Five-Year Summary of Selected Financial Data
                               Avado Brands, Inc.

<TABLE>
<CAPTION>
(In thousands, except per share data)                     1998       1997      1996      1995     1994
---------------------------------------------------------------------------------------------------------
<S>                                                    <C>         <C>       <C>       <C>       <C>     
Consolidated statement of earnings data
Total restaurant sales                                 $ 862,692   808,320   546,022   440,190   300,559
Operating income                                       $  72,631    74,823    31,596    41,329    32,452
Net earnings                                           $  66,283    28,448    11,674    20,279    19,060
---------------------------------------------------------------------------------------------------------
Per share data
Basic earnings per common share                        $    1.81      0.74      0.30      0.54      0.54
Diluted earnings per common share                      $    1.62      0.73      0.30      0.52      0.54
Cash dividends per common share                        $   0.048     0.038     0.030     0.022     0.015
---------------------------------------------------------------------------------------------------------
Consolidated balance sheet data
Total assets                                           $ 670,597   804,289   457,827   369,138   226,087
Working capital (excluding assets held for sale)       $(210,947)  (33,989)  (21,439)  (17,778)    2,200
Long-term obligations                                  $ 116,978   381,843   215,891   118,726    70,190
Convertible preferred securities                       $ 115,000   115,000         -         -         -
Shareholders' equity                                   $ 112,029   220,782   191,429   203,221   120,341
---------------------------------------------------------------------------------------------------------
</TABLE>


                                       
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Avado Brands, Inc.

     For an  understanding  of  the  significant  factors  that  influenced  the
performance of Avado Brands,  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. The
Company acquired McCormick & Schmick Holding Corp. ("McCormick & Schmick's") and
Hops  Restaurant  Bar & Brewery  ("Hops") in March 1997 and Canyon  Cafes,  Inc.
("Canyon Cafe") in July 1997. The pro forma information presented herein assumes
that these  acquisitions  had been  completed at the beginning of the respective
periods. The Company's fiscal year is a 52- or 53-week year ending on the Sunday
closest to December 31.  Accordingly,  the  following  discussion  is for the 53
weeks ended January 3, 1999 and the 52-week  periods ended December 28, 1997 and
December 29, 1996. 

Consolidated Overview of 1998 

     During 1998, Avado Brands,  Inc.  (formerly Apple South, Inc.) continued to
develop and implement  strategies  designed to enhance  long-term  returns.  The
Company  substantially  completed the  divestiture of its franchised  Applebee's
Neighborhood Grill & Bar ("Applebee's")  restaurants,  completed the sale of its
Harrigans Grill and Bar ("Harrigans")  operations,  retaining a 25% ownership in
the ongoing business,  and acquired a 20% interest in United Kingdom-based Belgo
Group PLC ("Belgo"). These pivotal changes have provided Avado Brands the focus,
flexibility  and  resources to expand  operations  at its "Core"  brands,  which
include Don Pablo's,  Hops,  McCormick & Schmick's and Canyon Cafe,  and to seek
new  investment  opportunities.  

Comparison of Historical Results - Fiscal Years 1998, 1997 and 1996 

Restaurant Sales  

     Restaurant  sales for 1998  increased  7% to  $862.7  million  from  $808.3
million in 1997  reflecting  increased  core brand  sales  which were  offset by
declining  revenues  associated  with the  divestitures  of the  Applebee's  and
Harrigans  brands.  In core brands,  sales  increased 59% to $527.4 million from
$331.9 million in 1997. A full-year's sales  attributable to the brands acquired
in 1997, new unit growth, increased average unit volumes in Hops and McCormick &
Schmick's  and  a  53-week  fiscal  1998  compared  to  a  52-week  fiscal  1997
contributed to the increase in core brand sales.  Operating  weeks  increased by
60% in core brands due to a full-year's  operations from 50 restaurants acquired
and 41  restaurants  opened  in 1997  and a  partial-year's  operations  from 59
restaurants  opened in 1998,  partially  offset by two Canyon  Cafe  restaurants
closed in 1998.  Average weekly sales at base restaurants (those open for a full
12 months at the  beginning of 1998) were  approximately  6% higher at Hops,  4%
higher at Canyon Cafe,  2% higher at McCormick & Schmick's  and 1% higher at Don
Pablo's as compared with 1997. On a pro forma basis, core brand restaurant sales
increased by 44% and  operating  weeks  increased  by 47% over 1997.  

     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  was  due to a  full-year's  operations  from  45
Applebee's and 19 Don Pablo's  restaurants  opened in 1996 and a  partial-year's
operations from 34 Applebee's and 28 Don Pablo's  restaurants opened in 1997. In
addition,  1997 sales  included ten months of operations  related to McCormick &
Schmick's  and Hops and six months of  operations  related to Canyon  Cafe.  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,  in 1997 the  Company  completed  the sale of its  ten-unit
Hardee's brand and closed one Harrigans restaurant. 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>
Restaurant Operating Expenses 

     Restaurant  operating  expenses as a percent of sales increased to 85.9% in
1998 from 85.8% in 1997.  The resulting  1998  decrease in restaurant  operating
margins  of ten  basis  points  is  principally  due to an  increase  in cost in
Applebee's  generated by the ongoing divestiture of the brand and an increase in
core  brand  expenses  due  primarily  to  costs  associated  with  opening  new
restaurants.  These increases were partially  offset by depreciation  related to
Applebee's  which was  suspended in December  1997 when the related  assets were
classified  as assets held for sale.  

     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  core brands and (ii) the Company's  brands which have been or
are being discontinued which include Applebee's,  Harrigans,  Tomato Rumba's and
Hardee's.  

Core Brands 

Fiscal                                               1998       1997       1996
--------------------------------------------------------------------------------
Restaurant sales: 
  Don Pablo's                                        51.3%      59.2%     100.0%
  Hops                                               20.2       14.9          - 
  McCormick & Schmick's                              19.4       20.3          - 
  Canyon Cafe                                         9.1        5.6          - 
--------------------------------------------------------------------------------
    Total restaurant sales                          100.0      100.0      100.0
--------------------------------------------------------------------------------
Restaurant operating expenses:
  Food and beverage                                  28.0       27.8       26.0 
  Payroll and benefits                               30.4       29.8       29.0
  Depreciation and amortization                       3.2        3.7        4.6 
  Other operating expenses                           23.4       22.9       22.6 
--------------------------------------------------------------------------------
    Total restaurant operating expenses              85.0       84.1       82.2 
--------------------------------------------------------------------------------
Income from restaurant operations                    15.0%      15.9%      17.8%
--------------------------------------------------------------------------------

     Core restaurant operating expenses for 1998 were 85.0% of sales compared to
84.1% in 1997 (84.9% on a pro forma  basis).  Don Pablo's  higher  margins  were
offset by lower margins from smaller,  developing  brands which were acquired in
1997,  resulting in lower  reported  margins in 1998.  These lower  margins were
primarily  attributable  to (i) an increase in payroll and benefit costs related
to an increase in the number of new unit  openings  which  typically  experience
higher  labor  costs  during the first  several  months of  operations,  (ii) an
increase in food and beverage  costs  primarily  related to an increase in Hops'
sales as a  percentage  of total core brand  sales  compared to prior year (Hops
experiences  higher food and beverage  costs due to a larger  percentage of beef
sales and a smaller  percentage of alcoholic  beverage  sales as compared to the
other brands),  (iii) an increase in other operating  expenses related primarily
to an increase in advertising  in Don Pablo's and Hops and (iv) other  operating
costs  also  associated  with an  increase  in the  number of new unit  openings
coupled  with the policy of  expensing  preopening  costs as incurred  which was
adopted at the  beginning  of 1998.  Restaurant  operating  margins for all core
restaurants were also negatively  impacted by seven  underperforming Don Pablo's
restaurants  which  opened in 1997.  Excluding  the  operations  of these  seven
restaurants, total 1998 core brand income from restaurant operations was 15.4%.

