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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    ---------
                                    FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
    ACT OF 1934 [FEE REQUIRED] for the fiscal year ended December 28, 1997
                                       OR
[ ] TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE  SECURITIES  EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

          For the transition period from ____________ to ______________

                         Commission file number 0-17980

                            RALLY'S HAMBURGERS, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                      62-1210077
   (State or other jurisdiction of                       (I.R.S. Employer
   incorporation or organization)                       Identification No.)

   600 Cleveland Street, Eighth Floor, Clearwater, Florida     33755
         (Address of principal executive offices)           (Zip Code)

       Registrant's telephone number, including area code: (813) 441-3500
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                                                                                             Name of Each Exchange
                                                                   Title of Class             on which Registered
                                                                ----------------------    ----------------------------
<S>                                  <C>                        <C>                       <C>
   Securities registered pursuant to 12(b) of the Act:          9 7/8% Senior Notes       New York Stock Exchange
                                                                due 2000
   Securities registered pursuant to 12(g) of the Act:          Common Stock, par         NASDAQ -- NMS
                                                                value $.10 per share
   Securities registered pursuant to 12(g) of the Act:          Common Stock              NASDAQ -- NMS
                                                                Purchase Warrants
</TABLE>

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

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

     The number of shares outstanding of the Registrant's Common Stock as of
March 16, 1998, was 24,836,900 shares. The aggregate market value of the shares
of Registrant held by non-affiliates of the Registrant, based on the closing
price of such stock on the National Market System of the NASDAQ Stock Market, as
of March 16, 1998, was approximately $30,306,518. For purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.

     Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.

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<PAGE>

                                TABLE OF CONTENTS

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                                                                                                           Page No.
                                                                                                           --------
PART I
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<S>       <C>                                                                                                 <C>
     Item 1.      Business.....................................................................................3

     Item 2.      Properties...................................................................................9

     Item 3.      Legal Proceedings...........................................................................10

     Item 4.      Submission of Matters to a Vote of Security Holders.........................................11

PART II
-------

     Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters.......................11

     Item 6.      Selected Consolidated Financial Data........................................................12

     Item 7.      Management's Discussion and Analysis of Financial Condition and Results of Operations.......13

     Item 7A.     Quantitative and Qualitative Disclosures about Market Risk..................................21

     Item 8.      Financial Statements and Supplementary Data.................................................22

     Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.......45

PART III
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     Item 10.     Directors, Executive Officers, Promoters and Control Persons of the Registrant..............45

     Item 11.     Executive Compensation......................................................................45

     Item 12.     Stock Ownership of Principal Holders and Management.........................................45

     Item 13.     Certain Relationships and Related Transactions..............................................45

PART IV
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     Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................45

</TABLE>

                                       2
<PAGE>
                                     PART I


Item 1.    Business

General

     Rally's Hamburgers, Inc. and its subsidiaries are collectively referred to
herein as the context requires as "Rally's" or the "Company". See Note 1 to
Consolidated Financial Statements.

     Rally's is one of the largest chains of double drive-thru restaurants in
the United States. At December 28, 1997, the Rally's system included 477
restaurants in 18 states, primarily in the Midwest and the Sunbelt, comprised of
229 Company-owned and operated and 248 franchised, including 27 Company-owned
restaurants in Western markets which are operated as Rally's restaurants by CKE
Restaurants, Inc. ("CKE"), a significant shareholder of the Company, under an
operating agreement which began July 1996. Two additional Company-owned stores
covered by the operating agreement have been converted to the Carl's Jr. format
and are not included in the above store count. The Company's restaurants offer
high quality fast food. The Company primarily serves the drive-thru and take-out
segments of the quick-service restaurant industry. The Company opened its first
restaurant in January 1985 and began offering franchises in November 1986. See
"Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Cautionary Statement

     Information provided herein by the Company contains, and from time to time
the Company may disseminate material and make statements which may contain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). These cautionary statements are being
made pursuant to the provisions of the Act and with the intention of obtaining
the benefits of the "safe harbor" provisions of the Act. The Company cautions
investors that any forward-looking statements made by the Company are not
guarantees of future performance and that actual results may differ materially
from those in the forward-looking statements as a result of various factors,
including but not limited to, the following:

         (i)  The Company competes with numerous well established competitors
              who have substantially greater financial resources and longer
              operating histories than the Company. Competitors have
              increasingly offered selected food items and combination meals,
              including hamburgers, at discounted prices, and continued
              discounting by competitors may adversely affect revenues and
              profitability of Company restaurants.

         (ii) The Company will be negatively impacted if the Company is unable
              to reverse declining same store sales. Sales increases will be
              dependent, among other things, on the success of Company
              advertising and promotion of new and existing menu items. No
              assurances can be given that such advertising and promotions will
              in fact be successful.

The Company may also be negatively impacted by other factors common to the
restaurant industry such as changes in consumer tastes, away from red meat and
fried foods; increases in the costs of food, paper, labor, health care, worker's
compensation or energy; an inadequate number of hourly paid employees; and/or
decreases in the availability of affordable capital resources.

