417)       (6,189)        (3,131)      (2,205)
      Distributions on preferred securities          -                (6,412)           -             -              -            -
      Interest income                            (17.3)%                  71           69           638            789          590
      Other, primarily goodwill amortization      57.3%               (5,834)      (2,024)       (1,349)          (150)        (490)
------------------------------------------------------------------------------------------------------------------------------------
           Total other income (expense)           65.8%              (32,750)     (13,372)       (6,900)        (2,492)      (2,105)
------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes                      33.6%               42,073       18,224        34,429         29,960       19,193
                                                                         5.2%         3.3%          7.8%          10.0%         8.8%

Income taxes                                      29.6%               13,625        6,550        14,150         10,900        7,250
------------------------------------------------------------------------------------------------------------------------------------
Net earnings                                      35.8%             $ 28,448       11,674        20,279         19,060       11,943
====================================================================================================================================
                                                                         3.5%         2.1%          4.6%           6.3%         5.5%
Basic earnings per common share                   27.3%             $   0.74         0.30          0.54           0.54         0.36
====================================================================================================================================
Diluted earnings per common share                 27.1%             $   0.73         0.30          0.52           0.54         0.36
====================================================================================================================================
Restaurants open at end of period:
      Applebee's                                  31.2%                  264          231           187            120           90
      Don Pablo's                                 58.8%                   91           63            44             33           17
      McCormick & Schmick's                          -                    17            -             -              -            -
      Hops                                           -                    30            -             -              -            -
      Canyon Cafes                                   -                    16            -             -              -            -
      Harrigan's                                     -                    11           12            12             12           12
      Other                                          -                     -           10            31             23           14
            Total                                 33.5%                  429          316           274            188          133
Annual sales growth                               39.8%                 48.0%        24.0%         46.5%          38.0%        43.9%
Net earnings growth                               35.8%                143.7%       (42.4)%         6.4%          59.6%        93.8%
Diluted earnings per share growth                 27.1%                143.3%       (42.3)%        (3.7)%         50.0%        63.6%
Working capital (excluding assets held for sale)     -              $(33,989)     (21,439)      (17,778)         2,200        6,175
Total assets                                      61.0%             $804,289      457,827       369,138        226,087      137,201
Long-term obligations                             83.8%             $381,843      215,891       118,726         70,190       32,227
Convertible preferred securities                     -              $115,000            -             -              -            -
Shareholders' equity                              50.2%             $220,782      191,429       203,221        120,341       79,899
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Apple South, Inc.

     For an  understanding  of  the  significant  factors  that  influenced  the
performance of Apple South,  Inc. (the  "Company")  during the past three fiscal
years,  the  following  discussion  should  be  read  in  conjunction  with  the
consolidated financial statements appearing elsewhere in this annual report.

Business  Combinations  and Divestitures 

     Apple  South's  continued  focus  to  enhance  shareholder  value  over the
long-term by deploying  human and financial  capital in  high-return  businesses
resulted in several pivotal  changes during 1997.  During the first seven months
of the year,  the Company  completed  three business  combinations.  McCormick &
Schmick Holding Corp.  ("McCormick & Schmick's") was acquired for $68.3 million.
McCormick  &  Schmick's  operated  16  full-service,  upper-end  casual  seafood
restaurants in four states plus Washington, D.C. at the time of acquisition. The
Company also acquired Hops Restaurant Bar & Brewery  ("Hops") for $58.4 million.
Hops operated 21 full-service,  casual dining  restaurants in four states at the
time of  acquisition.  Additionally,  the Company  completed the  acquisition of
Canyon  Cafes,  Inc.  ("Canyon  Cafes")  for  $46.3  million.  At  the  time  of
acquisition,  Canyon Cafes operated 13 full-service,  casual dining  restaurants
emphasizing an authentic Southwestern theme, in six states plus Washington, D.C.
All  three  1997   acquisitions   were   accounted  for  as  purchase   business
combinations.  

     On December  23,  1997,  the  Company  announced  its  decision to sell its
franchised Applebee's  Neighborhood Grill & Bar restaurants in order to focus on
the  continued  development  of its  proprietary  restaurant  concepts  and  the
acquisition of new proprietary  concepts.  The Company expects to  substantially
complete its  divestiture  during 1998 and  believes  that net  proceeds,  after
selling  expenses and income  taxes,  will be  approximately  $400  million.  

     In furtherance of its  divestiture  strategy,  the Company  entered into an
Asset Purchase Agreement (the "Agreement") with Applebee's  International,  Inc.
("AII")  whereby the Company  has agreed to sell 31 of its  existing  Applebee's
restaurants and one restaurant under construction to AII for a purchase price of
$93.4 million in cash. The restaurants and development territories to be sold to
AII are located in the Charlottesville,  Norfolk, Richmond and Roanoke, Virginia
areas.  The  Agreement  provides that the Company will use its  reasonable  best
efforts to dispose of all its  remaining  Applebee's  restaurants  by the end of
1999,  and AII has agreed to cooperate in  accomplishing  the  disposition.  The
Company  has  an  option  to  put  up to 15  remaining  restaurants  to AII at a
predetermined  formula  through  1999.  Thereafter,  AII will  have an option to
acquire  all  of  the  Company's  remaining  Applebee's  restaurants.   Existing
covenants  not to compete with the  Applebee's  concept,  which are contained in
franchise and development  agreements with AII, will be eliminated by the end of
1998. In addition,  the Company has agreed to open 16  restaurants  in 1998, but
will be released from all other restaurant development requirements. 

     The Company has also executed  letters of intent with eight  purchasers for
the sale of 140  Applebee's  restaurants  and  related  territorial  development
rights for approximately $249 million in cash. These transactions are contingent
upon completion and signing of definitive  purchase  agreements and satisfaction
of customary closing conditions, including purchaser financing.

     In  April  1997,  the  Company  completed  the  sale  of  its  10  Hardee's
restaurants  for  approximately  $2.5 million.  The Hardee's  division was not a
significant division of the Company,  contributing less than 1% of sales in 1997
and less than 2% of sales in 1996.

     The Company has also  entered  into a letter of intent to sell the business
operations  of  its  Harrigan's  division  to  Pinnacle  Restaurant  Group,  LLC
("Pinnacle")  for $3 million in cash plus a $4 million  note.  In addition,  the
Company  would  receive a 25% equity  interest in  Pinnacle.  The Company  would
retain  ownership of certain real estate  relating to two  Harrigan's  locations
which would be leased to Pinnacle.
<PAGE>
     Subsequent to year end, the Company acquired a 20% interest in Belgo Group,
PLC ("Belgo"), a public restaurant company based in the United Kingdom that owns
and operates two Belgo restaurants in London, for $6.1 million. In addition, the
Company and Belgo have established two 50/50 joint ventures: one for the initial
development of the Company's  proprietary brands in Europe and the other for the
development  of  Belgo  restaurants  in  the  Western  Hemisphere.  

Results  of Operations 

     The following table sets forth, for the periods indicated,  the percentages
which certain items of income and expense bear to total restaurant sales:

                                                  Dec. 28,   Dec. 29,   Dec. 31,
For the years ended                                 1997       1996       1995 
--------------------------------------------------------------------------------
Restaurant sales:  
      Applebee's                                    56.2%      69.4%      68.3%
      Don Pablo's                                   24.3       24.4       20.2 
      McCormick & Schmick's                          8.3          -          -
      Hops                                           6.1          -          -
      Canyon Cafes                                   2.3          -          - 
      Harrigan's                                     2.4        4.0        5.2 
      Other                                          0.4        2.2        6.3 
--------------------------------------------------------------------------------
           Total restaurant sales                  100.0      100.0      100.0  
--------------------------------------------------------------------------------
Restaurant operating expenses:  
      Food and beverage                             27.9       27.5       27.4 
      Payroll and benefits                          30.8       29.7       29.4
      Depreciation and amortization                  3.9        4.1        4.0 
      Other operating expenses                      23.2       23.0       22.5 
--------------------------------------------------------------------------------
           Total restaurant operating expenses      85.8       84.3       83.3 
--------------------------------------------------------------------------------
Income from restaurant operations                   14.2       15.7       16.7 
General and administrative expenses                  4.9        4.8        5.1 
Merger and asset revaluation charges                   -        5.1        2.2
--------------------------------------------------------------------------------
Operating income                                     9.3        5.8        9.4 
--------------------------------------------------------------------------------
Other income (expense):  
      Interest expense                              (2.6)      (2.1)      (1.4)
      Distributions on preferred securities         (0.8)         -          - 
      Interest income                                  -          -        0.1  
      Other, primarily goodwill amortization        (0.7)      (0.4)      (0.3) 
--------------------------------------------------------------------------------
           Total other income (expense)             (4.1)      (2.5)      (1.6)
--------------------------------------------------------------------------------
Earnings before income taxes                         5.2        3.3        7.8 
Income taxes                                         1.7        1.2        3.2 
--------------------------------------------------------------------------------
Net earnings                                         3.5%       2.1%       4.6%
================================================================================

Comparison of Historical Results - Fiscal Years 1997, 1996 and 1995

Restaurant Sales

     Restaurant  sales for 1997  increased  48% to $808.3  million  from  $546.0
million in 1996 primarily due to increases in the number of restaurant operating
weeks through both restaurant openings and acquisitions, as well as increases in
average weekly sales over the prior year. For 1997, operating weeks increased by
19% at  Applebee's  and 47% at Don Pablo's as  compared  to the prior year.  The
increase in operating weeks is due to a full-year's sales from 45 Applebee's and
19 Don Pablo's  restaurants  opened in 1996 and a  partial-year's  sales from 34
Applebee's  and 28 Don Pablo's  restaurants  opened in 1997.  In addition,  1997
revenues included ten months of operations  related to McCormick & Schmick's and
Hops and six months of operations  related to Canyon Cafes.  The sales increases
resulting from the opening of new  restaurants  and  acquisitions  were slightly
offset by sales  related to 21 Tomato  Rumba's  restaurants  closed in 1996.  In
addition,  during 1997 the Company  completed  the sale of its 10-unit  Hardee's
division and closed one Harrigan's  restaurant.  One  Applebee's  restaurant was
closed in each of 1997 and 1996. Average weekly sales at base restaurants (those
open for a full 12 months at the beginning of 1997) were approximately 4% higher
at Don  Pablo's  and 3% higher at  Applebee's  in 1997 as  compared  with  1996.
<PAGE>
     Management  believes that the sales  increases in its Don Pablo's  division
are  primarily  attributable  to increased  concept  recognition  and  awareness
achieved through a combination of market penetration and television advertising.
The market penetration  strategy,  which was initiated in 1996 and has continued
throughout  1997, has greatly  improved the efficiency and  effectiveness of the
Don Pablo's advertising programs.  Additional sales increases in the Don Pablo's
division are  attributable  to 1997 menu price  increases of  approximately  2%.
Sales increases in the Applebee's  division are  attributable to (i) initiatives
begun in 1996 to enhance  operations  and to improve guest  satisfaction,  which
included  increased  staffing levels and the addition of experienced  multi-unit
managers and (ii) increased  advertising coupled with a third quarter menu price
increase of approximately  2%. 