     Restaurant  operating  expenses  as a percent of sales for the core  brands
increased  to 84.1% in 1997 from 82.2% in 1996.  The  corresponding  decrease in
1997  restaurant  operating  margins was  principally  due to (i) higher cost of
goods and  payroll  expenses in the brands  acquired  during  1997,  (ii) higher
occupancy costs in the newly acquired  brands due to restaurant  locations which

<PAGE>
are  predominantly  leased and (iii) higher  payroll and  training  costs in Don
Pablo's associated primarily with new hourly kitchen positions.  These increases
were offset  somewhat by a decrease in advertising  expense in Don Pablo's and a
decrease in occupancy cost generated by the Company's  tendency of owning versus
leasing  restaurant  locations.

Discontinued Brands  

Fiscal                                               1998       1997       1996
--------------------------------------------------------------------------------
Restaurant sales:  
  Applebee's                                        100.0%      95.3%      91.8%
  Harrigans                                             -        4.1        5.3
  Tomato Rumba's                                        -          -        0.9
  Hardee's                                              -        0.6        2.0 
--------------------------------------------------------------------------------
    Total restaurant sales                          100.0      100.0      100.0
--------------------------------------------------------------------------------
Restaurant operating expenses:
  Food and beverage                                  28.0       28.0       27.9 
  Payroll and benefits                               35.5       31.6       29.9
  Depreciation and amortization                         -        4.0        3.9 
  Other operating expenses                           23.7       23.4       23.2 
--------------------------------------------------------------------------------
Total restaurant operating expenses                  87.2       87.0       84.9 
--------------------------------------------------------------------------------
Income from restaurant operations                    12.8%      13.0%      15.1%
--------------------------------------------------------------------------------

     Restaurant operating expenses as a percent of sales for discontinued brands
increased to 87.2% in 1998 from 87.0% in 1997 and 84.9% in 1996.  The  resulting
decrease in 1998  restaurant  operating  margins is principally due to increased
payroll  and  benefits  resulting  from  performance-based,   pay-to-stay  bonus
programs  implemented to control management  turnover and operating costs during
the Applebee's  divestiture  period.  

     The 1997 decrease in restaurant  operating  margins was  principally due to
payroll and benefits which  escalated in  anticipation  of the Company's exit of
the Applebee's  business.  These  increases were 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
the period prior to  announcement of a divestiture.  

General and Administrative Expenses 

     General  and  administrative  expenses  as a percent  of sales were 5.3% as
compared with 4.9% in 1997 and 4.8% in 1996.  The 1998 increase is primarily due
to the brands  acquired in 1997 which have higher  expenses as a  percentage  of
revenue,  due primarily to lower leverage on the fixed costs required to support
these  smaller,  higher-growth  concepts.  The  increases at the new brands were
offset  by a  continued  decrease  in Don  Pablo's  as it gained  leverage  from
absolute size. General and  administrative  expenses related to core brands were
6.5% of total core brand sales in 1998 compared to 7.7% on a pro forma basis for
1997. Core brand general and administrative expenses are expected to approximate
6.0% of sales in 1999. 

Asset Revaluation and Other Special Charges 

     In the fourth  quarter of 1998,  programs  were  initiated  at Don Pablo's,
Canyon Cafe and the Company's  corporate  headquarters to reorganize  management
and reduce  overhead  costs. A pre-tax charge of $2.9 million was recorded,  the
components  of which  related  primarily to employee  termination  and severance
costs. 

<PAGE>
     In 1996, the Tomato Rumba's  operating brand was dissolved,  and efforts to
sell   Hardee's   were   accelerated.   These   decisions,   combined  with  the
implementation of Statement of Financial  Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets to Be
Disposed Of," resulted in an asset revaluation  charge of $27.7 million.  During
1998 and 1997,  the Hardee's  brand and several  Tomato  Rumba's  locations were
sold, several  additional  locations were converted to other company brands, and
the  remaining  assets were  redeployed.  

Interest and Other Expenses  

     Interest  expense  increased to $25.3 million in 1998 from $20.5 million in
1997 and $11.3 million in 1996 due to higher average  borrowings.  Financing the
construction  of new  restaurants  and the 1997  acquisition  of new brands,  in
excess of cash generated by operations,  led to higher average debt levels under
revolving  credit  facilities.  These  uses of funds  were  partially  offset by
proceeds from various divestitures,  a significant portion of which were used to
reduce revolving debt obligations.  The Company's weighted average interest rate
on  borrowings  was  approximately  8.0% in 1998 as compared to 7.9% in 1997 and
8.1% in 1996.  

     Distributions on preferred  securities reflect expenses associated with the
1997  issuance of $115.0  million,  7% term  convertible  securities  which were
outstanding  for the  full-year  in 1998.  

     Gain on disposal of assets  primarily  reflects the gain  recognized on the
Applebee's  divestiture.  The unsold  premises and equipment and franchise  cost
related to the brand are included in "Assets held for sale" in the  consolidated
balance sheets. 

     Income from  investments  carried at equity reflects the Company's pro rata
share of earnings from its 20% equity  interest in Belgo and 25% equity interest
in Harrigans. 

     Other expenses relate  primarily to  amortization  of goodwill.  Total 1998
other expenses were  comparable to 1997 as a result of increases in amortization
expense  resulting  from a full-year  of goodwill  amortization  from the brands
acquired in 1997 which was offset by goodwill amortization related to Applebee's
which was suspended in December 1997 when the related assets were  classified as
assets  held  for  sale.  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.  

Income Tax Expense  

     Income tax expense as a percent of earnings  before  income taxes was 36.7%
in 1998  compared  to 32.4% in 1997 and  35.9%  in  1996.  The  increase  in the
effective  tax rate for 1998  compared with 1997 is due primarily to an increase
in  taxable  income  generated  primarily  by the gain on sale of  assets  and a
corresponding  decrease  in the  impact of FICA tip  credits.  The  decrease  in
effective tax rate for 1997 compared with 1996 was due primarily to an increased
impact  of FICA  tip  credits  and  the  allocation  of  earnings  among  states
associated with the 1997 acquisitions.

Net Earnings 

     Net earnings as a percent of sales was 7.7% in 1998,  3.5% in 1997 and 2.1%
in 1996.  The  increase  from 1997 to 1998 was  primarily  a result of the $72.5
million pre-tax gain on disposal of assets.  This increase was partially  offset
by (i) a $4.8 million increase in interest expense, (ii) a $1.8 million increase
in  distributions  on preferred  securities and (iii) a $2.2 million decrease in
operating  income resulting from a combination of increased core brand operating
income and a decline in Applebee's  operating income.  The increase from 1996 to
1997 was  primarily  a result of the $27.7  million  pre-tax  asset  revaluation
charge recorded in 1996. The resulting  increase in 1997 was partially offset by


<PAGE>
(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  Applebee's
division. 

Liquidity and Capital Resources 

     The Company's historical and projected growth and its preference to own its
real estate 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 1998  consisted  of  proceeds  from  the  divestiture  of
Applebee's and cash generated from operations of $41.0 million. As of January 3,
1999, the Company had sold 233 of its 279 Applebee's restaurants for total gross
proceeds of $434.8  million  including  $6.8 million in notes and other  amounts
due. Sale of the remaining restaurants is expected to be completed early in 1999
with  estimated  gross  proceeds of $79.0  million.

     The  principal   uses  of  funds  during  1998  consisted  of  (i)  capital
expenditures of $142.8 million,  (ii) treasury stock purchases of $92.0 million,
(iii) net  repayment of revolving  credit  facilities  of $114.7  million,  (iv)
equity  investments  of $15.1 million and (v) the  retirement of $8.5 million of
the Company's 9.75% Senior Notes. 

     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. Increases in accounts receivable, prepaid expenses and
other, inventory,  accounts payable and accrued liabilities occurred during 1998
primarily  as  a  result  of  new  restaurant  openings.  These  increases  were
substantially   offset  by  decreases   resulting   from   divested   Applebee's
restaurants.  Further  increases  in current  asset and  liability  accounts are
expected  as the Company  continues  its  restaurant  development  program.  The
increase in other  assets is  principally  due to (i) equity  investments,  (ii)
loans to the Chief Executive Officer and certain other executive officers, (iii)
certain properties retained in connection with the Applebee's  divestiture which
are  being  leased to  several  buyers,  (iv)  bondholder  consent  fees paid in
connection  with treasury stock  repurchases and (v) the annual increase in cash
surrender  value on an officer's life insurance  policy.  