Recent Acquisitions

     On December 18, 1997, the Company acquired approximately 19.1 million
shares (the "Checkers Shares") of the common stock, $.001 par value per share
(the "Checkers Common Stock"), of Checkers Drive-In Restaurants, Inc., a
Delaware corporation ("Checkers"), pursuant to that certain Exchange Agreement,
dated as of December 8, 1997 (the "Exchange Agreement"), between Rally's, CKE
Restaurants, Inc, ("CKE"), Fidelity National Financial, Inc. ("Fidelity"), GIANT
GROUP, LTD. ("GIANT") and the other parties named in the Exchange Agreement.

     Checkers owns, operates and franchises approximately 477 double drive-thru
restaurants primarily in the Southeast and Mid-Atlantic regions. CKE, Fidelity
and GIANT beneficially owned approximately 23.9%, 12.7% and 15.2%, respectively,
of the Rally's Common Stock outstanding prior to the consummation of the
Exchange Agreement and, as a result of the exchange, as of December 28, 1997,
beneficially own approximately 32.5%,


                                       3
<PAGE>

12.6% and 12.8%, respectively. In addition, Terry Christensen, William Foley II,
Burt Sugarman and C. Thomas Thompson, who are directors of Rally's and Checkers,
and David Gotterer and Andrew Puzder, who are directors of Rally's, participated
in the exchange. Mary Hart Sugarman, AJ Sugarman and Al Sugarman, who also
participated in the exchange, are related to Burt Sugarman.

     In consideration of the acquisition of the Checkers Shares, Rally's issued
3,909,336 shares of its common stock, $.10 par value per share (the "Rally's
Common Stock"), and 45,667 shares of its Series A Participating Preferred Stock,
$.10 par value per share (the "Rally's Preferred Stock"), the terms of which are
set forth in Exhibit B to the Exchange Agreement. The Rally's Preferred Stock
will be converted into 4,566,700 shares of Rally's Common Stock upon approval of
such conversion by Rally's stockholders. The exchange ratio used to determine
the number of shares of Rally's Common Stock (including upon conversion of the
Rally's Preferred Stock) received pursuant to the Exchange Agreement was based
upon the average closing price of the Checkers Common Stock and the Rally's
Common Stock for the five trading days preceding the public announcement of the
proposed exchange on September 22, 1997.

     Effective November 30, 1997, Rally's and Checkers entered into a management
services agreement pursuant to which Checkers is providing key services to
Rally's, including executive management, financial planning and accounting,
franchise, purchasing and human resources. In addition, Rally's and Checkers
share certain of their executive officers, including the Chief Executive Officer
and the Chief Operating Officer. Management believes that Rally's acquisition of
the Checkers Common Stock, entering into the Management Services Agreement and
sharing certain executive officers will enable Rally's and Checkers to take
advantage of cost savings opportunities by facilitating the combination of
administrative and operational functions. See "Employees" below, "Item 2.
Properties," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 4 to the Consolidated Financial
Statements set forth under "Item 8. Consolidated Financial Statements and
Supplementary Data."

Concept and Strategy

     The Company's primary strategy is to serve the drive-thru and take-out
segment of the quick-service restaurant industry. The Company's operating
strategy is to take advantage of off-premise food consumption by serving a
limited menu consisting of a variety of great tasting burgers with limited side
items. The key elements of this strategy are Rally's operating system,
restaurant design, brand positioning and marketing program.

     Rally's Operating System. The Rally's operating system is designed to
provide fast and accurate service of high quality fast food. Within the
restaurants, all products are prepared to order in a systematic fashion moving
from the back of the restaurant to the front windows with each employee
performing specific duties. Labor is staffed in an attempt to courteously serve
guests within 45 seconds of their reaching the drive-thru window and to maintain
a safe, clean food service environment. The Company's training and franchise
support programs are designed to promote consistency of product and service
throughout the Rally's system and are documented in a uniform confidential
operations manual.

     The Company installed computer-based point of sale devices and related
software in each of its Company-owned restaurants in 1993 and 1994. This
software allows Rally's to centralize control over certain aspects of restaurant
operations at the corporate office on a daily basis. As a result, menu prices
and menus can be controlled and transactions reviewed and audited at corporate
headquarters.

     The computer-based point of sale devices are coupled with a back office
computer to monitor sales, assist inventory management, maintain cash control,
provide variance reporting, and control labor and food costs. Each restaurant
transmits its data via a daily polling procedure, and it is accumulated at the
principal offices of the Company. This data is used to analyze and make
decisions about the business. Many computer systems using two-digit fields to
store years must be converted to read four-digit fields before the turn of the
century in order to recognize the difference between the years 1900 and 2000.
The Company's software system will be upgraded or replaced in time to meet the
Year 2000 requirements at a cost estimated at approximately $300,000.