     Restaurant  sales for 1996  increased  24% to $546.0  million  from  $440.2
million in 1995  primarily due to a full-year's  sales from 67 Applebee's and 11
Don Pablo's  restaurants  opened or acquired in 1995 and a partial-year's  sales
from 45 Applebee's  and 19 Don Pablo's  restaurants  opened in 1996.  This sales
increase was  partially  offset by the closure of 21  restaurants  in the Tomato
Rumba's  division and one Applebee's  restaurant in 1996. For  restaurants  that
were open during all of 1995 and 1996,  average weekly volumes from 1995 to 1996
decreased 3% at Applebee's  and increased 8% at Don Pablo's.  

     In November 1995, Apple South merged with DF&R Restaurants,  Inc. ("DF&R"),
owner of Don  Pablo's  and  Harrigan's  restaurants,  in a  pooling-of-interests
transaction. The merger was effected through the exchange of 1.5 shares of Apple
South common stock for each share of DF&R common  stock,  which  resulted in the
issuance of  approximately  9.3 million shares of Apple South common stock.  The
fair market value of the shares issued was  approximately  $190.0 million at the
date of merger.  

     Also in 1995, the Company  acquired  certain assets  including 26 operating
Applebee's  restaurants and the exclusive Applebee's development rights for most
of Iowa and Wisconsin,  northern  Illinois,  including the Chicago  metropolitan
area,  and  contiguous  areas  in  Missouri,   Minnesota  and  Michigan  in  two
acquisitions (the "Midwest"  acquisitions) totaling approximately $65.5 million.
The  results  of  operations  from the  acquired  restaurants  are  included  in
consolidated  operating  results  from  the  time  of  acquisition.   

Restaurant Operating Expenses 

     Restaurant  operating  expenses as a percent of sales increased to 85.8% in
1997 from 84.3% in 1996.  The resulting  1997  decrease in restaurant  operating
margins is principally due to (i) an increase in cost in the Applebee's division
generated by the impending divestiture of the division, (ii) higher costs in the
divisions acquired in 1997 and (iii) an increase in other operating costs in the
Don Pablo's division.  The following discussion of restaurant operating expenses
focuses  on the  percentages  which  certain  items  of  expense  bear to  total
restaurant  sales for (i) the Company's  ongoing "Core" brands which include Don
Pablo's,  McCormick & Schmick's,  Hops and Canyon  Cafes and (ii) the  Company's
brands  which  have  been  or are  expected  to be  discontinued  which  include
Applebee's,  Harrigan's,  Tomato Rumba's and Hardee's. 

Core Brands 
                                                  Dec. 28,   Dec. 29,  Dec.  31,
For the years ended                                 1997       1996       1995  
--------------------------------------------------------------------------------
Restaurant sales:  
      Don Pablo's                                   59.2%     100.0      100.0
      McCormick & Schmick's                         20.3          -          - 
      Hops                                          14.9          -          - 
      Canyon Cafes                                   5.6          -          - 
--------------------------------------------------------------------------------
           Total restaurant sales                  100.0      100.0      100.0 
--------------------------------------------------------------------------------
Restaurant operating expenses: 
      Food and beverage                             27.7       26.0       26.4 
      Payroll and benefits                          29.8       29.0       29.9 
      Depreciation and amortization                  3.7        4.6        5.0 
      Other operating expenses                      23.0       22.6       20.7  
--------------------------------------------------------------------------------
           Total restaurant operating expenses      84.2       82.2       82.0 
--------------------------------------------------------------------------------
Income from restaurant operations                   15.8%      17.8%      18.0%
================================================================================
<PAGE>
     Restaurant  operating  expenses  as a percent of sales for the core  brands
increased  to  84.2%  in 1997  from  82.2%  in  1996  and  82.0%  in  1995.  The
corresponding  decrease in 1997 restaurant operating margins was principally due
to (i) higher  cost of goods and  payroll  expenses  in the  divisions  acquired
during 1997 relative to Don Pablo's,  (ii) a shift  towards  leased versus owned
retaurants in newly acquired  divisions which increased rent in "other operating
expenses" and reduced  depreciation  and  amortization as a percent of sales and
(iii) higher payroll and training costs in Don Pablo's associated primarily with
new hourly kitchen positions which were created to improve operating  efficiency
and decrease  management  labor in the long term.  These  increases  were offset
somewhat  by a  decrease  in  advertising  expense in Don  Pablo's  attributable
primarily to economies of scale and a decrease in occupancy  cost related to the
Company's tendency of owning versus leasing restaurant  locations.  

     The  increase  in  restaurant  operating  expenses  from  1995  to  1996 is
primarily  attributable  to  advertising  expenses  related  to the Don  Pablo's
marketing  initiative  which began in 1996.  This increase was largely offset by
(i) a decrease in food and beverage costs related to a new  distribution  supply
contract  and (ii) a decrease in payroll and  benefits  related to  efficiencies
gained in worker's compensation and insurance through the Company's consolidated
risk management  program.  

Discontinued Brands 

                                                  Dec. 28,   Dec. 29,   Dec. 31,
For the years ended                                 1997       1996       1995 
--------------------------------------------------------------------------------
Restaurant sales:  
      Applebee's                                    95.3%      91.8%      85.6%
      Harrigan's                                     4.1        5.3        6.5 
      Tomato Rumba's                                   -        0.9        5.5
      Hardee's                                       0.6        2.0        2.4 
--------------------------------------------------------------------------------
           Total restaurant sales                  100.0      100.0      100.0 
--------------------------------------------------------------------------------
Restaurant operating expenses:    
      Food and beverage                             28.0       27.9       27.7 
      Payroll and benefits                          31.6       29.9       29.1 
      Depreciation and amortization                  4.0        3.9        3.7  
      Other operating expenses                      23.4       23.2       23.1 
--------------------------------------------------------------------------------
           Total restaurant operating expenses      87.0       84.9       83.6 
--------------------------------------------------------------------------------
Income from restaurant operations                   13.0%      15.1%      16.4% 
================================================================================

     Restaurant  operating  expenses as a percent of sales for the  discontinued
brands  increased  to 87.0% in 1997 from  84.9% in 1996 and  83.6% in 1995.  The
resulting 1997 decrease in restaurant  operating  margins is principally  due to
payroll and benefits which  escalated in  anticipation  of the Company's exit of
the  Applebee's  business.  These  increases are primarily  attributable  to (i)
increased   staffing  at  the  hourly  and  management  levels  related  to  the
accelerated  implementation  of project  "Exceed"  (a program  initiated  by the
franchisor  to enhance the  performance  of the  Applebee's  system) and (ii) an
increase in management  turnover and operating costs which often escalate during
divestiture periods. In addition,  payroll and benefits expense increased during
the first portion of 1997 as a result of a customer focus  initiative  which was
implemented during the third quarter of 1996. Also,  advertising  expense in the
Applebee's  division  increased  by 1.4% of sales in 1997 as  compared  to 1996.
These  increases  were offset by (i) a decrease in training and  preopening as a
result of a decrease in the number of new Applebee's restaurant openings in 1997
as a percentage of existing  restaurants,  (ii) a decrease in insurance expenses
generated by risk  management  initiatives  implemented  during 1997 and (iii) a
decrease in  occupancy  cost as a result of the  Company's  ongoing  strategy of
owning  versus  leasing  restaurant  locations.  
<PAGE>
     Decreases in 1996 in restaurant  operating  margins were principally due to
(i) higher food and  beverage  costs as a percent of sales at  Applebee's,  (ii)
lower average unit volumes in the Applebee's  division  which reduced  operating
leverage  on fixed  costs and (iii) an  increase  in labor  costs in  Applebee's
related to the staffing  initiatives  begun in the third quarter of 1996.  These
1996 margin  reductions were partially  offset by lower  preopening and training
costs as a percent of sales.  

General and Administrative Expenses  

     General  and  administrative  expenses  as a percent  of sales were 4.9% as
compared with 4.8% in 1996 and 5.1% in 1995.  The 1997 increase is primarily due
to the  divisions  acquired in 1997 which have  higher  expenses as a percent of
revenue,  due primarily to lower leverage on the fixed costs required to support
these  higher  growth  concepts.   The  increases  at  the  new  divisions  were
substantially  offset by a  continued  decrease  in general  and  administrative
expenses in the Don  Pablo's  and  Applebee's  divisions  as the  Company  gains
leverage from absolute size and higher average unit volumes.

Merger and Asset Revaluation Charges

     Merger and asset  revaluation  charges are  non-recurring  costs related to
organizational changes made in 1996 and 1995. In April 1995, the Company changed
the name of the Gianni's  Little Italy concept to Tomato Rumba's  Pastaria Grill
to avoid  trademark  conflicts in certain  markets.  During 1995,  all but three
restaurants  in this division  were opened as, or converted to, Tomato  Rumba's.
However,  during 1996,  the division was not meeting the Company's  expectations
and all 21 restaurants  were closed.  Also during 1996, the Company  accelerated
its efforts to sell the Hardee's division.  These decisions regarding the Tomato
Rumba's and Hardee's  divisions  prompted an evaluation of the fair value of the
assets in each of these  divisions.  Fair value of the assets was  determined in
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets to be
Disposed of," by comparing  expected  future cash flows to the carrying value of
these  assets.  The  resulting  impairment,  along with the  write-off  of other
specific assets and certain  operating losses of these divisions,  totaled $27.7
million and is included in merger and asset  revaluation  charges.  In 1997, the
Hardee's  division  and several  Tomato  Rumba's  locations  were sold,  several
additional locations were converted to other brands and the remaining assets are
expected to be redeployed.  In 1995,  merger and  revaluation  charges  included
professional  fees and other  costs  related to the DF&R  merger.  Also in 1995,
these expenses  included  conversion  costs such as decor and menu changes,  the
write-off  of  specific  assets  and  certain  operating  losses  related to the
Gianni's Little Italy restaurants prior to conversion to Tomato Rumba's Pastaria
Grill.  

Interest and Other Expenses  

     Interest  expense  increased to $20.6 million in 1997 from $11.4 million in
1996 and $6.2 million in 1995 due to higher  average  borrowings.  Financing the
construction  of new  restaurants  and the  acquisition  of new  concepts led to
higher debt levels under revolving credit facilities and the $125 million, 9.75%
senior notes, issued in March 1996. The Company's weighted average interest rate
on  borrowings  was  approximately  7.9% in 1997 as compared to 8.1% in 1996 and
7.3% in 1995.  

     Distributions on preferred  securities reflect expenses associated with the
1997 issuance of $115.0 million, 7% term convertible securities.  

     Other  expenses  increased in 1997  compared to 1996  primarily  due to the
amortization of goodwill and other intangible  assets  associated with the three
1997  acquisitions.  Other expenses increased in 1996 compared to 1995 primarily
due to a  full-year  of  amortization  of goodwill  associated  with the Midwest
acquisitions  in 1996  compared to a  partial-year  in 1995.  