     Capital  expenditures  during  1998  provided  for  the  opening  of 32 Don
Pablo's,  17 Hops,  five McCormick & Schmick's and five Canyon Cafes in addition
to ongoing  refurbishments  of existing  restaurants.  In addition,  the Company
completed  the  construction  of  and  opened  15  Applebee's  restaurants.  

     The following table presents  anticipated  restaurant openings for the core
brands for 1999 and 2000:  

                                                                1999       2000 
--------------------------------------------------------------------------------
Don Pablo's                                                       15         27 
Hops                                                              20         24
McCormick & Schmick's                                              4          5
Canyon Cafe                                                        1          4
--------------------------------------------------------------------------------
Total                                                             40         60
================================================================================

     Capital  requirements  for the  construction  of new core  restaurants  are
expected to approximate $200 million in 1999 through 2000, over half of which is
expected to be generated  internally.  A portion of these  capital  requirements
will be funded  through  remaining  commitments  of $3.7  million  under a $30.0
million master equipment lease. The remaining funds are expected to be available
on existing  revolving  credit  facilities,  renewals and expansion of which are
currently  being  negotiated. 

<PAGE>
     The  Board  of  Directors,  from  time  to time  and  depending  on  market
conditions,  authorizes the purchase of common shares.  In connection with these
programs,  consent was  obtained  from the holders of the 9.75% Senior Notes due
2006 to amend certain  covenants  contained in the Indenture  dated May 1, 1996,
relating to the notes (the  "Indenture").  Bondholder  consent was  finalized on
July 1, 1998 and the Company paid $4.2 million to the consenting holders. During
1998, a total of 7.3 million  shares was  repurchased.  

     In 1998,  third  parties  purchased  a total of 8.3  million  shares of the
Company's  common  stock at an  average  price per  share of $13.36  (or a total
acquisition cost of $110.9 million)  pursuant to four equity forward  contracts.
Upon expiration of the contracts,  the Company has the option to (i) acquire the
shares at the third parties' average acquisition cost as described above or (ii)
instruct  the third  parties to sell the shares in the market and settle in cash
any  appreciation  or  depreciation in the market value of the stock at the sale
date compared to the acquisition cost described above. Any such  appreciation or
depreciation in the value of the shares will be reflected in equity and will not
impact net earnings.  One of these  contracts for 2.0 million shares was settled
in December  1998,  and the Company  exercised its option to acquire the related
shares for $29.9 million.  At January 3, 1999,  three equity  forward  contracts
covering 6.3 million  shares were pending  settlement.  The third parties' total
acquisition  price for these  shares of $81.8  million,  net of a $10.7  million
collateral  deposit  made by the Company  with a third  party,  is  reflected as
"Temporary equity,  net" in the 1998 consolidated  balance sheet. In March 1999,
one of the remaining contracts covering 2.5 million shares was settled for $32.4
million. The remaining two contracts expire, unless renewed, in June and July of
1999.

     Acquisition  of the shares  represented  by the  remaining  equity  forward
contracts  is  contingent  on the  Company's  ability  to obtain  financing  and
maintain  compliance  with various  provisions of its Senior Notes and revolving
credit agreements.  Management believes that the Company will be able to acquire
all shares  pending  settlement  and that credit  availability  under  existing,
renewed,  or new  credit  facilities  and  cash  flow  from  operations  will be
sufficient to satisfy the Company's obligations upon expiration of the remaining
contracts.

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 1998 and 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.

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.  Furthermore,  the  following

<PAGE>
     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 employees while sales are pending;
the  availability of qualified buyers for the remaining  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.

Year 2000

     Historically,  certain computer  programs were written and certain computer
chips were designed using two-digit year designations.  These programs and chips
may  experience  problems  handling  dates beyond 1999.  Incomplete  or untimely
resolution of these problems by the Company,  by its critical  suppliers,  or by
governmental  entities  could have a material  adverse  effect on the  Company's
consolidated  financial  position  or results of  operations.  Work on Year 2000
related  issues  began  in  1997  with  executive  awareness  programs  and  the
engagement of outside consultants to assist in developing a consistent Year 2000
methodology,  time  line and  project  plan.  An  inventory  and  assessment  of
information  technology  ("IT")  systems as well as non-IT systems was completed
during  1998,  and the  solution  implementation  and  testing  phases have been
substantially  completed.  As the Company  has  invested  primarily  in licensed
software rather than developing it internally,  remediation  efforts and related
expenditures have not been material. An evaluation of key suppliers to determine
the status of their Year 2000 compliance programs is also in process. Currently,
management  does not  anticipate any adverse  effects  related to the Year 2000.
Contingency  plans,  however,  are being  developed  to address  all  aspects of
operation  level  functionality  and vendor  management in the event  unforeseen
circumstances arise.

Quantitative and Qualitative Disclosures About Market Risk 

     The  Company is exposed to market risk from  changes in interest  rates and
changes in commodity prices. Exposure to interest rate risk relates primarily to
variable rate U.S. LIBOR  obligations on revolving credit  agreements.  Interest
rate swap  agreements are utilized to manage overall  borrowing costs and reduce
exposure to adverse  fluctuations  in interest  rates.  Two  interest  rate swap
agreements  are  currently  in place under which the Company  pays an average of
certain  foreign  LIBOR-based  variable  rates.  These  agreements  also contain
interest  rate caps which further limit  interest  rate  exposures.  If interest
rates related to the Company's  U.S.  LIBOR  obligations  increased by 100 basis
points  over the rates in effect at  January 3, 1999,  interest  expense,  after
considering  the effects of interest  rate swap  agreements,  would  increase by
approximately  $1.4 million in 1999. If an additional  100 basis point  interest
rate  increase  occurred  in  the  Company's  foreign  LIBOR-based  obligations,
interest  expense in 1999 would  increase by an additional  $1.2 million.  These
amounts were determined by considering the impact of hypothetical interest rates
on the Company's borrowing cost and interest rate swap agreements.  The analyses
do not consider the effects of the overall  reduced debt levels  anticipated  in
1999.  Further,  in the event of a change of such  magnitude,  management  would
likely take actions to further mitigate its interest rate exposures.

     The Company purchases certain commodities such as beef, chicken,  flour and
cooking  oil.  Purchases  of these  commodities  are  generally  based on vendor

<PAGE>
agreements which often contain contractual features that limit the price paid by
establishing  price floors or caps. As commodity price aberrations are generally
short  term in nature  and have not  historically  had a  significant  impact on
operating  performance,  financial  instruments  are not used to hedge commodity
price risk.  

New Accounting Pronouncements

     AICPA  Statement  of  Position  98-5,   "Reporting  the  Cost  of  Start-Up
Activities,"  was adopted at the  beginning  of 1998.  This  statement  requires
entities to expense the costs of start-up activities as incurred. As a result of
the adoption of this change in  accounting  policy,  from  expensing  preopening
costs in the first full month of a restaurant's  operations to expensing them as
incurred,  a cumulative effect charge from the change in accounting principle of
$2.2 million ($1.5 million net of tax benefit) was recorded in the first quarter
of 1998. 

     Also at the  beginning of fiscal 1998,  AICPA  Statement of Position  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use," was adopted.  This statement  requires that certain costs related
to the  development  or purchase of  internal-use  software be  capitalized  and
amortized over the estimated  useful life of the software.  The adoption of this
statement did not have a material effect on the Company's consolidated financial
position  or  results  of  operations  in  1998.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting  Comprehensive
Income." SFAS 130, which is 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.  Total  comprehensive  income
for the year ended  January 3, 1999  included  net  earnings  as reported in the
consolidated  statement  of  earnings  plus  the  foreign  currency  translation
adjustment  related to the  equity  investment  in Belgo  (see the  consolidated
statements of shareholders' equity and comprehensive income). 