     Restaurant Design and Economics. Rally's restaurants present a distinctive
design which conveys a message of "clean and fast" to the passing motorist. The
restaurants' typical "double drive-thru" design features drive-thru windows on
both sides of the restaurant for quicker service. While the restaurants
generally do not have an interior dining area, most have a patio for outdoor
eating. These areas contain canopy tables and seats and are landscaped to create
an attractive eating environment. Rally's restaurant buildings average 600 to
720 square feet depending

                                       4

<PAGE>

upon geographic location and require less property than the traditional eat-in
restaurants. As a result of the small size of the restaurant building, Rally's
restaurants generally require a smaller capital investment and have lower
occupancy and operating costs per restaurant than traditional dine-in fast
feeders. The size of the facility also permits somewhat greater flexibility with
respect to the selection of prospective sites for restaurants.

     During 1997, the Company opened nine new restaurants, re-opened three
restaurants and acquired 11 restaurants from franchisees and sold one restaurant
to a franchisee. The incremental cash outlay, exclusive of land, of opening
these restaurants was reduced due to the substantial use of surplus assets as
well as to the types of restaurants constructed (stick versus modular versus
conversions of pre-existing restaurants). In total, the incremental cash outlay,
exclusive of land, of these restaurants was approximately $4.8 million.

     In 1994, the full development cost associated with constructing and opening
a Rally's restaurant (excluding land cost and interest on construction) was
approximately $478,000. When purchased, the majority of real estate sites have
cost between $100,000 and $300,000. As of December 28, 1997, approximately 69%
of Company-owned and operated restaurants were located on leased real estate.

     Over the past two years, the Company has been building stores by either
using surplus equipment and/or surplus modular buildings or purchasing
conversion properties. When using surplus equipment and modular buildings, the
Company's cash outlay has typically been approximately $250,000. Although the
Company expects to continue to use excess modular buildings and seek additional
conversion opportunities, the Company estimates that the cost associated with
new store development will return to the higher pre-slowdown levels where these
alternatives are not practical.

     During 1997, the Company initiated a test of an indoor seating environment
where a 20 to 50 seat dining room replaced the passenger side drive-thru lane.
As of March, 1998, five units were converted from a double-drive-thru format to
a single drive-thru/indoor seating format. The Company plans to continue testing
this design with a goal of engineering the costs down in order to achieve an
attractive economic return.

Brand Positioning: The Best Burger. Rally's is attempting to establish an
overall brand positioning as the fast food hamburger chain which serves the best
tasting hamburger in America. This positioning is supported by:

         1.   A limited menu of high quality hamburgers/cheeseburgers, chicken
              sandwiches, french fries and soft drinks, executed via a highly
              focused operating system.
         2.   Television, radio and outdoor advertising which differentiates
              Rally's from other fast food hamburger chains and targets heavy
              hamburger users.
         3.   New, visually attractive menu boards, merchandising and packaging
              that feature these high quality products/brands and ingredients.

     This new brand positioning continues to represent a strategic shift for
Rally's away from its prior positioning which had been based primarily on low
prices and quick service. Good value and quick service are still important to
guests, but the competitive environment has become so price oriented that basing
a brand positioning on low prices is not unique enough to differentiate Rally's
from its competitors. Further, relying too heavily on low prices and price
promotion had a negative financial impact on the Company, causing higher costs
as a percentage of sales and lower profits. By focusing the brand positioning on
what Rally's believes guests really want from a quick service hamburger
restaurant and on what Rally's can effectively provide - great tasting burgers -
Rally's believes that it will be able to effectively differentiate itself from
its competitors and improve its sales and guest count trends over time.

     This shift in Rally's brand positioning began at the end of 1996 and
resulted in an increase in the size of its hamburger patty from 2.8 ounces to
3.2 ounces, a reformulation of its spice profile and the addition of two new
signature burgers to its product line - The Super Double and the Barbecue Bacon
Cheeseburger (single and double). These new products, along with a bigger
Rallyburger(R) and Big Buford(TM) double cheeseburger, currently represent the
core burger line-up. Additionally, the Company offers its One of a Kind
Fries(R), a chicken breast sandwich, onion rings, Coca-Cola(R) brand soft drinks
and milk shakes. A limited number of additional products may be offered in some
locations from time to time.

     Marketing Program. Rally's plans to introduce a new advertising campaign in
all Company markets in April, 1998 to support the new brand positioning. The
campaign will be based on strategic market research, which confirms the consumer
appeal of "best tasting burger." This new advertising was created by the
Company's

                                       5
<PAGE>

advertising agency, M&C Saatchi, New York, who were assigned the account in
December, 1997. The new advertising campaign will rely heavily on television as
the primary medium. In cases where effective levels of television are not
affordable, the Company may use radio, outdoor or print advertising.