Income Tax Expense

     Income tax expense as a percent of earnings  before  income taxes was 32.4%
in 1997, 35.9% in 1996 and 41.1% in 1995. The decrease in effective tax rate for
1997  compared  with 1996 is due  primarily to the impact of the FICA tip credit
and  the  allocation  of  earnings  among  states   associated   with  the  1997
acquisitions. The decrease in the effective tax rate for 1996 compared with 1995
is due to certain non-deductible costs associated with the DF&R merger in 1995.
<PAGE>
Net Earnings

     Net earnings as a percent of sales was 3.5% in 1997,  2.1% in 1996 and 4.6%
in 1995.  The  decrease  from  1995 to 1996 and  increase  from 1996 to 1997 was
primarily a result of $27.7  million of asset  revaluation  charges  recorded in
1996. The resulting increase in 1997 was partially offset by (i) higher interest
expense  and  intangible  amortization  related to the 1997  acquisitions,  (ii)
distributions  related  to the  convertible  preferred  securities  and  (iii) a
decrease in operating margins associated with the Company's Applebee's division.

Liquidity and Capital Resources 

     The Company's  historical and projected  future growth cause it to be a net
user of  cash,  even  after a  significant  amount  of  expansion  financing  is
internally  generated  from  operations.  Principal  financing  sources  in 1997
consisted of (i) additional borrowings under revolving credit agreements ($165.5
million),  (ii) net  proceeds  from  convertible  preferred  securities  ($111.3
million) and (iii) cash flow from operations  ($62.7 million).  The primary uses
of funds consisted of (i) costs  associated with  expansion,  principally  land,
building and  equipment  associated  with the  construction  of new  restaurants
($173.0 million),  (ii)  acquisitions of McCormick & Schmick's,  Hops and Canyon
Cafes  ($146.4  million),  (iii) the purchase of 1.7 million  shares of treasury
stock ($23.0 million) and (iv) additions of other assets ($4.8  million).  

     Since substantially all sales in the Company's restaurants are for cash and
accounts  payable are generally due in 15 to 45 days, the Company  operates with
negative  working  capital.  

     The  increases  in accounts  receivable,  inventory,  prepaid  expenses and
other, accounts payable and accrued liabilities are principally due to the three
1997  acquisitions and additional new restaurants which were opened during 1997.
The increase in other assets is principally due to deferred costs related to the
issuance of convertible  preferred  securities  and the annual  increase in cash
surrender  value on an officer's life  insurance  policy.  Further  increases in
current asset and liability  accounts are expected as the Company  continues its
restaurant  development  program.  These  increases will be offset by changes in
assets and liability  accounts  resulting from the  divestiture of the Company's
Applebee's division.  

     The  Company's  1997  capital  expenditures  provided for the opening of 34
Applebee's,  28 Don Pablo's,  nine Hops,  three Canyon  Cafes,  one  McCormick &
Schmick's and one Harrigan's  restaurant,  as well as new office  facilities for
the Don Pablo's division and ongoing refurbishments of existing restaurants. 

     The  following  table  presents  anticipated  restaurant  openings  for the
Company's core brands for 1998 and 1999:

                                                         1998            1999
--------------------------------------------------------------------------------
Don Pablo's                                             35-40           50-55
McCormick & Schmick's                                       4             3-4
Hops                                                       12              18
Canyon Cafes                                             8-10           12-15
--------------------------------------------------------------------------------
      Total                                             59-66           83-92
================================================================================
<PAGE>
     The  capital  requirement  for  new  construction  of core  restaurants  is
expected to approximate $130 million to $140 million in 1998 and $195 million to
$210 million in 1999.  A portion of these  capital  requirements  will be funded
through cash generated from  operations in addition to the Company's $70 million
master  equipment  lease.  In addition,  at December  28, 1997,  the Company had
revolving credit agreements  aggregating $300 million,  of which $45 million was
unused and  available.  

     Net proceeds from the sales of the Applebee's division will be used to fund
new 1998  restaurants  and to repay  amounts  outstanding  on  revolving  credit
facilities.  Surplus  proceeds  will be  carried  forward  into 1999 to fund new
restaurants.  The remaining 1999 capital  requirements  will be financed through
borrowings under revolving credit facilities.  

     The Company's Board of Directors, from time to time and depending on market
conditions,  authorizes  the  Company to  purchase  shares of its common  stock,
through open market transactions,  to satisfy obligations under stock option and
employee  stock  ownership  plans.  As of  December  28,  1997,  the Company had
purchased an aggregate  3.1 million  shares of its common stock for an aggregate
purchase price of $53.0 million (average price of $16.99 per share).  On January
9, 1998,  the Company  announced  the  approval by its Board of Directors of the
purchase of up to two million additional shares of its common stock. The Company
has not  purchased a  significant  number of shares  pursuant to this  approval.

Effect of Inflation  

     Management  believes  that  inflation  has not  had a  material  effect  on
earnings  during the past several years.  Inflationary  increases in the cost of
labor,  food and other  operating  costs could  adversely  affect the  Company's
restaurant  operating margins. In the past,  however,  the Company generally has
been able to modify its operations to offset  increases in its operating  costs.

     Federal law was enacted during 1996 which increased the hourly minimum wage
by $0.50 to $4.75 on October 1, 1996 and by another  $0.40 to $5.15 on September
1, 1997. The legislation,  however, froze the wages of tipped employees at $2.13
per hour if the  difference  is  earned  in tip  income.  Although  the  Company
experienced a slight  increase in hourly labor costs during 1997,  the effect of
the increase in minimum wage was significantly  diluted due to the fact that the
majority  of the  Company's  hourly  employees  are  tipped  and  the  Company's
non-tipped  employees  have  historically  earned wages greater than the federal
minimum.  As such,  the  Company's  increases  in hourly  labor  costs  were not
proportionate to the increases in minimum wage rates. The impact of minimum wage
increases is expected to slightly increase hourly labor costs in 1998.

Forward-Looking Information

     Certain   information   contained  in  this  annual  report,   particularly
information  regarding  the  timing  and  sales  price  of  the  disposition  of
Applebee's  restaurants,  future economic  performance and finances,  restaurant
development plans, capital requirements and objectives of management, is forward
looking.  In some cases,  information  regarding  certain important factors that
could cause actual results to differ  materially  from any such  forward-looking
statement  appear  together  with such  statement.  In addition,  the  following
factors,  in addition to other  possible  factors not listed,  could  affect the
Company's actual results and cause such results to differ  materially from those
expressed in  forward-looking  statements.  These  factors  include  competition
within the casual dining restaurant industry,  which remains intense; changes in
economic  conditions such as inflation or a recession;  consumer  perceptions of
food safety;  weather conditions;  changes in consumer tastes; labor and benefit
costs;  legal claims;  the continued  ability of the Company to obtain  suitable
locations and financing for new restaurant development;  government monetary and
fiscal policies; laws and regulations;  governmental initiatives such as minimum
wage rates and taxes; retention of Applebee's division employees while sales are
pending; the availability of qualified buyers for the Applebee's restaurants and
their ability to obtain  required  financing;  and the  satisfaction  of closing
conditions for  prospective  transactions  subject to  outstanding  contracts or
letters of intent.  Other  factors that may cause actual  results to differ from
the forward-looking statements contained in this release and that may affect the
Company's  prospects in general are  described in Exhibit 99.1 to the  Company's
Form 10-Q for the fiscal  quarter ended June 29, 1997,  and the Company's  other
filings with the Securities and Exchange  Commission.  
<PAGE>
Year 2000 

     The  Company  has  implemented  plans to address  the  potential  exposures
related to the impact on its computer  systems of the Year 2000.  Key financial,
information and  operational  systems have been assessed and detailed plans have
been developed to address systems  modifications  required by December 31, 1999.
The Company  expenses all costs  associated  with these  systems  changes as the
costs are incurred.  The financial impact of making the required systems changes
is not expected to be material to the Company's  consolidated financial position
or  results of  operations.  

New  Accounting  Pronouncements 

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting  Comprehensive
Income."  SFAS 130,  which will be  effective  for the  Company's  fiscal  1998,
establishes  standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.  Comprehensive
income is  defined as the  change in equity of a  business  enterprise  during a
period  from  transactions  and other  events and  circumstances  from  nonowner
sources.  It  includes  all  changes  in equity  during a period,  except  those
resulting from investments by owners and  distributions  to owners.  The Company
expects  that  implementation  of SFAS 130 will have no  material  effect on its
consolidated financial position or results of operations.

     The  American  Institute  of Certified  Public  Accountants  has proposed a
Statement of Position,  "Reporting on the Costs of Start-Up  Activities,"  which
will  require  all  entities  to expense  the costs of  start-up  activities  as
incurred.  This statement is expected to be issued during 1998 and effective for
fiscal 1999. The Company,  however,  plans to early adopt the statement in 1998.
Implementation of this change in accounting policy,  from expensing in the first
full month of a restaurant's operations to expensing as incurred, is expected to
result in a change in accounting  principle charge of approximately $2.0 million
in 1998. 

<PAGE>
<TABLE>

Consolidated Statements of Earnings 
Apple South, Inc.
(In thousands, except per share data)          

<CAPTION>
                                                                           December 28,           December 29,          December 31,
For the years ended                                                            1997                   1996                  1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                     <C>                   <C>  
Restaurant sales:
      Applebee's                                                            $454,127                379,042               300,928
      Don Pablo's                                                            196,457                133,261                88,820
      McCormick & Schmick's                                                   67,373                      -                     -
      Hops                                                                    49,511                      -                     -
      Canyon Cafes                                                            18,577                      -                     -
      Harrigan's                                                              19,560                 21,991                22,781
      Other                                                                    2,715                 11,728                27,661
------------------------------------------------------------------------------------------------------------------------------------
           Total restaurant sales                                            808,320                546,022               440,190
------------------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
      Food and beverage                                                      225,302                150,090               120,630
      Payroll and benefits                                                   249,356                162,017               129,424
      Depreciation and amortization                                           31,441                 22,509                17,662
      Other operating expenses                                               187,781                125,781                98,850
------------------------------------------------------------------------------------------------------------------------------------
           Total restaurant operating expenses                               693,880                460,397               366,566
------------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses                                           39,617                 26,329                22,298
Merger and asset revaluation charges                                               -                 27,700                 9,997
------------------------------------------------------------------------------------------------------------------------------------
Operating income                                                              74,823                 31,596                41,329
------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
      Interest expense                                                       (20,575)               (11,417)               (6,189)
      Distributions on preferred securities                                   (6,412)                     -                     -
      Interest income                                                             71                     69                   638
      Other, primarily goodwill amortization                                  (5,834)                (2,024)               (1,349)
------------------------------------------------------------------------------------------------------------------------------------
           Total other expense                                               (32,750)               (13,372)               (6,900)
------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes                                                  42,073                 18,224                34,429
Income taxes                                                                  13,625                  6,550                14,150
------------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                               $  28,448                 11,674                20,279
====================================================================================================================================
Basic earnings per common share                                            $    0.74                   0.30                  0.54
====================================================================================================================================
Diluted earnings per common share                                          $    0.73                   0.30                  0.52 
====================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
<TABLE>