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131,  "Disclosures about Segments of
an Enterprise  and Related  Information."  SFAS 131,  which is effective for the
Company's fiscal 1998,  establishes  standards for reporting certain information
about  operating  segments,  their  products and services,  geographic  areas of
operations and major  customers.  The Company  believes it meets the aggregation
criteria for reportable  segments,  since the segments  exhibit similar economic
characteristics  and  the  nature  of  the  products  and  services,  processes,
customers  and  distribution  methods are similar.  

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting  for Derivative
Instruments  and  Hedging  Activities."  SFAS 133,  which is  effective  for the
Company's  first  quarter  financial  statements  in  fiscal  2000,  establishes
standards for the accounting and reporting of derivative instruments and hedging
activities.  The Company has not completed its evaluation of the impact, if any,
that adoption of this statement will have on its consolidated financial position
or results of operations.
<PAGE>
<TABLE>
Consolidated Statements of Earnings
Avado Brands, Inc.

(In thousands, except per share data)
<CAPTION>
For the fiscal years ended                                                      1998                1997                1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                  <C>                 <C>    
Restaurant sales:
     Don Pablo's                                                             $270,399             196,457             133,261
     Hops                                                                     106,329              49,511                   -
     McCormick & Schmick's                                                    102,489              67,373                   -
     Canyon Cafe                                                               48,187              18,577                   -
     Applebee's                                                               335,288             454,127             379,042
     Other                                                                          -              22,275              33,719
---------------------------------------------------------------------------------------------------------------------------------  
          Total restaurant sales                                              862,692             808,320             546,022
---------------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
     Food and beverage                                                        241,689             225,302             150,090
     Payroll and benefits                                                     279,274             249,356             162,017
     Depreciation and amortization                                             17,014              31,441              22,509
     Other operating expenses                                                 202,994             187,781             125,781
---------------------------------------------------------------------------------------------------------------------------------
          Total restaurant operating expenses                                 740,971             693,880             460,397
---------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses                                            46,150              39,617              26,329
Asset revaluation and other special charges                                     2,940                   -              27,700
---------------------------------------------------------------------------------------------------------------------------------
Operating income                                                               72,631              74,823              31,596
---------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
     Interest expense, net                                                    (25,313)            (20,504)            (11,348)
     Distributions on preferred securities                                     (8,205)             (6,412)                  -
     Gain on disposal of assets                                                72,547                   -                   -
     Income from investments carried at equity                                  1,025                   -                   -
     Other, primarily goodwill amortization                                    (5,641)             (5,834)             (2,024)
---------------------------------------------------------------------------------------------------------------------------------
          Total other income (expense)                                         34,413             (32,750)            (13,372)
---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative effect
     of change in accounting principle                                        107,044              42,073              18,224
Income taxes                                                                   39,300              13,625               6,550
---------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of change in accounting principle            67,744              28,448              11,674 
Cumulative effect of change in accounting principle, net of tax benefit         1,461                   -                   -
---------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                                 $ 66,283              28,448              11,674 
=================================================================================================================================
Basic earnings per common share:
     Basic earnings before cumulative effect of change
          in accounting principle                                            $   1.85                0.74                0.30
     Cumulative effect of change in accounting principle                        (0.04)                  -                   -
---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share                                              $   1.81                0.74                0.30
=================================================================================================================================
Diluted earnings per common share:
     Diluted earnings before cumulative effect of change
          in accounting principle                                            $   1.65                0.73                0.30
     Cumulative effect of change in accounting principle                        (0.03)                  -                   -
---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share                                            $   1.62                0.73                0.30 
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Balance Sheets
Avado Brands, Inc.

(In thousands, except share data)
<CAPTION>
Fiscal year end                                                                                     1998                1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>                   <C>      
Assets
Current assets:
     Cash and cash equivalents                                                                  $   7,216               2,503
     Short-term investments                                                                            27                  37
     Accounts receivable                                                                            9,124               8,983
     Inventories                                                                                    8,599              10,732
     Prepaid expenses and other                                                                     3,205               9,047
     Assets held for sale                                                                          72,814             331,104
---------------------------------------------------------------------------------------------------------------------------------
          Total current assets                                                                    100,985             362,406

Premises and equipment, net                                                                       367,587             283,839
Goodwill, net                                                                                     138,005             138,403
Investments carried at equity                                                                      16,106                   -
Other assets                                                                                       47,914              19,641
--------------------------------------------------------------------------------------------------------------------------------- 
                                                                                                $ 670,597             804,289
=================================================================================================================================

Liabilities and Shareholders' Equity 
Current liabilities:
     Accounts payable                                                                           $  28,474              24,819
     Accrued liabilities                                                                           42,053              40,266
     Current installments of long-term debt                                                       140,500                 206
     Income taxes                                                                                  28,091                   -
---------------------------------------------------------------------------------------------------------------------------------
          Total current liabilities                                                               239,118              65,291
---------------------------------------------------------------------------------------------------------------------------------
Long-term debt                                                                                    116,978             381,843
Deferred income taxes                                                                               8,200              14,231
Other long-term liabilities                                                                         8,177               7,142
---------------------------------------------------------------------------------------------------------------------------------
          Total liabilities                                                                       372,473             468,507
---------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities of
     Avado Financing I, a subsidiary holding solely Avado Brands, Inc.
     7% convertible subordinated debentures due March 1, 2027                                     115,000             115,000
Temporary equity, net                                                                              71,095                   -

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 1998 and 1997                                                                     405                 405
     Additional paid-in capital                                                                    63,431             145,269
     Retained earnings                                                                            162,411              97,905
     Accumulated other comprehensive income                                                            24                   -
     Treasury stock at cost; 8,910,174 shares in 1998 and 1,662,812 shares in 1997               (114,242)            (22,797)
---------------------------------------------------------------------------------------------------------------------------------
          Total shareholders' equity                                                              112,029             220,782
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                $ 670,597             804,289
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Avado Brands, Inc.
<CAPTION>
                                                                                             Accumulated
                                                                   Additional                   Other                     Total
                                                 Common Stock       Paid-in     Retained    Comprehensive   Treasury   Shareholders'
(In thousands, except per share data)           Shares   Amount     Capital     Earnings        Income        Stock       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>      <C>         <C>               <C>       <C>            <C>    
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
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
     Net earnings                                    -       -            -      66,283            -              -         66,283
     Foreign currency translation adjustment         -       -            -           -          $24              -             24
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                           -       -            -      66,283           24              -         66,307
------------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock                             -       -            -           -            -        (92,028)       (92,028)
Common stock issued to ESOP and ESPP                 -       -           36           -            -            370            406
Exercise of options                                  -       -          (65)          -            -            213            148
Temporary equity                                     -       -      (81,809)          -            -              -        (81,809)
Cash dividends ($0.0475 per share)                   -       -            -      (1,777)           -              -         (1,777)
------------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1999                      40,479    $405     $ 63,431    $162,411          $24      $(114,242)      $112,029
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Avado Brands, Inc.