Working Capital

     The Company's working capital requirements are generally typical of
companies within the quick-service restaurant industry. The Company does not
normally require large amounts of working capital to maintain operations since
sales are for cash, purchases are on open accounts and meat and produce
inventories are limited to a two to four day supply to assure freshness. During
1996 and 1997, the Company's working capital requirements were substantially
reduced as a result of significant slowdowns in new store construction as
compared with prior years. Additionally, sales of certain assets held for sale,
net of underlying encumbrances, provided another source of working capital.
Additional working capital could be required for the addition of indoor dining
areas to existing units if the Company decides to expand this concept beyond the
five units currently in test. See "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Franchising Program; Area Development Rights

     The Company offers area development agreements to franchisees for
construction of one or more new restaurants over a defined period of time within
a defined geographic area. The specific restaurant locations selected by
franchisees are subsequently covered by separate franchise agreements. Under the
standard area development agreement, a franchisee is generally required to pay,
at the time the agreement is signed, a non-refundable fee of approximately
$5,000 per potential restaurant in the defined geographic area. The number of
potential restaurants is determined by negotiation between the Company and the
franchisee. The Company's standard area development agreement also provides for
a franchise fee of approximately $15,000 for each restaurant, which is due when
the franchise agreement with respect to a restaurant is executed. The standard
franchise agreement is for a term of 15 years and provides for payment to the
Company of royalties equal to 4% of sales and minimum marketing expenditures of
4% of sales (1/2% of which is paid to the Rally's National Advertising Fund).
The Company requires each franchisee to have an approved full-time Principal
Operator who is responsible for the supervision and conduct of the franchise. As
of December 28, 1997, the Company had 39 franchisees operating 221 restaurants
(exclusive of the CKE-operated restaurants), representing approximately 46.3% of
all systemwide restaurants. Approximately five of these franchisees operate 32
restaurants in Western markets that are in designated market areas ("DMA's")
where Carl's Jr. has previously run commercials that were used by the Company in
1997. These Rally's stores were not be able to utilize the marketing material
that the Company received from Carl's Jr. as part of the marketing-sharing
agreement. The Company has reached an agreement in principle with these
franchisee groups which would provide these franchisees additional funding and
flexibility to allow them to continue to effectively compete without having
access to the above referenced marketing materials.

Expansion Strategy

     The Company currently intends to open approximately two new restaurants in
an existing Company market in 1998. Currently, franchisees are expected to open
approximately 10 locations during 1998.

     There can be no assurance that the Company or its franchisees will be able
to open planned new restaurants or that, if opened, these restaurants can be
operated profitably. The Company has pursued and intends to continue to pursue
an expansion strategy, which may include addition of indoor seating to existing
units. These strategies depend upon a number of factors, some of which are
beyond the control of the Company. Such factors include the availability and
cost of suitable locations, the hiring, training and retention of skilled
management and other personnel, the availability of adequate financing and the
selection of viable franchisees. The Company may also make selective
acquisitions, depending on, among other factors, the availability of suitable
acquisition prospects and appropriate financing. There can be no assurance that
the Company will be able to build additional indoor dining facilities, acquire
additional restaurants, or that this growth would add profits to the Rally's
system. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."

                                       6
<PAGE>

Restaurant Locations

     The following table sets forth the number of restaurants in the Rally's
system at December 28, 1997 by state:
<TABLE>
<CAPTION>

                  Company-owned and operated Restaurants (229)
<S>            <C>                                     <C>                             <C>
       Alabama (14)                           Kentucky (31)                       Ohio (23)
       Arkansas (10)                          Louisiana (22)                      Tennessee (9)
       Florida (17)                           Michigan (37)                       Virginia (13)
       Indiana (23)                           Missouri (30)

       Franchised Restaurants (including CKE - operated restaurants) (248)

       Alabama (1)                            Indiana (25)                          Ohio (85)
       Arizona (9)                            Kentucky (15)                         Pennsylvania (3)
       California (50)                        Louisiana (5)                         Tennessee (4)
       Florida (1)                            Michigan (20)                         Virginia (8)
       Georgia (7)                            Mississippi (4)                       West Virginia (4)
       Illinois (4)                           Missouri (3)
</TABLE>

Site Selection and Construction

     The Company believes that the location of a Rally's restaurant is very
important to its success. In evaluating particular sites, the Company uses
demographic data related to quick-service restaurant sales. Sites proposed for
both Company-owned restaurants and franchised restaurants must be accepted by a
committee comprised of most members of the Company's senior management team. The
committee considers, among other factors, the accessibility, visibility, cost,
surrounding traffic patterns and population characteristics of each potential
site.

     The Company has prototype plans and approved suppliers for the construction
of its restaurants. Since 1990, the Company has increasingly used modular
buildings. Prior to that time, "stick" (constructed on-site) buildings were used
almost exclusively.