Consolidated Balance Sheets
Apple South, Inc.
(In thousands, except share data)    

<CAPTION>  
                                                                                                  December 28,          December 29,
                                                                                                      1997                  1996
------------------------------------------------------------------------------------------------------------------------------------
<S>
Assets                                                                                            <C>                     <C>       
Current assets:
      Cash and cash equivalents                                                                   $   2,503                 3,923
      Short-term investments                                                                             37                    52
      Accounts receivable                                                                             8,983                 4,568
      Inventories                                                                                    10,732                 6,364
      Prepaid expenses and other                                                                      9,047                 3,835
      Assets held for sale                                                                          331,104                 5,945
------------------------------------------------------------------------------------------------------------------------------------
           Total current assets                                                                     362,406                24,687

Premises and equipment, net                                                                         283,839               380,523
Franchise costs, net                                                                                      -                 5,880
Goodwill, net                                                                                       138,403                36,351
Other assets                                                                                         19,641                10,386
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  $ 804,289               457,827
====================================================================================================================================

Liabilities and Shareholders' Equity
Current liabilities:
      Accounts payable                                                                            $  24,819                16,688
      Accrued liabilities                                                                            40,266                22,887
      Current installments of long-term debt                                                            206                   286
      Income taxes                                                                                        -                   320
------------------------------------------------------------------------------------------------------------------------------------
           Total current liabilities                                                                 65,291                40,181

Long-term debt                                                                                      381,843               215,891
Deferred income taxes                                                                                14,231                10,326
Other long-term liabilities                                                                           7,142                     -
------------------------------------------------------------------------------------------------------------------------------------
           Total liabilities                                                                        468,507               266,398
------------------------------------------------------------------------------------------------------------------------------------

Company-obligated mandatorily redeemable preferred securities of
      Apple South Financing I, a subsidiary holding solely Apple South, Inc.
      7% convertible subordinated debentures due March 1, 2027                                      115,000                     -
Shareholders' equity:
      Preferred stock, $0.01 par value. Authorized 10,000,000 shares; none issued                         -                     -
      Common stock, $0.01 par value. Authorized 75,000,000 shares; 
           40,478,760 issued in 1997 and 39,124,925 issued in 1996                                      405                   391
      Additional paid-in capital                                                                    145,269               132,976
      Retained earnings                                                                              97,905                70,981
      Treasury stock at cost; 1,662,812 shares in 1997 and 677,508 shares in 1996                   (22,797)              (12,919)
------------------------------------------------------------------------------------------------------------------------------------
           Total shareholders' equity                                                               220,782               191,429
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  $ 804,289               457,827
====================================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>
<TABLE>

Consolidated Statements of Shareholders' Equity
Apple South, Inc.
(In thousands, except per share data) 

<CAPTION>

                                                                               Additional                                 Total
                                                        Common Stock            Paid-in       Retained    Treasury     Shareholders'
                                                    Shares        Amount        Capital       Earnings      Stock         Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>         <C>            <C>        <C>            <C>        
Balance at December 31, 1994                        34,300          $343       $ 79,172        $40,826          -        $120,341
Net earnings                                             -             -              -         20,279          -          20,279
Sale of common stock                                 4,076            41         57,307              -          -          57,348
Common stock issued to ESOP and ESPP                    57             -            665              -          -             665
Exercise of options                                    646             7          1,798              -          -           1,805
Tax effect of exercise of options by employees           -             -          3,413              -          -           3,413
Cash dividends ($0.022 per share)                        -             -              -           (630)         -            (630)
------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1995                        39,079           391        142,355         60,475          -         203,221
Net earnings                                             -             -              -         11,674          -          11,674
Purchase of common stock                                 -             -              -              -   $(30,048)        (30,048)
Common stock issued to ESOP and ESPP                     -             -            197              -        487             684
Exercise of options                                     46             -        (14,111)             -     16,642           2,531
Tax effect of exercise of options by employees           -             -          4,535              -          -           4,535
Cash dividends ($0.030 per share)                        -             -              -         (1,168)         -          (1,168)
------------------------------------------------------------------------------------------------------------------------------------

Balance at December 29, 1996                        39,125           391        132,976         70,981    (12,919)        191,429
Net earnings                                             -             -              -         28,448          -          28,448
Purchase of common stock                                 -             -              -              -    (22,995)        (22,995)
Issuance of common stock for acquisitions            1,298            13         16,323              -          -          16,336
Issuance of treasury stock for acquisitions              -             -           (922)             -      6,078           5,156
Common stock issued to ESOP and ESPP                    46             1            688              -          -             689
Exercise of options                                     10             -         (4,814)             -      7,039           2,225
Tax effect of exercise of options by employees           -             -          1,018              -          -           1,018
Cash dividends ($0.038 per share)                        -             -              -         (1,524)         -          (1,524)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997                        40,479          $405       $145,269        $97,905   $(22,797)       $220,782
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Apple South, Inc.
(In thousands)      
<CAPTION>
       

                                                                           December 28,           December 29,          December 31,
For the years ended                                                            1997                   1996                  1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                      <C>                   <C>      
Cash flows from operating activities: 
      Net earnings                                                         $ 28,448                 11,674                20,279
      Adjustments to reconcile net earnings to net cash
          provided by operating activities:
             Depreciation and amortization                                   39,972                 26,250                19,946
             Deferred income taxes                                            3,905                    300                 5,050
             Loss on disposal of premises and equipment                          54                    107                    97
             Asset revaluation charges                                            -                 27,700                     -
             (Increase) in assets:
                 Accounts receivable                                         (2,441)                (1,062)               (1,601)
                 Inventories                                                 (2,592)                (1,488)               (1,435)
                 Prepaid expenses and other                                  (1,980)                (1,837)               (1,403)
             Increase (decrease) in liabilities:
                 Accounts payable                                               703                  3,199                 2,394
                 Accrued liabilities                                         (1,447)                (4,958)                7,527
                 Income taxes                                                (2,050)                 4,668                 2,241
                 Other long-term liabilities                                    164                      -                     -
------------------------------------------------------------------------------------------------------------------------------------
                      Net cash provided by operating activities              62,736                 64,553                53,095
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
      Capital expenditures                                                 (172,963)              (124,623)             (124,066)
      Acquisition of businesses, net of cash acquired                      (146,444)                     -               (52,059)
      Proceeds from sale of premises and equipment                            5,798                    429                 2,209
      Decrease in short-term investments                                         15                    325                 2,480
      Additions to franchise costs                                             (900)                (1,302)               (1,205)
      Additions to other assets                                              (4,776)                (3,388)               (1,795)
------------------------------------------------------------------------------------------------------------------------------------
                      Net cash used in investing activities                (319,270)              (128,559)             (174,436)
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
      Net proceeds from (repayment of) revolving credit agreements          165,500                (11,000)               56,000
      Net proceeds from issuance of preferred securities                    111,261                      -                     -
      Net proceeds from issuance of long-term debt                              823                121,880                     -
      Principal payments on long-term debt                                     (865)               (19,756)               (9,628)
      Proceeds from issuance of common stock                                  2,914                  3,215                59,818
      Dividends declared and paid                                            (1,524)                (1,168)                 (630)
      Purchase of treasury stock                                            (22,995)               (30,048)                    -
------------------------------------------------------------------------------------------------------------------------------------
                      Net cash provided by financing activities             255,114                 63,123               105,560
------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                    (1,420)                  (883)              (15,781)
Cash and cash equivalents at the beginning of the period                      3,923                  4,806                20,587
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period                         $  2,503                  3,923                 4,806
====================================================================================================================================
Supplemental disclosures:
------------------------------------------------------------------------------------------------------------------------------------
      Interest paid                                                        $ 20,452                 10,728                 6,878
------------------------------------------------------------------------------------------------------------------------------------
      Distributions on preferred securities                                $  5,944                      -                     -
------------------------------------------------------------------------------------------------------------------------------------
      Income taxes paid                                                    $  9,022                  1,415                 6,859
------------------------------------------------------------------------------------------------------------------------------------
      Business acquisitions, net of cash acquired:
           Fair value of assets acquired, other than cash                  $ 63,261                      -                13,639
           Liabilities assumed                                              (34,704)                     -                  (373)
           Merger consideration payable                                      (1,890)                     -                     -
           Stock issued                                                     (21,492)                     -                     -
           Purchase price in excess of the net assets acquired              141,269                      -                38,793
------------------------------------------------------------------------------------------------------------------------------------
                  Net cash used for acquisitions                           $146,444                      -                52,059
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
Notes to Consolidated Financial Statements
Apple South, Inc.

Note 1 - Summary of Significant Accounting Policies

     Apple South, Inc., including its wholly owned subsidiaries (the "Company"),
is a  multi-concept  restaurant  company owning and operating  restaurants in 30
states plus the District of Columbia. At December 28, 1997, the Company operated
264 Applebee's  Neighborhood  Grill & Bar  restaurants,  91 Don Pablo's  Mexican
Kitchen restaurants,  30 Hops Restaurant Bar & Brewery restaurants, 17 McCormick
& Schmick's  seafood  dinner houses plus one catering  facility,  16 Canyon Cafe
restaurants and 11 Harrigan's Grill & Bar  restaurants.  The Company owns all of
its brands on a proprietary basis except  Applebee's which is franchised.  

     Basis of Presentation - The consolidated  financial  statements include the
accounts of Apple South, Inc. and its wholly owned subsidiaries. All significant
intercompany  accounts and transactions  have been eliminated in  consolidation.

     Use of Estimates - Preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions related to the reported amount of assets and liabilities and the
disclosure of contingent  assets and liabilities.  Actual results may ultimately
differ from estimates.

     Fiscal Year - The  Company's  fiscal year is a 52 or 53-week year ending on
the Sunday closest to December 31.  Accordingly,  the accompanying  consolidated
financial  statements  are as of and for the  years  ended  December  28,  1997,
December 29, 1996 and December 31, 1995. All general  references to years relate
to fiscal years unless  otherwise  noted.  

     Cash Equivalents - Cash equivalents  include all highly liquid investments,
which have original maturities of three months or less. 

     Short-Term  Investments  -  Short-term  investments,  which  have  original
maturities  of  greater  than  three  months,  are  stated at cost plus  accrued
interest,  which approximates  market value.  

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

     Assets Held for Sale - Assets held for sale are stated at the lower of cost
or estimated net realizable  value and include  certain  premises and equipment,
franchise  costs and  goodwill  related  primarily to the  Company's  Applebee's
division  (Note  3).  In  accordance  with  Statement  of  Financial  Accounting
Standards ("SFAS") No. 121,  "Accounting for the Impairment of Long-Lived Assets
and  Long-Lived  Assets  to be  Disposed  Of," the  Company  does not  recognize
depreciation or  amortization  expense during the period in which the assets are
being held for sale.