(In thousands)
<CAPTION>
For the fiscal years ended                                                      1998                1997                1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                  <C>                 <C>         
Cash flows from operating activities:
     Net earnings                                                           $  66,283              28,448              11,674
     Adjustments to reconcile net earnings to net cash
          provided by operating activities:
               Depreciation and amortization                                   23,221              39,972              26,250
               Deferred income taxes                                           (6,031)              3,905                 300
               (Gain) loss on disposal of assets                              (72,547)                 54                 107
               Income from investments carried at equity                       (1,025)                  -                   -
               Asset revaluation charges                                            -                   -              27,700
               (Increase) decrease in assets:
                    Accounts receivable                                          (141)             (2,441)             (1,062)
                    Inventories                                                (2,260)             (2,592)             (1,488)
                    Prepaid expenses and other                                  4,187              (1,980)             (1,837)
               Increase (decrease) in liabilities:
                    Accounts payable                                            3,655                 703               3,199
                    Accrued liabilities                                        (4,725)             (1,447)             (4,958)
                    Income taxes                                               28,091              (2,050)              4,668
                    Other long-term liabilities                                 2,309                 164                   -
------------------------------------------------------------------------------------------------------------------------------------
                         Net cash provided by operating activities             41,017              62,736              64,553
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Capital expenditures                                                    (142,841)           (172,963)           (124,623)
     Acquisition of businesses, net of cash acquired                           (2,658)           (146,444)                  -
     Proceeds from disposal of assets, net                                    373,814               5,798                 429
     Decrease in short-term investments                                            10                  15                 325
     Additions to investments carried at equity                               (15,057)                  -                   -
     Additions to other assets                                                (21,975)             (5,676)             (4,690)
------------------------------------------------------------------------------------------------------------------------------------
                         Net cash provided by (used in) investing activities  191,293            (319,270)           (128,559)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
     Net proceeds from (repayment of) revolving credit agreements            (114,726)            165,500             (11,000)
     Proceeds from issuance of preferred securities, net of issue costs             -             111,261                   -
     Proceeds from issuance of long-term debt                                       -                 823             121,880
     Principal payments on long-term debt                                      (8,500)               (865)            (19,756)
     Proceeds from issuance of common stock                                       148               2,914               3,215
     Dividends declared and paid                                               (1,777)             (1,524)             (1,168)
     Purchase of treasury stock                                               (92,028)            (22,995)            (30,048)
     Collateral payments on equity forward contracts                          (10,714)                  -                   -
------------------------------------------------------------------------------------------------------------------------------------
                         Net cash (used in) provided by financing activities (227,597)            255,114              63,123
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                            4,713              (1,420)               (883)
Cash and cash equivalents at the beginning of the period                        2,503               3,923               4,806
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period                          $   7,216               2,503               3,923
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
Avado Brands, Inc.

Note 1 - Summary of Significant Accounting Policies

     Avado Brands, Inc. (formerly Apple South, Inc.), including its wholly owned
subsidiaries (the "Company"),  is a multi-concept  restaurant  company operating
restaurants in 29 states plus the District of Columbia.  At January 3, 1999, the
Company operated 123 Don Pablo's Mexican Kitchen restaurants, 47 Hops Restaurant
Bar and Brewery restaurants,  23 McCormick & Schmick's seafood dinner houses, 19
Canyon  Cafe  restaurants  as well  as 44  Applebee's  Neighborhood  Grill & Bar
restaurants  which were held for sale.  The Company  owns all of its brands on a
proprietary basis except Applebee's, which is franchised. Avado Brands also owns
a 20% equity interest in Belgo Group PLC, a ten-unit  United Kingdom  restaurant
company,  and a 25% equity interest in 11 Harrigans  Grill and Bar  restaurants.

     Basis of Presentation - The consolidated  financial  statements include the
accounts of Avado Brands, Inc. and its wholly owned subsidiaries. Investments in
20% to 50% owned  affiliates  and  partnerships  are accounted for on the equity
method. All significant intercompany accounts and transactions are 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 53  weeks  ended  January  3,  1999
("fiscal  1998") and the 52-week periods ended December 28, 1997 ("fiscal 1997")
and December 29, 1996 ("fiscal 1996"). 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 brand
(Note 2).  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
30 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.  

     Franchise  Costs - In 1997 and 1996,  the costs related to  acquisition  of
Applebee's   franchises  were  amortized  over  their  estimated  useful  lives,
principally 20 years,  using the  straight-line  method.  At January 3, 1999 and

<PAGE>
December  28, 1997,  franchise  costs are included as a component of assets held
for sale in the consolidated  balance sheets (Note 2). The franchise  agreements
for the  Applebee's  restaurants  require  royalty fees equal to 4% of sales and
advertising  fees equal to 11/2% of sales.  Such fees are  expensed as incurred.
Total royalty and advertising  fees paid under  franchise  agreements were $18.4
million  in  1998,   $25.0   million   in  1997  and  $21.4   million  in  1996.

     Goodwill - Goodwill represents the excess of purchase price over fair value
of  net  assets  acquired  and is  amortized  over  the  expected  period  to be
benefitted,  typically 40 years, using the straight-line method.  Recoverability
of this intangible asset is determined by assessing  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 $5.9  million at
January 3, 1999 and $2.9 million at December 28, 1997. 

     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:  $5.0  million in 1998,  $4.7 million in 1997 and $4.0 million in 1996.

     Preopening  Costs  -  Preopening  costs  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.  AICPA  Statement of
Position 98-5,  "Reporting the Cost of Start-Up  Activities," was adopted at the
beginning  of 1998.  This  statement  requires  entities to expense the costs of
start-up  activities as incurred.  As a result of the adoption of this change in
accounting policy, from expensing  preopening costs in the first full month of a
restaurant's  operations  to  expensing  them as incurred,  a cumulative  effect
charge from the change in accounting principle of $2.2 million ($1.5 million net
of   tax   benefit)    was   recorded   in   the   first    quarter   of   1998.

     Advertising  -  Advertising  is  expensed  over the  period  covered by the
related  promotions.  Total  advertising  expense  included  in other  operating
expenses was $32.6  million in 1998,  $29.0 million in 1997 and $15.0 million in
1996,  in addition to amounts  paid to the  franchisor  of  Applebee's.  

     Foreign  Currency  Translation  -  Investments  in foreign  affiliates  are
translated into U.S. dollars at the period-end exchange rate, while net earnings
are  translated at the average  exchange  rate during the period.  The resulting
translation  adjustments are recorded as a separate  component of  shareholders'
equity   and   comprehensive   income.   

     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 14).

     Interest Rate Contracts - Interest rate contracts are used  principally for
the management of 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.  At January 3, 1999,  no  interest  rate swap  contracts  were
classified as trading instruments. 

<PAGE>
     Counterparties to interest rate contracts are major financial  institutions
with which the  Company  also has other  financial  relationships.  Exposure  to
credit  loss  exists in the  event of  nonperformance  by these  counterparties.
However,  the Company does not anticipate  nonperformance  by the other parties,
and no material loss would be expected from their nonperformance.

     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 1997 and
1996  financial  statements  to conform  with the 1998  classifications.  

Note 2 - Applebee's  Divestiture 

     In December 1997, the Company announced the decision to sell its franchised
Applebee's  restaurants  in order to focus  on the  development  of  proprietary
restaurant  concepts.  During 1998, the divestiture was substantially  completed
with  the  sale  of 233 of 279  Applebee's  locations  and  the  closing  of two
additional  locations.  Gross proceeds in 1998 totaled $434.8 million  including
$6.8 million in notes and other  amounts  due. The notes,  net of a $2.6 million
allowance,  are included in "Other assets" in the accompanying 1998 consolidated
balance  sheet.   

     "Gain  on  disposal  of  assets"  in  the  accompanying  1998  consolidated
statement of earnings  primarily  reflects the gain recognized on the Applebee's
divestiture. The unsold premises and equipment and franchise cost related to the
brand are  included in "Assets held for sale" in the  accompanying  consolidated
balance sheets.  Depreciation and  amortization on these long-lived  assets were
suspended in December 1997, when management finalized the decision to dispose of
the brand.  Sale of the  remaining  restaurants  is expected to be  completed in
early 1999.  

Note 3 - Asset Revaluation and Other Special Charges 

     In the fourth  quarter of 1998,  programs  were  initiated  at Don Pablo's,
Canyon Cafe and the Company's  corporate  headquarters to reorganize  management
and reduce  overhead  costs. A pre-tax charge of $2.9 million was recorded,  the
components  of which  related  primarily to employee  termination  and severance
costs.  At January 3, 1999,  the unpaid  portion of these charges ($1.8 million)
was included in "Accrued  liabilities"  in the  accompanying  1998  consolidated
balance sheet.  

     In 1996,  the Tomato Rumba's  operating  brand was dissolved and efforts to
sell   Hardee's   were   accelerated.   These   decisions,   combined  with  the
implementation of Statement of Financial  Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets to Be
Disposed Of," resulted in an asset revaluation  charge of $27.7 million.  Assets
related to these brands,  included as a component of assets held for sale in the
consolidated  balance  sheets,  were $0.5 million and $1.7 million at January 3,
1999 and  December 28, 1997,  respectively.  During 1998 and 1997,  Hardee's and
several Tomato Rumba's locations were sold,  several  additional  locations were
converted to other company  brands,  and the remaining  assets were  redeployed.