Purchasing

     Franchisees are required to purchase their equipment, food, beverages and
supplies from Company-approved suppliers. All products must meet specifications
set by the Company, and management continually monitors the quality of the food,
beverages and supplies provided to the restaurants. The Company negotiates
directly with wholesale suppliers to ensure consistent quality and freshness of
products throughout the Rally's system and believes that it has obtained
competitive pricing from its suppliers. The Company currently has approximately
33 major food and paper suppliers and 15 distributors. During the year, the
Company continued participating with related parties in attempting to leverage
aggregate purchase volumes of common items to obtain more favorable pricing. The
Company expects these efforts will continue in the future.

Restaurant Staffing and Training; Franchise Support

     A typical Rally's restaurant, during peak hours, is staffed with 8 to 12
team members, with a manager generally on the premises at all times. The
function of assuring that each Company-owned restaurant consistently delivers
high-quality food and service is performed by Area Managers. Area Managers
report to Regional Vice Presidents. Regional Vice Presidents, Area Managers and
restaurant management are compensated with a fixed salary plus a bonus based on
the performance of the restaurants under their supervision. On average, the
Company has one Area Manager for every 5 to 10 Company restaurants and 8 to 11
Area Managers for each of the three Regional Vice Presidents. The Regional Vice
Presidents report to the Chief Operating Officer.

     The Company believes that training is important to the success of its
restaurant operations. The Company's training programs emphasize quality food
preparation, quick service, cleanliness of restaurants, courteous employees and
consistency of execution.

                                       7
<PAGE>

     All General Managers of Company-owned restaurants are required to complete
the Company's training program, which generally consists of five weeks of
hands-on training. The designated operating partner of each franchisee is
required to receive similar training, generally 12 weeks in duration. All
Company and franchise General Managers must generally complete an intensive
six-day "Train the Trainer" program before being certified to train management
personnel in their respective markets. The certification process takes
approximately 30 days to complete. In addition, the Company sends a training
team consisting of both management and hourly workers to a new franchisee's
first three restaurant openings for a duration of up to two weeks (one week
before and one week after the opening). After a new franchisee opens three
restaurants, the Company provides this training team as it deems necessary, or
upon the franchisee's request at the franchisee's expense.

     The Company has six Franchise Business Managers, each of whom acts as a
link between the Company and its franchisees. The Franchise Business Managers
perform regularly scheduled restaurant operation evaluations to ensure that each
franchised restaurant consistently delivers high quality food and fast, friendly
service in a clean environment. They also review the financial results and
effectiveness of franchise restaurant management to identify possible areas of
improvement.

Competition

     The quick-service restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, traffic patterns,
consumer concerns about the nutritional quality of quick-service food and
increases in the number and particular locations of competing quick-service
restaurants. Factors such as inflation, increases in food, labor (including
health care costs) and energy costs and the availability of an adequate number
of hourly-paid employees also affect the quick-service restaurant industry.
Major chains, which have substantially greater financial resources and longer
operating histories than the Company, dominate the quick-service restaurant
industry. The Company believes that its primary competitors are five national
chains: McDonald's, Wendy's, Hardee's, Burger King and Taco Bell. In certain
markets, the Company competes with other quick-service double drive-thru
hamburger chains with operating concepts similar to the Company. Certain of the
major chains have increasingly offered selected food items and combination
meals, including hamburgers, at discounted prices. The Company believes that the
pricing strategies of its competitors, in general, had an adverse impact on the
Company's systemwide sales in the last three fiscal years. The pricing or other
marketing strategies of one or more of these competitors could have a continuing
adverse impact on the Company's performance.

     With respect to the sale of franchises, the Company competes with many
franchisors of restaurants, including other double drive-thru franchisors, and
franchisors of other business concepts. The Company believes it has attracted a
number of franchisees with significant experience in the restaurant industry as
a result of the strength of its concept and operating strategy and the favorable
potential return available from a relatively low capital investment.

     In general, there is active competition for management personnel, capital
and attractive commercial real estate sites suitable for restaurants.

Employees

     As of March 24, 1998, the Company employed approximately 5,500 employees,
including approximately 11 corporate personnel. On November 30, 1997, the
Company entered into a Management Services Agreement, pursuant to which certain
of the management of Checkers will manage certain operations of the Company.

     Most employees, other than restaurant management and certain corporate
personnel, are paid on an hourly basis. The Company believes that it provides
working conditions and wages that are comparable with those of other companies
within the quick-service restaurant industry. The Company's employees are not
covered by a collective bargaining agreement.

Trademarks and Service Marks

     The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its principal logo Rally's Hamburgers(R) and its design with the U.S.
Patent and Trademark Office (the "PTO") on the Principal Register as a service
mark for its restaurant services. The Company registered One of a Kind Fries(R)
with the PTO on the Principal Register as a trademark for

                                       8
<PAGE>

its french fries. The Company also registered the Rallyburger(R), Rally-Q(R) and
Smokin' Sausage(R) with the PTO as a trademark for these Company sandwiches. The
Company has also filed with the PTO several applications to register service
marks and trademarks used in connection with its advertising of products and
services including the Big Buford(TM) sandwich. The Company's policy is to
pursue registration of its marks whenever possible and to oppose strenuously any
infringement of its marks.