     Premises  and  Equipment  -  Premises  and  equipment  are  stated at cost.
Depreciation  of premises and  equipment is calculated  using the  straight-line
method over the estimated useful lives of the related assets, which approximates
25 years for buildings and seven years for equipment. Leasehold improvements are
depreciated using the  straight-line  method over the shorter of the lease term,
including renewal periods, or the estimated useful life of the asset.
<PAGE>
     Franchise  Costs - The  costs  related  to the  acquisition  of  Applebee's
franchises  are amortized  over their  estimated  useful lives,  principally  20
years, using the straight-line  method.  Accumulated  amortization of Applebee's
franchise  costs  amounted to $1.7 million at December 28, 1997 and $1.3 million
at December 29, 1996.  At December  28, 1997  franchise  costs are included as a
component of assets held for sale in the  consolidated  balance  sheet (Note 3).
The franchise  agreements for the Applebee's  restaurants  also require  royalty
fees equal to 4% of sales and  advertising  fees equal to 1 1/2% of sales.  Such
fees are expensed as incurred.  Total  royalty and  advertising  fees paid under
franchise agreements were $25.0 million in 1997, $21.4 million in 1996 and $16.9
million in 1995.  

     Goodwill - Goodwill represents the excess of purchase price over fair value
of net assets  acquired and is being  amortized  over the expected  period to be
benefited,  ranging from 20 to 40 years,  using the  straight-line  method.  The
Company  assesses the  recoverability  of this  intangible  asset by determining
whether the  amortization of the goodwill balance over its remaining life can be
recovered  through  undiscounted  future  operating  cash flows of the  acquired
operations.  The amount of goodwill  impairment,  if any,  is measured  based on
projected   discounted  future  operating  cash  flows  using  a  discount  rate
reflecting  the Company's  average cost of funds.  Accumulated  amortization  of
goodwill  amounted  to $7.9  million at  December  28, 1997 and $ 3.5 million at
December 29, 1996.  At December 28,  1997,  goodwill  related to the  Applebee's
division  was  classified  as a  component  of  assets  held for sale  (Note 3).

     Development  Costs - Certain direct and indirect  costs are  capitalized in
conjunction  with acquiring and  developing  new restaurant  sites and amortized
over the life of the related  building.  Development  costs were  capitalized as
follows:  $4.7  million in 1997,  $4.0 million in 1996 and $3.0 million in 1995.

     Preopening  Costs - Preopening  costs are incurred  before a restaurant  is
opened and consist primarily of wages and salaries,  hourly employee recruiting,
license fees, meals, lodging and travel plus the cost of hiring and training the
management  teams.  Preopening  costs are  expensed in the first full month of a
restaurant's operations.   

     Advertising - The Company  generally  expenses  advertising over the period
covered by the related  promotions.  Total advertising expense included in other
operating  expenses was $26.1  million in 1997,  $13.2  million in 1996 and $9.1
million in 1995, in addition to amounts paid to franchisors.

     Stock-Based Compensation - Stock-based compensation is determined using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting  for  Stock  Issued  to  Employees,"  and  related  Interpretations.
Accordingly,  compensation  cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's  stock at the date of the grant
over the amount an employee must pay to acquire the stock (Note 11).

     Earnings  Per Share - Effective  for fiscal year ending  December 28, 1997,
the Company adopted  Statement of Financial  Accounting  Standards  ("SFAS") No.
128,  "Earnings  Per Share."  SFAS 128  requires  all  entities to provide  dual
disclosure of earnings per share,  basic and diluted.  Basic  earnings per share
equals net earnings  divided by the  weighted  average  number of common  shares
outstanding and does not include the dilutive effects of stock options.  Diluted
earnings per share is computed by giving effect to dilutive stock options and by
adjusting  both  net  earnings  and  shares  outstanding  as if the  Convertible
Preferred  Securities  (Note 6) had been  converted at the date of issuance.  In
accordance  with  SFAS  128,  all  prior-period  earnings  per  share  have been
restated. In addition,  the weighted average number of shares and per share data
have been  retroactively  adjusted  to give  effect  to  various  stock  splits,
effected as stock  dividends.  The  adoption of SFAS 128 did not have a material
impact on earnings  per share in any of the  periods  presented.  The  following
table  presents a  reconciliation  of weighted  average  shares and earnings per
share amounts (amounts in thousands, except per share data):
<PAGE>
                                                    1997       1996       1995
--------------------------------------------------------------------------------
Average number of common
   shares used in basic calculation                38,620     38,731     37,698
Net additional shares issuable
   pursuant to employee stock option
   plans at period-end market price                   206        686      1,328
Shares issuable on assumed conversion
   of Convertible Preferred Securities              6,101          -          -
--------------------------------------------------------------------------------
Average number of common
   shares used in diluted calculation              44,927     39,417     39,026
================================================================================

Net earnings for computation of
   basic earnings per common share                $28,448     11,674     20,279
Distribution savings on assumed
   conversion of Convertible Preferred
   Securities, net of income taxes                  4,336          -          -
--------------------------------------------------------------------------------
Net earnings for computation of
   diluted earnings per common share              $32,784     11,674     20,279
================================================================================
Basic earnings per common share                   $  0.74       0.30       0.54
================================================================================
Diluted earnings per common share                 $  0.73       0.30       0.52
================================================================================


     Interest Rate  Contracts - Interest rate  contracts are used by the Company
principally for the management of its interest rate exposures.  Differentials to
be received  or paid under  contracts  designated  as hedges are  recognized  in
income  over the life of the  contracts  as  adjustments  to  interest  expense.

     Certain interest rate swap contracts are used for trading  purposes.  These
contracts are carried at fair value. Fair value for interest rate swap contracts
is based on pricing  models  intended to  approximate  the amounts that would be
received from or paid to a third party in settlement of the  contracts.  Factors
taken   into   consideration   include   credit   spreads,   market   liquidity,
concentrations,  and funding and administrative  costs incurred over the life of
the  instruments.  

     The Company is exposed to credit losses in the event of  nonperformance  by
the counterparties to its interest rate swaps. The Company anticipates, however,
that  counterparties  will  be able  to  satisfy  their  obligations  under  the
contracts.   The  Company  does  not  obtain  collateral  to  support  financial
instruments but monitors the credit standing of the counterparties.

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

     Reclassifications - Certain accounts have been reclassified in the 1996 and
1995  financial  statements to conform with the 1997  classifications.  
<PAGE>
Note 2 - Acquisitions and Conversions 

     In July 1997, the Company acquired Dallas-based Canyon Cafes, Inc. ("Canyon
Cafes") for $46.3 million,  including  $41.1 million in cash and the issuance of
357,600 shares of the Company's  common  stock.  The cash portion of the merger
consideration  included $30.8 million paid to the  stockholders of Canyon Cafes,
plus  additional  amounts  relating  primarily  to the  exercise of an option to
purchase certain property. At the time of acquisition,  Canyon Cafes operated 13
full-service  casual dining  restaurants in six states plus Washington,  D.C. 

     In March 1997, the Company  acquired Hops Restaurant Bar & Brewery ("Hops")
for $58.4 million, which included $45.2 million in cash and the issuance of 1.05
million  shares of the Company's  common stock.  The  accompanying  consolidated
financial  statements reflect minority interest equal to the proportionate share
of the subsidiary's net assets not owned by the Company.  This minority interest
is included in other  long-term  liabilities  in the  accompanying  consolidated
balance  sheet.  Minority  interest  expense is included in other expense in the
accompanying  consolidated  statement of  earnings.  The  Florida-based  company
operated 21 full-service casual dining restaurants in four states at the time of
acquisition.  

     In March 1997,  the Company  acquired  McCormick  & Schmick  Holding  Corp.
("McCormick  &  Schmick's"),  an  Oregon-based  restaurant  company,  for  $68.3
million,  including  $65.1 million in cash and the issuance of 248,139 shares of
the  Company's  common  stock.  McCormick & Schmick's  operated 16  full-service
upper-end casual seafood restaurants in four states plus Washington, D.C. at the
time of acquisition. 

     All three 1997 acquisitions were accounted for using the purchase method of
accounting.  Accordingly,  a portion of the purchase consideration was allocated
to the net assets acquired based on their estimated fair values. At December 28,
1997, the Company had not finalized its evaluation of the fair value of tangible
and intangible assets acquired and liabilities assumed. Based on the preliminary
estimates,  the aggregate fair value of tangible assets acquired and liabilities
assumed  was  $66.4  million  and $34.7  million,  respectively.  The  remaining
estimated excess of purchase price over net assets acquired, $141.3 million, was
recorded as goodwill  and is being  amortized on a  straight-line  basis over 40
years. 

     The following unaudited pro forma financial information gives effect to all
of the three foregoing  acquisitions as if the  acquisitions  had occurred as of
the beginning of the periods  presented.  This pro forma  financial  information
reflects certain  adjustments  such as:  expensing rather than  capitalizing and
amortizing  preopening expenses,  amortization of goodwill,  interest expense on
the proceeds of the Convertible  Preferred  Securities (Note 6),  elimination of
interest on a portion of the  acquisition  debt assumed,  and the related income
tax effects (amounts in thousands, except per share data): 

                                                            1997         1996 
--------------------------------------------------------------------------------
                                                        (unaudited)  (unaudited)
Total restaurant sales:                                 $ 842,785      672,927 
Net earnings                                            $  26,759        6,536 
Basic earnings per common share                         $    0.67         0.16 
Diluted earnings per common share                       $    0.67         0.16

     These pro forma  results are not  necessarily  indicative  of what actually
would have occurred if the  acquisitions  had taken place as of the beginning of
the periods  presented,  nor do they reflect the purchase  price that might have
been  negotiated  at these  earlier  periods.  
<PAGE>
     In November 1995, the Company  exchanged 9.3 million newly issued shares of
its common stock for all of the  outstanding  shares of DF&R  Restaurants,  Inc.
("DF&R").  The fair market value of the shares issued was  approximately  $190.0
million at the date of merger.  At the time of the  exchange,  DF&R  operated 56
full-service,  casual  dining  restaurants,  including  44  Mexican  restaurants
operating under the name Don Pablo's and 12 Harrigan's restaurants. 

     In 1995,  the  Company  acquired  certain  assets  including  26  operating
Applebee's  restaurants and the exclusive Applebee's development rights for most
of Iowa and Wisconsin,  northern  Illinois,  including the Chicago  metropolitan
area,  and  contiguous  areas  in  Missouri,   Minnesota  and  Michigan  in  two
acquisitions (the "Midwest"  acquisitions) totaling approximately $65.5 million.
The  results  of  operations  from the  acquired  restaurants  are  included  in
consolidated  operating  results from the time of acquisition.  

     Merger  and  asset  revaluation  charges  in 1995 are  non-recurring  costs
related to the merger with DF&R Restaurants, Inc. and the conversion of Gianni's
Little Italy  restaurants  to Tomato Rumba's  Pastaria  Grill in 1995.  