Note 4 - Investments and Acquisitions 

     In January 1998, the Company acquired,  for $6.1 million, a 20% interest in
Belgo  Group PLC  ("Belgo"),  a public  restaurant  company  based in the United
Kingdom that owned two Belgo restaurants in London. In 1998, Belgo completed two
transactions for the acquisition of five additional  restaurants.  In connection

<PAGE>
with these  acquisitions,  the Company  invested an  additional  $8.8 million to
maintain  its 20% equity  interest.  At  January 3, 1999,  the fair value of the
Company's investment in Belgo was approximately $31.0 million. Also in 1998, the
Company and Belgo entered into two 50/50 joint  ventures:  one to develop one of
the  Company's  proprietary  brands in Europe  and the  other to  develop  Belgo
restaurants  in the  Western  Hemisphere.  In  January  1999,  the  first  Belgo
restaurant in the United States was opened in New York City.

     In April 1998, the Company sold its Harrigans brand, receiving $3.0 million
in cash plus a $4.0  million  note and  retaining  a 25% equity  interest in the
ongoing  business.  The  transaction  resulted  in a $0.6  million  gain with an
additional  $4.0  million  gain,  related  to  the  note,  being  deferred.  The
investment is accounted for using the equity method of accounting.

     In July 1997, the Company acquired Canyon Cafes,  Inc.  ("Canyon Cafe") for
$46.3 million,  including  $33.6 million in cash, the issuance of 357,600 shares
of common stock and the  assumption  of  approximately  $7.5 million in debt.

     In March 1997, the Company  acquired Hops Restaurant Bar & Brewery ("Hops")
for $58.4  million,  which  included $16.3 million in cash, the issuance of 1.05
million shares of common stock and the assumption of approximately $28.9 million
in debt. 

     In March 1997,  the Company  acquired  McCormick  & Schmick  Holding  Corp.
("McCormick & Schmick's")  for $68.3 million,  including  $50.1 million in cash,
the  issuance  of  248,139   shares  of  common  stock  and  the  assumption  of
approximately  $15.0 million in debt. 

     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.  The aggregate
fair value of identifiable  assets  acquired and  liabilities  assumed was $68.0
million and $37.5  million,  respectively.  The  remaining  estimated  excess of
purchase  price over net assets  acquired  of $142.5  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 7),  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>
Note 5 - Premises and Equipment 

(Amounts in thousands) 
For fiscal year end                                             1998       1997
--------------------------------------------------------------------------------
Land                                                        $ 69,154     42,166
Buildings                                                    161,501    123,901
Equipment                                                     79,371     87,043 
Leasehold improvements                                        88,270     59,584
Construction in progress                                      23,628     19,234 
--------------------------------------------------------------------------------
Total premises and equipment                                 421,924    331,928 
Less accumulated depreciation and amortization                54,337     48,089 
--------------------------------------------------------------------------------
Premises and equipment, net                                 $367,587    283,839 
================================================================================


Note 6 - Long-Term Debt 

(Amounts in thousands)
For fiscal  year end                                            1998       1997
--------------------------------------------------------------------------------
Revolving  credit  agreements,  unsecured,  with
  variable rate interest (7.3% at January 3, 1999)          $140,500    255,000 
Senior notes, unsecured                                      116,500    125,000 
Other                                                            478      2,049 
--------------------------------------------------------------------------------
Total long-term debt                                         257,478    382,049
Less current maturities                                      140,500        206 
--------------------------------------------------------------------------------
Long-term debt, excluding current maturities                $116,978    381,843 
================================================================================


     At January 3, 1999,  revolving credit agreements  aggregated $162.0 million
of which $21.5 million was unused and available.  The agreements expire in March
through July of 1999, and as such,  the $140.5 million of revolving  obligations
have been classified as current  maturities.  The Company  anticipates  reducing
these   obligations   with  proceeds   received  from   Applebee's   divestiture
transactions  expected to be completed in 1999. Remaining revolving  obligations
are  expected  to be  replaced  prior to their  expiration  with the renewal and
expansion of long-term  revolving credit agreements.

     In 1996,  $125.0  million of 9.75%  senior notes were issued under a $200.0
million shelf  registration.  The notes are due March 2006 with interest payable
semi-annually.  In 1998,  the Company  repurchased  $8.5 million of these notes.

     Based on the borrowing rates  currently  available to the Company for loans
with similar terms and average  maturities,  the fair value of revolving  credit
agreements and other long-term debt  approximates the book value recorded.  Fair
value of the senior notes at January 3, 1999 was  estimated  as $109.8  million,
based on quoted market prices of the notes. 

     The aggregate annual  maturities of long-term debt for the years subsequent
to January 3, 1999 are as follows:  1999-$140.5  million and 2001-$0.5  million.
The $116.5 million  senior notes are due in 2006.

     Terms of the 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.  As  amended,  the  Company  was in  compliance  with the loan
provisions. 


<PAGE>
     During 1998 and 1997,  the Company was party to various  interest rate swap
agreements  with notional  amounts ranging from $75.0 million to $115.0 million.
At January 3, 1999,  two interest rate swap  agreements  with $100.0 million and
$115.0 million notional amounts were in place. The first agreement is a hedge of
U.S. LIBOR obligations relating to revolving credit facilities.  Under the terms
of the  agreement,  the Company pays an average of certain  foreign  LIBOR-based
variable  rates  (6.0% at  January  3,  1999) and  receives  a U.S.  LIBOR-based
variable  rate (5.2% at  January 3,  1999).  At  January  3, 1999,  the  Company
estimates that it would have paid  approximately  $1.0 million to terminate this
swap  agreement.  The other swap  agreement  relates to the 7.0% fixed  interest
obligation  on  the  Convertible   Preferred  Securities  (Note  7).  Under  the
agreement,  the Company pays an average of certain foreign LIBOR-based  variable
rates (5.9% at January 3, 1999) and  receives a 7.0% fixed  rate.  At January 3,
1999, the Company estim ates that it would have paid  approximately $2.8 million
to terminate this swap agreement. Under the terms of the agreement, however, the
swap terminates upon conversion of the Convertible  Preferred Securities with no
amounts due from either party. Amounts received on interest rate swap agreements
accounted  for as hedges  totaled $0.1 million in 1998 and $1.9 million in 1997.

Note 7 - Convertible Preferred Securities 

     In 1997, Avado Financing I (formerly 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 Avado Brands,
Inc. (the "Convertible  Debentures").  

     The  Convertible  Preferred  Securities  are  convertible  until 2027 at an
initial  rate of 3.3801  shares of Avado Brands  common stock for each  security
(equivalent  to a conversion  price of $14.793 per share).  A guarantee has been
executed with regard to the  Convertible  Preferred  Securities.  The guarantee,
when taken together with the obligations under the Convertible  Debentures,  the
indenture  pursuant to which the  Convertible  Debentures  were issued,  and the
declaration  of trust of Avado  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.  

Note 8 - Leases  

     Various leases are utilized for restaurant land,  buildings,  equipment and
office  facilities.  Land and building lease terms typically 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 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 $70.0 million (amended to $30.0 million
in 1998) master equipment lease agreement. The agreement provides for the rental
of  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 January 3, 1999,  $3.7
million of the $30.0 million commitment was unused and available. 

<PAGE>
     Future  minimum lease  payments  under  noncancelable  operating  leases at
January 3, 1999 are as follows (amounts in thousands):

1999                                                                   $ 20,192 
2000                                                                     21,036
2001                                                                     20,854
2002                                                                     20,621
2003                                                                     20,436
Later years                                                             105,169
--------------------------------------------------------------------------------
Total minimum payments                                                 $208,308 
================================================================================

     Total rental  expense  related to cancelable  and  noncancelable  operating
leases was $27.5  million in 1998,  $24.3  million in 1997 and $15.6  million in
1996. Rental expense included  contingent  rentals of $2.3 million in 1998, $1.0
million in 1997 and $0.9 million in 1996.