Government Regulation

     The Company is subject to Federal Trade Commission ("FTC") regulation and
state laws which regulate the offer and sale of franchises. The Company is also
subject to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires the Company to furnish to prospective
franchisees a franchise offering circular containing information prescribed by
the FTC Rule. At least fifteen states presently regulate the offer and sale of
franchises and, in almost all cases, require registration of the franchise
offering with state authorities.

     State laws that regulate the offer and sale of franchises and/or the
franchisor-franchisee relationship presently exist in a substantial number of
states. Such laws generally require registration of the franchise offering with
state authorities and/or regulate the franchise relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination among franchisees in charges, royalties or fees. These laws have
not precluded the Company from seeking franchisees in any given area. Although
such laws may restrict a franchisor in the termination of a franchise agreement
by, for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and repurchase of inventory or other compensation, these provisions have
not had a significant effect on the Company's operations.

     The Company is not aware of any pending franchise legislation which, in its
view, is likely to affect significantly the operations of the Company. The
Company believes that its operations comply substantially with the FTC Rule and
state franchise laws. Each Company-operated and franchised restaurant is subject
to regulation by federal agencies and to licensing and regulation by state and
local health, sanitation, safety, fire and other departments. Difficulties or
failures in obtaining the required licenses or approvals could delay or prevent
the opening of new restaurants.

     The Company is subject to federal and state environmental regulations,
although such regulations have not had a material effect on the Company's
operations. More stringent and varied requirements of local governmental bodies
with respect to zoning, land use and environmental factors could delay or
prevent development of new restaurants in particular locations. The Company is
also subject to the Fair Labor Standards Act and various state laws governing
such matters as minimum wage requirements, overtime and other working conditions
and citizenship requirements. A significant number of the Company's food service
personnel are paid at rates related to the federal minimum wage and increases in
the minimum wage could increase the Company's labor costs.

     The restaurant business is subject to extensive federal, state and local
regulations relating to the development and operation of restaurants, including
regulations relating to building and zoning requirements, access to persons with
disabilities, preparation and sale of food and laws governing the Company's
relationship with its employees, including minimum wage requirements, overtime
and working conditions and citizenship requirements. The failure to obtain or
retain food licenses, or a substantial increase in the minimum wage rate, could
adversely affect the operations of the Company's restaurants.

     The Company believes that it is operating in substantial compliance with
applicable laws and regulations governing its operations.

Item 2.    Properties

     As of January 23, 1998, the Company owned or leased parcels of land and
buildings for restaurants, either operating, under construction or held for sale
or disposal as follows: Company-owned land (82) and buildings (287); and
Company-leased land (232) and buildings (36). Land leased by the Company for
restaurants is generally under "triple net" leases that require the Company to
pay real estate taxes, maintenance and insurance with respect to the premises
and, in some cases, pay contingent rentals based on sales in excess of specified
amounts. Generally, the leases have initial terms of five to fifteen years with
options to renew for additional periods which

                                       9
<PAGE>

can range from five to twenty years. The Company also leases the Louisville
office of approximately 18,800 square feet, approximately 6,300 of which has
been subleased subsequent to the Company's transfer of substantially all of its
corporate management functions to Clearwater, Florida in February 1998. See Note
4 to the Consolidated Financial Statements. The Company also leases certain
temporary storage facilities for excess modular buildings and surplus equipment.

Item 3.  Legal Proceedings

     Jonathan Mittman, Steven Horowitz, Dina Horowitz and John Hannan v. Rally's
Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne Albritton, Donald C.
Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser and Arthur Andersen
LLP (Case NO. C-94-0049-L-(CS).

     This putative class action purportedly on behalf of the stockholders' of
Rally's, alleging certain violations of the Securities Exchange Act of 1934,
among other claims, with respect to Rally's Common Stock, was filed in the
United States District Court for the Western District of Kentucky on January 24,
1994 (Civ. No. C94-0039-L(CS)) against GIANT, Rally's, certain present and
former officers and directors and Rally's auditors. The complaint alleges
defendants violated the Securities Exchange Act of 1934, among other claims, by
issuing inaccurate public statements about the Company in order to arbitrarily
inflate the price of Rally's Common Stock. The plaintiffs seek unspecified
damages. On February 14, 1994, a related lawsuit was filed by two other
stockholders making the same allegations before the same court, known as Edward
L. Davidson and Rick Sweeney v. Rally's Hamburgers, Inc., Burt Sugarman, GIANT
GROUP, LTD., Wayne M. Albritton, Donald C. Moore, Edward C. Binzel, Gena L.
Morris, Patricia L. Glaser and Arthur Andersen LLP, (Civ. No. C-94-0087-L-S). On
March 23, 1994, all plaintiffs filed a consolidated lawsuit known as Mittman et
al. v. Rally's Hamburgers, Inc. et al., (Civ. No. C-94-0039-L(CS)) (the "Mittman
Actions").