Note 3 - Assets Held for Sale and Asset Impairments  

     On December  23,  1997,  the  Company  announced  its  decision to sell its
franchised Applebee's  Neighborhood Grill & Bar restaurants in order to focus on
the  continued  development  of its  proprietary  restaurant  concepts  and  the
acquisition of new  proprietary  concepts.

     In furtherance of its  divestiture  strategy,  the Company  entered into an
Asset Purchase Agreement (the "Agreement") with Applebee's  International,  Inc.
("AII")  whereby the Company  has agreed to sell 31 of its  existing  Applebee's
restaurants and one restaurant under construction to AII for a purchase price of
$93.4 million in cash. The restaurants and development territories to be sold to
AII are located in the Charlottesville,  Norfolk, Richmond and Roanoke, Virginia
areas.  The  Agreement  provides that the Company will use its  reasonable  best
efforts to dispose of all its  remaining  Applebee's  restaurants  by the end of
1999,  and AII has agreed to cooperate in  accomplishing  the  disposition.  The
Company  has  an  option  to  put  up to 15  remaining  restaurants  to AII at a
predetermined  formula  through  the end of 1999.  Thereafter,  AII will have an
option  to  acquire  all  of the  Company's  remaining  Applebee's  restaurants.
Existing  covenants  not to  compete  with the  Applebee's  concept,  which  are
contained in franchise and  development  agreements with AII, will be eliminated
by the end of 1998. In addition,  the Company has agreed to open 16  restaurants
in  1998,   but  will  be  released  from  all  other   restaurant   development
requirements. 

     The Company has also executed  letters of intent with eight  purchasers for
the sale of 140  Applebee's  restaurants  and  related  territorial  development
rights for approximately $249 million in cash. These transactions are contingent
upon completion and signing of definitive  purchase  agreements and satisfaction
of customary closing  conditions,  including  purchaser  financing.  

     The Company expects to substantially  complete its divestiture  during 1998
and believes that net proceeds, after selling expenses and income taxes, will be
approximately $400 million. Net assets of the division,  included in assets held
for sale,  were  $329.4  million at December  28,  1997.  Such  assets  included
premises  and  equipment,  goodwill  and  franchise  costs,  net of  accumulated
depreciation  and  amortization,  of  $289.2  million,  $34.0  million  and $6.2
million, respectively. Operating income from the Applebee's division amounted to
$44.2  million  in 1997,  $42.0  million  in 1996  and  $50.3  million  in 1995.
Depreciation  and  amortization  on the  long-lived  assets  of  the  Applebee's
division  were  suspended on December 16, 1997,  when  management  finalized the
decision to dispose of the division.  
<PAGE>
     In  April  1997,  the  Company  completed  the  sale  of  its  10  Hardee's
restaurants  for  approximately  $2.5 million.  The Hardee's  division was not a
significant division of the Company,  contributing less than 1% of sales in 1997
and less than 2% of sales in 1996. 

     The Company has also  entered  into a letter of intent to sell the business
operations  of  its  Harrigan's  division  to  Pinnacle  Restaurant  Group,  LLC
("Pinnacle")  for $3 million in cash plus a $4 million  note.  In addition,  the
Company  would  receive a 25% equity  interest in  Pinnacle.  The Company  would
retain  ownership of certain real estate  relating to two  Harrigan's  locations
which would be leased to  Pinnacle.  

     In 1996,  the  Company  closed  its 18 Tomato  Rumba's  and three  Gianni's
restaurants and dissolved the operating division.  During 1996, the Company also
accelerated  efforts  to sell  its 10  Hardee's  restaurants.  These  decisions,
combined with the  implementation  of SFAS 121, resulted in an asset revaluation
charge of $27.7 million which consisted  primarily of the asset  impairment loss
and included certain operating losses related to those divisions.  Fair value of
the assets in the Tomato  Rumba's  and  Hardee's  divisions  was  determined  by
comparing  expected  future cash flows to the carrying  amount of these  assets.
Assets related to Hardee's and certain Tomato Rumba's  locations,  included as a
component of assets held for sale in the consolidated  balance sheet,  were $1.7
million  and  $5.9   million  at  December  28,  1997  and  December  29,  1996,
respectively. 

Note 4 - Premises and Equipment  

     A summary of premises  and  equipment at December 28, 1997 and December 29,
1996 follows (amounts in thousands):

                                                            1997         1996
--------------------------------------------------------------------------------
Land                                                     $ 42,166       80,912
Buildings                                                 123,901      208,008
Equipment                                                  87,043      127,860
Leasehold improvements                                     59,584       24,092
Construction in progress                                   19,234       16,639
--------------------------------------------------------------------------------
Total premises and equipment                              331,928      457,511
Less accumulated depreciation
   and amortization                                        48,089       76,988
--------------------------------------------------------------------------------
Premises and equipment, net                              $283,839      380,523
================================================================================

Note 5 - Long-Term Debt

     Long-term  debt at December 28, 1997 and December 29, 1996 consisted of the
following (amounts in thousands):

                                                            1997         1996
--------------------------------------------------------------------------------
Revolving credit agreements, unsecured,
   with variable rate interest
   (7.0% at December 28, 1997)
   due in 1999-2000                                      $255,000       89,500
Senior notes, unsecured, with interest
   at 9.75%, payable semi-annually;
   due in 2006                                            125,000      125,000
Other                                                       2,049        1,677
--------------------------------------------------------------------------------
Total long-term debt                                      382,049      216,177
Less current installments                                     206          286
--------------------------------------------------------------------------------
Long-term debt, excluding
   current installments                                  $381,843      215,891
================================================================================
<PAGE>
     Based on the borrowing rates  currently  available to the Company for loans
with similar  terms and average  maturities,  the fair value of  long-term  debt
approximates  the book  value  recorded.  

     The aggregate annual  maturities of long-term debt for the years subsequent
to December 28, 1997 are as follows:  1998 - $0.2 million; 1999 - $55.3 million;
2000 - $200.3 million;  2001 - $0.3 million; 2002 - $0.2 million; and thereafter
- $125.7  million.  At December  28,  1997,  the Company  had  revolving  credit
agreements  aggregating  $300  million,  of which $45  million  was  unused  and
available.  

     Terms of the Company's senior notes and revolving credit agreements include
various  provisions  which,  among  other  things,  require  the  Company to (i)
maintain  defined net worth and coverage  ratios,  (ii) limit the  incurrence of
certain liens or  encumbrances  in excess of defined  amounts and (iii) maintain
defined  leverage  ratios.  The Company was not in compliance with certain ratio
provisions at December 28, 1997.  Subsequent to year end, these  provisions were
retroactively  amended to December 28, 1997. The Company was in compliance  with
the amended  provisions.  

     During 1997 and 1996,  the Company was party to various  interest rate swap
agreements with notional  amounts  ranging from $75 million to $100 million.  At
December 28, 1997,  the Company was party to two interest  rate swap  agreements
each with $100 million notional  amounts.  The first agreement is a hedge of the
Company's U.S. LIBOR  obligations  relating to its revolving credit  facilities.
Under the terms of the agreement, the Company pays an average of certain foreign
LIBOR-based  variable  rates  (5.82% at December  28,  1997) and receives a U.S.
LIBOR-based  variable rate (5.81% at December 28,  1997).  At December 28, 1997,
the Company  estimates  that it would have paid  approximately  $1.8  million to
terminate  this  agreement.  Amounts  received on interest rate swap  agreements
accounted  for as hedges  totaled $1.9 million in 1997 and $1.1 million in 1996.

     The remaining swap  agreement  relates to the Company's 7.0% fixed interest
obligation  on  the  Convertible   Preferred  Securities  (Note  6).  Under  the
agreement,  the Company pays an average of certain foreign LIBOR-based  variable
rates (5.77% at December  28, 1997) and receives a 7.0% fixed rate.  The Company
has not accounted for this swap  agreement as a hedge.  Accordingly,  changes in
the fair market value are recognized as  adjustments to interest  expense in the
period  incurred.  The value of this interest rate contract at December 28, 1997
was approximately $0.2 million.

Note 6 - Convertible Preferred Securities

     During the first  quarter of 1997,  Apple South  Financing I (the  "Trust")
issued 2,300,000, $3.50 term convertible securities,  Series A (the "Convertible
Preferred Securities"), having a liquidation preference of $50 per security. The
Trust, a statutory business trust, is a wholly owned, consolidated subsidiary of
the Company with its sole asset being $115.0 million aggregate  principal amount
of 7% convertible subordinated debentures due March 1, 2027 of Apple South, Inc.
(the  "Convertible  Debentures").   

     The  Convertible  Preferred  Securities  are  convertible  until 2027 at an
initial  rate of 3.3801  shares of Apple South  common  stock for each  security
(equivalent  to a  conversion  price of $14.793  per  share).  The  Company  has
executed a guarantee with regard to the Convertible  Preferred  Securities.  The
guarantee,  when  taken  together  with  the  Company's  obligations  under  the
Convertible  Debentures,   the  indenture  pursuant  to  which  the  Convertible
Debentures were issued, and the declaration of trust of Apple South Financing I,
provides a full and unconditional guarantee of amounts due under the Convertible
Preferred  Securities.  

     Proceeds, after deducting underwriters' fees and other offering expenses of
approximately $3.7 million,  of $111.3 million were used to repay revolving loan
advances  used for the  acquisition  of McCormick & Schmick's and to finance the
acquisition of Hops Restaurant Bar & Brewery including, in each case, retirement
of acquired  Company  debt.  
<PAGE>
Note 7 - Leases 

     The Company has various leases for restaurant  land,  buildings,  equipment
and office facilities.  Land and building lease terms range from 10 to 20 years,
with  renewal  options  ranging  from five to 20 years.  Equipment  lease  terms
generally range from four to eight years. In the normal course of business, some
leases are  expected to be renewed or  replaced  by leases on other  properties.
Future minimum lease payments do not include  amounts payable by the Company for
maintenance  costs, real estate taxes,  insurance,  etc., or contingent  rentals
payable  based on a  percentage  of sales in excess of  stipulated  amounts  for
restaurant  facilities.  

     In 1997,  the Company  entered into a $70 million  master  equipment  lease
agreement.  This  agreement  provides  for the  rental of up to $70  million  in
restaurant equipment for a five-year period, subject to renewal at the Company's
option. Pursuant to terms of the agreement, the Company acts as purchasing agent
for the lessor.  Equipment is procured for new restaurants,  with payment coming
from the lessor. This agreement has been accounted for as an operating lease for
financial  reporting  purposes.  At December 28,  1997,  $1.1 million of the $70
million rental commitment had been utilized. 

     In 1995, the Company entered into a $30 million  leveraged lease agreement.
The lease is structured as a series of individual operating leases for financial
reporting purposes.  During 1995, the entire $30 million commitment was utilized
for the  development and  acquisition of Applebee's  restaurants.  In connection
with the expected  divestiture of the  Applebee's  division (Note 3), the lessor
has  agreed  to  sell  to the  respective  buyers,  at its  original  cost,  the
individual leased  properties  commensurate with the closing of Applebee's sales
transactions,  thereby  releasing the Company from any obligations or guarantees
under the original lease agreement.