Note 9 - Accrued Liabilities 

(Amounts in thousands) 
For fiscal year end                                             1998       1997
--------------------------------------------------------------------------------
Payroll and related benefits                                 $13,584     15,060 
Insurance                                                      6,615      4,219
Gift certificates                                              4,797      3,926
Applebee's divestiture                                         2,948          - 
Acquisition costs                                              2,830      5,327
Property taxes                                                 2,659      4,293 
Other                                                          8,620      7,441
--------------------------------------------------------------------------------
                                                             $42,053     40,266 
================================================================================

Note 10 - Supplemental Cash Flow Information  

     The  following  supplements  the  consolidated  statements  of  cash  flows
(amounts in thousands):

                                                     1998       1997       1996 
--------------------------------------------------------------------------------
Interest paid                                     $25,739     20,452     10,728 
--------------------------------------------------------------------------------
Distributions on preferred securities               8,050      5,944          -
--------------------------------------------------------------------------------
Income taxes paid                                  14,487      9,022      1,415 
--------------------------------------------------------------------------------
Business acquisitions, net of cash acquired:  
  Fair value of assets acquired, other than cash        -     64,861          - 
  Liabilities assumed                               1,274    (37,504)         - 
  Merger consideration payable                          -     (1,890)         - 
  Stock issued                                          -    (21,492)         -
  Purchase price in excess of the net  
    assets acquired                                 1,384    142,469          - 
--------------------------------------------------------------------------------
Net cash used for acquisitions                    $ 2,658    146,444          - 
================================================================================

     The 1998 business acquisition reflects the buyout of several of Hops' joint
venture  partners.  As  discussed  in  Note  2, in 1998  the  Company  sold  233
Applebee's  restaurants.  The accompanying  consolidated  balance sheets reflect
changes in asset and  liability  accounts  related to the  divestiture  of these
restaurants  as follows:  decrease  in assets  held for sale of $281.3  million,
decreases  in  assets  not  classified  as held  for  sale of $5.5  million  and
increases in accrued liabilities of $2.9 million.

<PAGE>
Note 11 - Earnings Per Share Information 

     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
7) had been converted at the date of issuance.  In accordance with SFAS 128, all
prior-period earnings per share have been restated. The following table presents
a  reconciliation  of weighted  average  shares and earnings  per share  amounts
(amounts in thousands, except per share data):

                                                     1998       1997       1996
--------------------------------------------------------------------------------
Average number of common shares used 
  in basic calculation                             36,612     38,620     38,731 
Additional shares issuable pursuant to employee
  stock option plans at period-end market price         9        206        686
Shares issuable on assumed conversion of
  Convertible Preferred Securities                  7,774      6,101          -
--------------------------------------------------------------------------------
Average number of common shares used 
  in diluted calculation                           44,395     44,927     39,417
================================================================================
Earnings before cumulative effect of 
  change in accounting principle                  $67,744     28,448     11,674 
Cumulative effect of change in accounting  
  principle, net of tax                             1,461          -          -
--------------------------------------------------------------------------------
Net earnings                                       66,283     28,448     11,674
Distribution savings on assumed conversion 
  of Convertible Preferred Securities, net 
  of income taxes                                   5,415      4,336          -
--------------------------------------------------------------------------------
Net earnings for computation of diluted
  earnings per common share                       $71,698     32,784     11,674
================================================================================
Basic earnings before cumulative effect of 
  change in accounting  principle                  $ 1.85       0.74       0.30
Cumulative effect of change in accounting
  principle                                         (0.04)         -          -
--------------------------------------------------------------------------------
Basic earnings per common share                    $ 1.81       0.74       0.30
================================================================================
Diluted earnings before cumulative effect of 
  change in accounting principle                   $ 1.65       0.73       0.30 
Cumulative effect of change in accounting 
  principle                                         (0.03)         -          -
--------------------------------------------------------------------------------
Diluted earnings per common share                  $ 1.62       0.73       0.30 
================================================================================

<PAGE>
Note 12 - Income Taxes 

     The  components  of the  provision  for  income  taxes for the years  ended
January 3, 1999,  December  28, 1997 and  December  29,  1996  before  change in
accounting  principle are as follows  (amounts in thousands):  

                                                  Current    Deferred     Total 
--------------------------------------------------------------------------------
1998: 
  Federal                                         $36,035     (3,861)    32,174
  State                                             9,296     (2,170)     7,126 
--------------------------------------------------------------------------------
    Total                                         $45,331     (6,031)    39,300 
================================================================================
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
================================================================================

     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  January  3,  1999,
December 28, 1997 and December 29, 1996 follows:

                                                     1998       1997       1996 
--------------------------------------------------------------------------------
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            4.1        4.0        3.9
  FICA tip and targeted jobs tax credits             (3.4)     (10.1)      (2.2)
Nondeductible goodwill                                1.0        2.0          - 
Other, net                                              -        1.5       (0.1)
--------------------------------------------------------------------------------
Effective tax rate                                   36.7%      32.4%      35.9%
================================================================================

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax  liabilities  at January 3,
1999 and December 28, 1997 are presented below (amounts in thousands): 

                                                                1998       1997
--------------------------------------------------------------------------------
FICA tip credits not yet taken for federal
  tax purposes                                              $  2,392      5,772
Asset impairment and other charges recorded 
  for financial statement purposes but not
  yet taken for tax purposes                                  10,311      6,618
Other                                                          7,092        589 
--------------------------------------------------------------------------------
Total deferred tax assets                                     19,795     12,979 
--------------------------------------------------------------------------------
Depreciation and amortization taken for tax 
  purposes in excess of amounts taken for 
  financial reporting purposes                               (25,499)   (25,713)
Other                                                         (2,496)    (1,497)
--------------------------------------------------------------------------------
Deferred tax liability                                      $ (8,200)   (14,231)
================================================================================

<PAGE>
     A valuation  allowance  for deferred tax assets has not been recorded as of
January 3, 1999 or December 28, 1997. 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 13 - Interest Expense

     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): 
            
                                                     1998       1997       1996 
--------------------------------------------------------------------------------
Interest cost capitalized                         $ 1,426      2,509      1,572
Interest cost expensed                             25,313     20,504     11,348 
--------------------------------------------------------------------------------
Total interest incurred                           $26,739     23,013     12,920 
================================================================================

Note 14 - Stock Option Plans 

     The 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  3,600,000  shares,  respectively,  of common  stock of the  Company  to key
officers,  directors and employees.  Generally,  options awarded under the 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 ten years,
and expire ten 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 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 the Company's 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.


<PAGE>     
     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
diluted  earnings per share would have been reduced by $0.6 million or $0.01 per
share in 1998, $2.3 million or $0.05 per share in 1997 and $2.1 million or $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 1998 is
estimated as $7.37 on the date of grant using the  Black-Scholes  option-pricing
mod el with the following assumptions:  dividend yield 0.33%, volatility of 50%,
risk-free  interest  rate of 5.0% and an  expected  life of 6.7  years.  Further
information relating to total options is as follows:

                                                                        Average
                                                            Shares       Price
--------------------------------------------------------------------------------
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 
Granted in 1998                                              183,425      13.15
Exercised in 1998                                            (15,885)      9.42 
Canceled in 1998                                          (1,149,880)     17.10 
--------------------------------------------------------------------------------
Outstanding at January 3, 1999                             2,015,790     $16.60
================================================================================

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

                         Options Outstanding               Options Exercisable
                 ----------------------------------    -------------------------
                             Average      Average                    Average
Exercise                    Remaining     Exercise                   Exercise
Price Range       Shares      Life         Price        Shares        Price
--------------------------------------------------------------------------------
$ 5.01-$10.00      9,375    9.5 years     $ 8.63           375       $ 8.33
$10.01-$15.00    937,013    8.0 years      13.45        45,653        12.77
$15.01-$20.00    694,390    5.6 years      18.23       116,300        17.26
$20.01-$25.00    334,464    7.0 years      21.18        27,847        21.16
$25.01-$30.00     40,548    7.0 years      25.48           900        25.25
--------------------------------------------------------------------------------
Total          2,015,790    7.0 years     $16.60       191,075       $16.78
================================================================================

Note 15 - Employee Benefit Plans

     A  noncontributory  Employee  Stock  Ownership  Plan  (the  "Plan")  covers
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. Contribution expense related to the Plan was $0.5 million in 1998, $0 in
1997 and $0.3 million in 1996.  