     The Court denied plaintiffs' motion for class certification, "until such
time as the issue of typicality of claims is further developed and clarified."
The Court granted Mr. Sugarman's motion to strike certain scurrilous and
irrelevant allegations, and directed plaintiffs to amend their complaint to
conform to the Court's order. On April 15, 1994, Ms. Glaser and GIANT filed a
motion to dismiss the consolidated lawsuit for lack of personal jurisdiction.
The remaining defendants filed motions to dismiss for failure to state a claim
upon which relief can be granted. On April 5, 1995, the Court denied these
motions. (The Court struck plaintiffs' punitive damages allegations and required
plaintiffs to amend their claims under Section 20 of the Exchange Act but
otherwise the Court let stand the most recent version of plaintiffs' complaint
at this juncture).

     Plaintiffs filed their second amended complaint on June 29, 1995, joining
additional plaintiffs pursuant to stipulation of the parties.

     Plaintiffs renewed their motion for class certification on or about July
31, 1995. Defendants filed an opposition to this motion on or about October 31,
1995. On April 16, 1996, the Court granted the motion and certified a class of
shareholders who purchased Rally's Common Stock from July 20, 1992 to September
29, 1993.

     On October 3, 1995, plaintiffs filed a motion to disqualify Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen, Miller") as
counsel for defendants based on a purported conflict of interest allegedly
arising from the representation of multiple defendants as well as Ms. Glaser's
position as both a director of Rally's and a partner in Christensen, Miller. The
Court denied the motion in the fall of 1996 and refused to disqualify
Christensen, Miller.

     Fact discovery is set to close in April 1998. No trial date has been
scheduled yet.

     The Company denies all wrongdoing and intends to vigorously defend itself
in this action. Because these matters are in a preliminary stage, the Company is
unable to determine whether a resolution adverse to the Company will have a
material effect on its results of operations or financial condition.
Accordingly, no provisions for any liabilities that may result upon adjudication
have been made in the accompanying financial statements. An estimate of defense
costs reimbursable under the Company's directors' and officers' insurance is
included in "Other Assets" in the accompanying consolidated financial
statements.


                                       10
<PAGE>

     Harbor Finance Partners v. GIANT GROUP, LTD., Burt Sugarman, Mary Hart,
     -----------------------------------------------------------------------
Michael M. Fleishman, David Gotterer, Patricia L. Glaser, Willie D. Davis and
-----------------------------------------------------------------------------
John A. Roschman (Civ. Act. No. 14834).
---------------------------------------

     In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
action, purportedly on behalf of Rally's, against GIANT and certain of Rally's
officers and directors before the Delaware Chancery Court. Harbor named Rally's
as a nominal defendant. Harbor claims that the directors and officers of both
Rally's and GIANT, along with GIANT, breached their fiduciary duties to the
public shareholders of Rally's by causing Rally's to repurchase from GIANT
certain Rally's 97/8% Senior Notes due in the year 2000 at an inflated price.
Harbor seeks "millions of dollars in damages," along with rescission of the
repurchase transaction. In the fall of 1996, all defendants moved to dismiss the
action. The Chancery Court conducted a hearing on November 26, 1996 and denied
the motions to dismiss on April 3, 1997. The Company denies all wrongdoing and
intends to vigorously defend the action. It is not possible to predict the
outcome of this action at this time.

     Kader Investments, Inc. v. Rally's Hamburgers, Inc., CAL.SUPER.CT., Orange
     --------------------------------------------------------------------------
County (Case No. 772257)
------------------------

     In December 1994, Rally's entered into two franchise agreements with Kader
Investments, Inc. ("Kader") for the development and operation of Rally's
Hamburgers restaurants in Anaheim, California and Tustin, California. Rally's
assisted the franchisee in developing and opening the restaurants. On November
27, 1996, Kader filed a six-count Complaint against Rally's in the California
Superior Court for Orange County (Case No. 772257) alleging material
misrepresentation, respondent superior, breach of contract, breach of the
implied covenant of good faith and fair dealing, fraud and unfair competition.
These claims arise out of allegations concerning Rally's offer and sale of two
franchises (under a two-store development agreement), and Rally's actions during
the term of the agreements. The Complaint seeks as relief rescission of the
parties' franchise and development agreements; general damages of at least
$1,494,277 and $1,400,000 for the material misrepresentation and fraud counts,
respectively; general damages in unspecified amounts as to the other counts;
punitive damages in unspecified amounts; and attorneys' fees. Rally's filed an
Answer, and filed a Cross-Complaint alleging breach of contract. In settlement
of the litigation, on December 18, 1997, the parties entered into a memorandum
of understanding pursuant to which the Company would purchase Kader's
restaurants for $1.65 million. The purchase price will consist of $855,000 in
cash, $375,000 in restricted stock and $420,000 in notes, and the transaction is
currently scheduled to close on or about April 7, 1998, subject to completion of
all necessary documentation and final dismissal. Accordingly, a provision of
$754,000 for these liabilities, net of assets to be received upon adjudication,
has been made in the accompanying financial statements. See Note 12 to the
Consolidated Financial Statements.