     Future  minimum lease  payments  under  noncancelable  operating  leases at
December 28, 1997 are as follows (amounts in thousands):

1998                                                                  $ 25,208
1999                                                                    25,264
2000                                                                    24,445
2001                                                                    23,829
2002                                                                    22,827
Later years                                                            125,250
--------------------------------------------------------------------------------
Total minimum lease payments                                          $246,823
================================================================================

     Total rental  expense  related to cancelable  and  noncancelable  operating
leases was $24.3  million in 1997,  $15.6  million in 1996 and $13.6  million in
1995.  Rental expense  included  contingent  rentals of $1.0 million in 1997 and
$0.9 million in 1996 and 1995.

Note 8 - Accrued Liabilities  

     A summary of accrued liabilities at December 28, 1997 and December 29, 1996
follows (amounts in thousands):

                                                            1997         1996
--------------------------------------------------------------------------------
Payroll and related benefits                              $15,060        8,624
Acquisition costs                                           5,327            -
Property taxes                                              4,293        3,039
Insurance                                                   4,219        3,110
Gift certificates                                           3,926        1,966
Franchisor fees                                             1,299        2,115
Other                                                       6,142        4,033
--------------------------------------------------------------------------------
                                                          $40,266       22,887
================================================================================
<PAGE>
Note 9 - Income Taxes

     The  components  of the  provision  for  income  taxes for the years  ended
December  28,  1997,  December  29,  1996 and  December  31, 1995 are as follows
(amounts in thousands):

                                                   Current   Deferred    Total
--------------------------------------------------------------------------------

1997:
      Federal                                      $8,090      3,850     11,940
      State                                         1,630         55      1,685
--------------------------------------------------------------------------------
           Total                                   $9,720      3,905     13,625
================================================================================

1996:
      Federal                                      $5,200        250      5,450
      State                                         1,050         50      1,100
--------------------------------------------------------------------------------
           Total                                   $6,250        300      6,550
================================================================================

1995:
      Federal                                      $7,300      4,450     11,750
      State                                         1,800        600      2,400
--------------------------------------------------------------------------------
           Total                                   $9,100      5,050     14,150
================================================================================

     A reconciliation  of the Federal statutory income tax rate to the effective
income tax rate  applied to earnings  before  income  taxes in the  accompanying
consolidated  statements  of earnings  for the years ended  December  28,  1997,
December 29, 1996 and December 31, 1995 follows:

                                                  1997       1996        1995  
--------------------------------------------------------------------------------

Tax at Federal statutory rate                     35.0%      35.0%       35.0%
Increase (decrease) in
   taxes due to:
       Rate differential                             -       (0.7)          -
       State income tax, net of
         Federal benefit                           4.0        3.9         4.5
       FICA tip and targeted
         jobs tax credits                        (10.1)      (2.2)       (3.3)
Nondeductible merger and
   conversion expenses                               -          -         5.1
Nondeductible goodwill                             2.0          -           -
Other, net                                         1.5       (0.1)       (0.2)
--------------------------------------------------------------------------------
Effective tax rate                                32.4%      35.9%       41.1%
================================================================================

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 28,
1997 and December 29, 1996 are presented below (amounts in thousands):

                                                            1997         1996
--------------------------------------------------------------------------------
FICA tip credits not yet taken for
   Federal tax purposes                                  $  5,772           -
Asset impairment charges recorded
   for financial statement purposes
   but not yet taken for tax purposes                       6,618       7,597
Other                                                         589         439
--------------------------------------------------------------------------------
Total deferred tax assets                                  12,979       8,036
--------------------------------------------------------------------------------
Depreciation taken for tax purposes
   in excess of depreciation taken for
   financial reporting purposes                           (25,713)    (17,259)
Other                                                      (1,497)     (1,103)
--------------------------------------------------------------------------------
Deferred tax liability                                   $(14,231)    (10,326)
================================================================================
<PAGE>
     The Company has not recorded a valuation  allowance for deferred tax assets
as of December 28, 1997 or December 29, 1996. In assessing the  realizability of
deferred  tax assets,  management  considers  whether it is more likely than not
that some portion or all of the  deferred  tax assets will not be realized.  The
ultimate  realization of deferred tax assets is dependent upon the generation of
future  taxable income during the periods in which those  temporary  differences
become deductible.  Management  considers the scheduled reversal of deferred tax
liabilities,  projected  future taxable income,  and tax planning  strategies in
making this assessment. Based upon these factors, management believes it is more
likely  than  not the  Company  will  realize  the  benefits  of the  deductible
differences.

Note 10 - Interest Expense

     The  following is a summary of interest  cost  incurred  and interest  cost
capitalized as a component of the cost of construction  in progress  (amounts in
thousands):

                                                  1997       1996        1995
--------------------------------------------------------------------------------
Interest cost capitalized                      $ 2,509      1,572       1,074
Interest cost expensed                          20,575     11,417       6,189
--------------------------------------------------------------------------------
Total                                          $23,084     12,989       7,263
================================================================================

Note 11 - Stock Option Plans

     The Company's 1988 stock option plan (the "Stock Option Plan") and the 1993
and 1995 Stock  Incentive  Plans (the "Stock  Incentive  Plans") provide for the
granting of  nonqualified  and  incentive  options for up to  1,974,375  shares,
450,000  shares  and  2,700,000  shares,  respectively,  of common  stock of the
Company to key officers,  directors and employees.  Generally,  options  awarded
under the Company's  Stock Option Plan and Stock  Incentive Plans are granted at
prices  which  equate  to  fair  market  value  on the  date of the  grant,  are
exercisable over three to 10 years, and expire 10 years subsequent to award.

     The 1992 DF&R Stock Option Plan (the "DF&R Option  Plan")  provides for the
granting of 1,000,000  shares of the  Company's  common  stock to key  officers,
directors and employees. Options awarded under the DF&R Option Plan prior to the
merger were  adjusted  based on the exchange  ratio of 1.5 shares of Apple South
common stock for each share of DF&R common stock. Options awarded under the DF&R
Option Plan are generally granted at prices which equate to fair market value on
the  date  of  grant.  With  limited  exceptions,   all  options  are  generally
exercisable  beginning  one year  from the date of  grant  with  annual  vesting
periods  and  terminate  not  later  than  five  years  from the date of  grant.
Management  does not anticipate  granting any additional  options under the DF&R
Option Plan. 

     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees,"  and related  Interpretations  in accounting for
its stock option plans. Accordingly, no compensation expense has been recognized
for its stock-based  compensation plans. Had compensation cost for the Company's
stock  option  plans  been  determined  based  upon the fair  value  methodology
prescribed under Statement of Financial  Accounting  Standards ("SFAS") No. 123,
"Accounting  for  Stock-Based  Compensation,"  the  Company's  net  earnings and
earnings per share would have been reduced by  approximately  $2.3  million,  or
approximately $0.06 per share in 1997 and reduced by approximately $2.1 million,
or approximately  $0.05 per share in 1996. The effects of either  recognizing or
disclosing  compensation  cost under SFAS 123 may not be  representative  of the
effects on reported net earnings for future years. The fair value of the options
granted  during  1997 is  estimated  as $8.90 on the  date of  grant  using  the
Black-Scholes  option-pricing  model with the  following  assumptions:  dividend
yield 0.28%, volatility of 58%, risk-free interest rate of 5.8%, and an expected
life of 6.7 years.
<PAGE>
     As  of  December  28,  1997,   options  to  purchase  273,339  shares  were
exercisable at a weighted average exercise price of $14.38.  Further information
relating to total options is as follows:

                                                                         Average
                                                          Shares          Price
--------------------------------------------------------------------------------
Outstanding at December 31, 1994                        1,983,336        $ 5.13
Granted in 1995                                         1,479,382         19.90
Exercised in 1995                                        (646,184)         2.80
Canceled in 1995                                          (25,861)        15.51
--------------------------------------------------------------------------------
Outstanding at December 31, 1995                        2,790,673         13.44
Granted in 1996                                           726,587         19.72
Exercised in 1996                                        (779,198)         3.25
Canceled in 1996                                         (243,870)        21.48 
--------------------------------------------------------------------------------
Outstanding at December 29, 1996                        2,494,192         17.66
Granted in 1997                                         1,412,694         14.46
Exercised in 1997                                        (334,296)         6.66
Canceled in 1997                                         (574,460)        19.15
--------------------------------------------------------------------------------
Outstanding at December 28, 1997                        2,998,130        $17.04 
================================================================================

     The following table summarizes information concerning currently outstanding
and exercisable options:

                            Options Outstanding             Options Exercisable
                   -------------------------------------   ---------------------
                                  Weighted     Weighted                 Weighted
    Range of                       Average     Average                  Average
    Exercise           Number     Remaining    Exercise      Number     Exercise
     Prices         Outstanding     Life        Price      Exercisable    Price
-------------------------------------------------------------------------------
$ 5.01 - $10.00        22,875        0.7       $ 8.44        22,875      $ 8.44
$10.01 - $15.00     1,293,178        9.0        13.43        88,641       13.07
$15.01 - $20.00       976,885        7.0        18.24       161,823       15.94
$20.01 - $25.00       532,886        8.1        21.23             -           -
$25.01 - $30.00       172,306        8.2        25.49             -           -
--------------------------------------------------------------------------------
                    2,998,130                               273,339
                   ==========                              ========


Note 12 - Employee Benefit Plans

     The  Company  has a  noncontributory  Employee  Stock  Ownership  Plan (the
"Plan") covering  substantially all full-time employees.  In accordance with the
terms of the Plan, the Company may make  contributions to the Plan in amounts as
determined  by the Board of Directors.  Participants  become 20% vested in their
accounts after three years of service, escalating 20% each year thereafter until
they are fully vested.  The Company  recognized no contribution  expense in 1997
and  approximately  $300,000  in 1996 and  $250,000  in 1995.  

     The Company has established  the Apple South,  Inc. Profit Sharing Plan and
Trust in accordance  with Section  401(k) of the Internal  Revenue  Code,  which
allows eligible  participating  employees to defer receipt of a portion of their
compensation  and  contribute  such  amount  to one or  more  investment  funds.
Employee  contributions  are  matched by the  Company  dollar for dollar for the
first 2% of the employee's  income deferred.  Company matching funds vest at the
rate  of 20%  each  year,  beginning  after  three  years  of  service.  Company
contributions were $514,000 in 1997, $422,000 in 1996 and $300,000 in 1995.
<PAGE>
Note 13 - Shareholders' Equity

     The Company's Board of Directors, from time to time and depending on market
conditions,  authorizes  the  Company to  purchase  shares of its common  stock,
through open market transactions,  to satisfy obligations under stock option and
employee  stock  ownership  plans.  As of  December  28,  1997,  the Company had
purchased an aggregate  3.1 million  shares of its common stock for an aggregate
purchase price of $53.0 million (average price of $16.99 per share).  On January
9, 1998,  the Company  announced  the  approval by its Board of Directors of the
purchase of up to two million additional shares of its common stock. The Company
has not purchased a significant number of shares pursuant to this approval.