<PAGE>
     The Avado  Brands,  Inc.  Profit  Sharing  Plan and Trust,  established  in
accordance  with Section 401(k) of the Internal  Revenue Code,  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.  Matching  funds vest at the rate of 20% each year,  beginning
after three years of service.  Company  contributions were $0.4 million in 1998,
$0.5 million in 1997 and $0.4 million in 1996. 

     Note 16 - Shareholders' Equity 

     The  Board  of  Directors,  from  time  to time  and  depending  on  market
conditions,  authorizes  the  purchase of common  shares.  In 1998,  the Company
purchased 7.3 million  shares of its common stock for $92.0  million,  including
one of the equity forward  contracts  discussed  below.  

     In 1998,  third  parties  purchased  a total of 8.3  million  shares of the
Company's  common  stock at an  average  price per  share of $13.36  (or a total
acquisition cost of $110.9 million)  pursuant to four equity forward  contracts.
Upon expiration of the agreements, the Company has the option to (i) acquire the
shares at the third parties' average acquisition cost as described above or (ii)
instruct  the third  parties  to sell the stock in the market and settle in cash
any  appreciation  or  depreciation in the market value of the stock at the sale
date compared to the acquisition cost described above. Any such  appreciation or
depreciation in the value of the shares will be reflected in equity and will not
impact net earnings.  One of these  contracts for 2.0 million shares was settled
in December  1998,  and the Company  exercised its option to acquire the related
shares for $29.9 million.  At January 3, 1999,  three equity  forward  contracts
covering 6.3 million  shares were pending  settlement.  The third parties' total
acquisition  price for these  shares of $81.8  million,  net of a $10.7  million
collateral  deposit  made by the Company  with a third  party,  is  reflected as
"Temporary  equity,  net" in the 1998 consolidated  balance sheet. The remaining
contracts expire in March through July of 1999.

Note 17 - 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 on estimates of the aggregate
liability for claims incurred. 

     The  Company  is  contingently  liable for  letters  of credit  aggregating
approximately  $4.3  million and is  co-guarantor  of a $5.0  million  revolving
credit facility  relating to one of its joint ventures with Belgo. At January 3,
1999,  $1.0 million was  outstanding  under this  facility.  

     In connection with Applebee's  divestiture  transactions  completed  during
1998, the Company remains  contingently liable for lease obligations relating to
67 restaurants.  Assuming that each respective  purchaser became  insolvent,  an
event management believes to be highly unlikely, the Company could be liable for
lease payments extending through 2035 with minimum lease payments totaling $48.0
million.  In the event of default,  the franchisor has the contractual  right to
assume the obligations under the leases. In the event the Company becomes liable
for any such obligations,  it may have certain rights to the leased  properties.
Management   believes  that  the  ultimate   disposition  of  these   contingent
liabilities  should  not  have  a  material  adverse  effect  on  the  Company's
consolidated financial position or results of operations.

     In 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

<PAGE>
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 sought damages and other relief. In 1998, one of these suits was
dismissed.  Although the ultimate  outcome of the  remaining  lawsuit  cannot be
determined at this time, 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  should not have a material  adverse effect on the
Company's  consolidated  financial  position or results of  operations.  

Note 18 - Related Party Transactions  

     In 1998,  the  Board of  Directors  approved  loans  to  certain  executive
officers of the Company.  At January 3, 1999, the Company held notes  receivable
from the Chief Executive Officer,  totaling $7.9 million. The principal balances
of the notes are due in November  and December of 2000 or earlier upon demand of
the Company and bear  interest  at 7.0% per annum with  interest  payment due at
maturity.  The Company  also holds  notes  receivable  from two other  executive
officers  totaling  $0.1  million.  The notes are due in October and November of
1999 and bear interest at 5.06% per annum with interest payment due at maturity.

Note 19 - Quarterly Financial Data (unaudited) 

(In thousands except             First    Second    Third     Fourth     Total 
  per share data)               Quarter   Quarter  Quarter    Quarter     Year 
--------------------------------------------------------------------------------
1998:
  Restaurant sales             $241,676   239,843   204,442   176,731   862,692 
  Gross profit(1)              $ 95,711    95,136    79,965    70,917   341,729 
  Net earnings (loss)(2)       $ 38,539     6,325    24,438    (1,558)   67,744
  Basic earnings (loss) 
    per share(2)               $   0.99      0.17      0.67     (0.05)     1.85
  Diluted earnings (loss)
    per share(2)               $   0.85      0.17      0.58     (0.05)     1.65 
1997:
  Restaurant sales             $171,453   202,889   215,739   218,239   808,320
  Gross profit(1)              $ 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
--------------------------------------------------------------------------------

     (1) 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.

     (2)Amounts  are  presented  before  the  cumulative  effect  of  change  in
accounting principle related to preopening expenses.

<PAGE>
Report of Management
Avado Brands, Inc.

     The  management  of  Avado  Brands,  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 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  weaknesses in internal  controls have been
brought to the  attention  of  management.

     The Company  assessed its internal control system as of January 3, 1999, 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 January 3, 1999, 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
and Chief Executive Officer

/s/ Erich J. Booth
---------------------------
Erich J. Booth
Chief Financial Officer
and Corporate Treasurer

<PAGE>
Independent Auditors' Report

The Board of Directors
Avado Brands, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheets of Avado
Brands,  Inc.  as of January 3, 1999 and  December  28,  1997,  and the  related
consolidated  statements  of earnings,  shareholders'  equity and  comprehensive
income  and cash  flows for each of the  years in the  three-year  period  ended
January  3, 1999.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated 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  financial  position of Avado
Brands,  Inc. at January 3, 1999 and December 28, 1997, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  January  3,  1999,  in  conformity  with  generally  accepted  accounting
principles.

     As discussed in Note 1 to the consolidated  financial  statements,  in 1998
the  Company  adopted  the  provisions  of AICPA  Statement  of  Position  98-5,
"Reporting the Cost of Start-Up Activities."

KPMG LLP

Atlanta, Georgia
January 29, 1999


<PAGE>
Corporate and Shareholder Information
Avado Brands, Inc.

Corporate Headquarters
Avado Brands, Inc.
Hancock at Washington
Madison, GA 30650
Telephone: (706) 342-4552

Independent Auditors
KPMG LLP 
303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308

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

Annual Meeting
The Annual Meeting of Shareholders is scheduled at 11:00 a.m.,  Tuesday,  May 4,
1999, to be held at the offices of the Company in Madison, Georgia.

Form 10-K
A copy of the  Company's  Annual  Report on Form 10-K for the fiscal  year ended
January  3,  1999 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 
Tony Shaffer, Director of Investor Relations  
Hancock at Washington   
Madison, GA 30650
Telephone: (706) 342-4552    
Facsimile: (706) 342-9283 
E-mail:    tshaffer@corp.avado.com  

Investor  Information 
The  Company's  common stock and convertible  preferred securities are traded on
the  Nasdaq  Stock  Market  (National  Market)  under  the  symbols  "AVDO"  and
"AVDOP,"  respectively.  A list of the brokerage  firms  publishing  research on
Avado  Brands is  available  upon  request by  calling  the  Investor  Relations
department or writing Investor Relations. 

Shareholder Information 
As  of  March  1,  1999,  there were  approximately  17,000  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.

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 Avado Brands 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 your stock certificates
in your own name so communications with you are direct and more expedient.

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

                                                                High        Low
--------------------------------------------------------------------------------
1998 
  First Quarter                                               $15.44     $10.50
  Second Quarter                                              $16.00     $12.44 
  Third Quarter                                               $15.44     $10.88
  Fourth Quarter                                              $11.13     $ 7.00 
1997 
  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  shows  cash  dividends  declared per share on the Company's
common stock:

Quarter ended                                        1998       1997       1996 
--------------------------------------------------------------------------------
March                                             $0.0100      0.008      0.006
June                                               0.0125      0.010      0.008
September                                          0.0125      0.010      0.008 
December                                           0.0125      0.010      0.008 
--------------------------------------------------------------------------------
Total                                             $0.0475      0.038      0.030
================================================================================