     Pursuant  to a direct  placement  of  common  stock on June 30,  1995,  the
Company sold 900,000 shares at $18.50.  Pursuant to a registered public offering
on March 3, 1995, the Company sold 3.2 million shares of common stock at $13.75.
After deducting expenses of these offerings, proceeds to the Company amounted to
approximately  $16.2 million in the June offering and $41.0 million in the March
offering.

Note 14 -  Commitments  and  Contingencies 

     Under  the  Company's   insurance   programs,   coverage  is  obtained  for
significant  exposures  as well as those risks  required to be insured by law or
contract.  It is the Company's  preference  to retain a  significant  portion of
certain  expected losses related  primarily to workers'  compensation,  physical
loss to property and  comprehensive  general  liability.  Provisions  for losses
expected under these programs are recorded based upon the Company's estimates of
the aggregate liability for claims incurred.  

     The Company is contingently liable for letters of credit and a guarantee of
the indebtedness of others aggregating  approximately $12.3 million. The Company
does not expect  circumstances to arise that would result in the disbursement of
funds under these guarantees.

     During  1997,  two  lawsuits  were filed by persons  seeking to represent a
class of  shareholders  of the Company  who  purchased  shares of the  Company's
common stock between May 26, 1995 and September 24, 1996.  Each plaintiff  named
the  Company  and certain of its  officers  and  directors  as  defendants.  The
complaints alleged acts of fraudulent  misrepresentation by the defendants which
induced  the  plaintiffs  to purchase  the  Company's  common  stock and alleged
illegal insider  trading by certain of the  defendants,  each of which allegedly
resulted in losses to the plaintiffs and similarly situated  shareholders of the
Company.  The  complaints  each seek  damages  and other  relief.  Although  the
ultimate  outcome of these lawsuits cannot be determined at this time,  based on
its preliminary  analysis the Company believes that the allegations  therein are
without merit and intends to vigorously defend itself.

     The Company is involved in various other claims and legal  actions  arising
in the ordinary course of business.  In the opinion of management,  the ultimate
disposition  of these  matters  will not have a material  adverse  effect on the
Company's consolidated financial position or results of operations.
<PAGE>
Note 15 - Quarterly Financial Data
(unaudited)

                           First      Second      Third       Fourth      Total
                          Quarter     Quarter     Quarter     Quarter     Year
--------------------------------------------------------------------------------
1997:
   Restaurant sales      $171,453     202,889     215,739     218,239    808,320
   Gross profit*         $ 71,269      85,940      90,549      85,904    333,662
   Net earnings          $  7,268      10,224      10,660         296     28,448
   Basic earnings
     per share           $   0.19        0.27        0.28        0.01       0.74
   Diluted earnings
     per share           $   0.19        0.25        0.26        0.01       0.73

1996:
   Restaurant sales      $126,333     136,945     139,796     142,948    546,022
   Gross profit*         $ 53,443      60,259      58,616      61,597    233,915
   Net earnings
     (loss)              $ (5,487)      9,777       1,188       6,196     11,674
   Basic earnings
     (loss) per share    $  (0.14)       0.25        0.03        0.16       0.30
   Diluted earnings
     (loss) per share    $  (0.14)       0.24        0.03        0.16       0.30
--------------------------------------------------------------------------------
          * The Company defines gross profit as total  restaurant sales less the
     cost of food and beverage and payroll and benefits.  These costs  represent
     the expenses  associated directly with providing the Company's products and
     services.

Note 16 - Subsequent Events

     On January 14, 1998 the Company acquired a 20% interest in Belgo Group, PLC
("Belgo"), a public restaurant company based in the United Kingdom that owns and
operates two Belgo  restaurants  in London,  for $6.1 million.  The Company will
account for its  investment in Belgo under the equity method of  accounting.  In
addition,  the Company and Belgo have established two 50/50 joint ventures:  one
for the initial  development of the Company's  proprietary  brands in Europe and
the other for the development of Belgo restaurants in the Western Hemisphere.

<PAGE>

Report of Management
Apple South, Inc.

     The management of Apple South, Inc. has prepared the consolidated financial
statements and all other financial  information appearing in this Annual Report,
and is responsible for their integrity.  The consolidated  financial  statements
were prepared in conformity with generally accepted accounting principles,  and,
accordingly,  include certain  amounts based on management's  best judgments and
estimates. 

     Management   maintains  a  system  of  internal   accounting  controls  and
procedures  designed  to  provide  reasonable   assurance,   at  an  appropriate
cost/benefit   relationship,   regarding  the   reliability   of  the  published
consolidated  financial  statements  and  the  safeguarding  of  assets  against
unauthorized  acquisition,  use or disposition. 

     The independent  auditors,  KPMG Peat Marwick LLP, were  recommended by the
Audit Committee of the Board of Directors and that  recommendation  was ratified
by the Company's shareholders.  The Audit Committee, which is composed solely of
directors  who are not  officers of the  Company,  meets  periodically  with the
independent  auditors and  management to ensure that they are  fulfilling  their
obligations and to discuss internal accounting controls,  auditing and financial
reporting  matters.  The  Audit  Committee  also  reviews  with the  independent
auditors the scope and results of the audit  effort.  The  independent  auditors
periodically  meet alone with the Audit Committee and have full and unrestricted
access  to  the  Audit  Committee  at  any  time.  

     The recommendations of the independent auditors are reviewed by management.
Control procedures have been implemented or revised as appropriate to respond to
these  recommendations.  No material control weaknesses have been brought to the
attention of management. 

     The Company  assessed its internal  control system as of December 28, 1997,
in relation to criteria for effective internal control over financial  reporting
described in "Internal Control Integrated  Framework" issued by the Committee of
Sponsoring  Organizations of the Treadway  Commission.  Based on its assessment,
the Company  believes  that,  as of December  28,  1997,  its system of internal
control  over  financial  reporting  and over  safeguarding  of  assets  against
unauthorized acquisition, use or disposition, met those criteria.



/s/ Tom E. DuPree, Jr.
--------------------------
Tom E. DuPree, Jr.,
Chairman of the Board



/s/ Erich J. Booth
-------------------------
Erich J. Booth,
Chief Financial Officer

<PAGE>


Independent Auditors' Report
The Board of Directors
Apple South, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheets of Apple
South,  Inc. as of December  28, 1997 and  December  29,  1996,  and the related
consolidated  statements  of earnings,  shareholders'  equity and cash flows for
each of the years in the  three-year  period  ended  December  28,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on 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 consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Apple  South,  Inc.  at  December  28,  1997  and  December  29,  1996,  and the
consolidated  results of its operations and its cash flows for each of the years
in the three-year  period ended December 28, 1997, in conformity  with generally
accepted  accounting  principles. 

     As discussed in Note 3 to the consolidated  financial  statements,  in 1996
the  Company  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived Assets to be Disposed Of."


                             KPMG Peat Marwick LLP

Atlanta, Georgia
January 23, 1998


<PAGE>

Corporate and Shareholder Information
Apple South, Inc.

Corporate Headquarters
Apple South, Inc.
Hancock at Washington
Madison, Georgia 30650
Telephone: 706-342-4552

Independent Auditors
KPMG Peat Marwick LLP
303 Peachtree Street, N.E.
Suite 2000
Atlanta, Georgia 30308

Transfer Agent and Registrar
SunTrust Bank, Atlanta
Corporate Trust Division
P.O. Box 4625
Atlanta, Georgia 30302

Annual Meeting
The Annual Meeting of Shareholders is scheduled at 11 a.m.,  Tuesday,  April 28,
1998, to be held at the Madison-Morgan Cultural Center in Madison, Georgia.

Form 10-K 
A  copy  of  the  Company's  Annual  Report on Form 10-K  for  the  fiscal  year
ended December 28, 1997 is filed electronically with the Securities and Exchange
Commission  and is  available  on the SEC web site.  Copies  will be sent to any
shareholder  upon request to Investor  Relations.  

Investor  Relations  
Erich J. Booth, Chief Financial Officer 
Keri L. Kiger, Investor Relations Analyst 
Hancock at Washington 
Madison, Georgia 30650 
Telephone:          (706) 342-4552 
Hotline:            (706) 343-2091 
Facsimile:          (706) 342-9283
E-mail: kkiger@corp.applesouth.com  

Investor  Information 
The  Company's  common  stock  is  traded on  the Nasdaq Stock Market  (National
Market) under the symbol  "APSO." Apple South is also a corporate  member of the
National  Association of Investors  Corporation  (NAIC). A list of the brokerage
firms  publishing  research on Apple South is available  upon request by calling
the  Investor  Relations  Hotline or  writing  Investor  Relations.  

Shareholder Information 
As  of  March 2, 1998,  there  were  approximately  20,000  shareholders  of the
Company's common stock,  based on the number of record holders and the estimated
number of individual participants represented by security position listings.

Shareholder of Record
Shares  are  held  in  the  shareholder's   name   which  means  the  holder  is
registered  directly  on the books of the  Company as a  shareholder  of record.
Stock  may be in the  form  of a  traditional  stock  certificate,  or it may be
confirmed by a Company statement  reflecting  ownership in shares that have been
deposited or transferred to your ESOP or employee stock purchase account.
<PAGE>
Street Name Shareholder
Shares  are  held  for  the  shareholder in a "street  name" account by a broker
chosen by the  shareholder.  Proxy material is mailed by the broker which always
takes a little more time than if Apple  South were able to mail  directly to the
shareholder. The Company would like to encourage all street name shareholders to
consider   becoming  a  shareholder  of  record  by   registering   their  stock
certificates  in their own name so  communications  with you are direct and more
expedient.  

Stock Price  Performance 
A  summary  of  the  high  and  low  sales  prices  per share for the  Company's
common stock is presented below.

1996                                                    High              Low
--------------------------------------------------------------------------------
First Quarter                                          $24.50           $17.13
Second Quarter                                         $28.25           $22.13
Third Quarter                                          $27.25           $13.00
Fourth Quarter                                         $15.00           $11.38

1997                                                    High              Low
--------------------------------------------------------------------------------
First Quarter                                          $15.13           $11.75
Second Quarter                                         $16.00           $12.25
Third Quarter                                          $19.25           $13.69
Fourth Quarter                                         $19.94           $13.38

Dividends
The following table indicates cash dividends declared per share on the Company's
common  stock for the years  ended  December  28,  1997,  December  29, 1996 and
December 31, 1995.

Quarter ended                                     1997        1996        1995
--------------------------------------------------------------------------------
March                                            $0.008       0.006       0.004
June                                              0.010       0.008       0.006
September                                         0.010       0.008       0.006
December                                          0.010       0.008       0.006
--------------------------------------------------------------------------------
Total                                            $0.038       0.030       0.022
================================================================================