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

Item 4.    Submission of Matters to a Vote of Security Holders

     Not applicable.

                                     PART II
                                     -------

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

     The Company's Common Stock is quoted on the National Market System of the
NASDAQ Stock Market under the symbol "RLLY". As of March 16, 1998, there were
approximately 1,074 record holders of the Company's Common Stock. The table
below sets forth the high and low sales prices of the Company's Common Stock, as
reported on the NASDAQ National Market System, for each quarter during the
Company's last two years.
<TABLE>
<CAPTION>
<S>                                  <C>                 <C>                   <C>                 <C>
         1997
         ----
         Quarter ended         March 30             June 29          September 28         December 28
         High               $   5                $   3 13/16         $     4              $    4 5/8
         Low                    2 3/8                1 15/16               1 7/8               2

         1996
         ----
         Quarter ended         March 31             June 30          September 29         December 29
         High               $   2 1/4            $   4 5/16          $     3 9/16         $    4 7/8
         Low                    1 1/32               1 1/2                  2 1/8               3

</TABLE>


                                       11
<PAGE>
         On December 18, 1997, the Company issued 3,909,336 shares of Rally's
Common Stock and 45,667 shares of Rally's Preferred Stock pursuant to the
Exchange Agreement, in a private placement pursuant to Section 4(2) of the
Securities Act of 1933. The Company received approximately 19 million shares of
Checkers Common Stock in exchange for the Rally's Common Stock and the Rally's
Preferred Stock. The Rally's Preferred Stock is convertible into Rally's Common
Stock (at a ratio of 100/1, subject to adjustment) upon approval of such
conversion by Rally's stockholders. See Note 2 to the accompanying consolidated
financial statements for further discussion. The terms of the Rally's Preferred
Stock are set forth in Exhibit B to the Exchange Agreement. The parties to the
Exchange Agreement include CKE, GIANT, and Fidelity. For a list of the other
purchasers, see Exhibit A to the Exchange Agreement, which is filed as Exhibit
10.12 to this Form 10-K.

         The Company has not declared or paid any dividends on its Common Stock,
and does not intend to declare or pay any dividends in the foreseeable future.
The Company currently intends to retain any earnings for the future operation
and development of its business. Any determination to pay dividends in the
future will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition, capital
expenditures, working capital requirements, any contractual restrictions and
other factors deemed relevant by the Board of Directors. Furthermore, under the
terms of the Indenture governing the 9 7/8% Senior Notes due 2000, the Company
is not permitted to pay any dividends on the Common Stock unless certain income
tests are met.

Item 6.    Selected Consolidated Financial Data

     The selected consolidated financial data was derived from the consolidated
financial statements and includes Rally's Hamburgers, Inc. and its wholly-owned
subsidiaries. This data should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto, and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.

 (In thousands, except per share amounts and statistical data)
<TABLE>
<CAPTION>

                                          January 2,    January 1,    December 31   December 29,    December 28,
                                             1994          1995          1995           1996            1997
                                         ------------- -------------  ------------  --------------  --------------
<S>                                      <C>           <C>            <C>           <C>             <C>
Systemwide sales                         $    354,666  $    370,087   $    355,719  $     316,670   $    290,133
                                         ============ =============   ============  ==============  ============

Company restaurant sales                 $    165,829  $    178,476   $    181,778  $     156,445   $    139,350
Other revenues                                  8,517         7,842          7,081          6,307          5,580
                                         ------------   -----------   ------------  --------------  ------------
   Total revenues                             174,346       186,318        188,859        162,752        144,930
                                         ------------   -----------   ------------  --------------  ------------
Income (loss) from operations                  (7,050)      (14,636)       (36,470)         4,090          3,320
   (1)(2)(3)
   Other expenses                              (4,433)       (9,619)        (9,910)        (8,057)        (7,381)
Litigation settlement                          (2,000)            -              -              -              -
                                         ------------   -----------   ------------  --------------  ------------
   Income (loss) before taxes                 (13,483)      (24,255)       (46,380)        (3,967)        (4,061)
Tax provision (benefit)                        (4,576)       (4,982)           539           (675)           455
                                         ------------   -----------   ------------  --------------  ------------
   Loss before extraordinary items             (8,907)      (19,273)       (46,919)        (3,292)        (4,516)
Extraordinary items (4)                             -             -              -          5,280              -
                                         ------------   -----------   ------------  --------------  ------------
   Net income (loss)                     $     (8,907) $    (19,273)  $    (46,919) $       1,988   $     (4,516)
                                         ============ =============   ============  ==============  ============

Income (loss) per common share:
   Income (loss) before extraordinary    $       (.67) $      (1.42)  $      (3.00) $        (.19)  $       (.22)
   item
   Extraordinary item                               -             -              -            .31              -
                                         ------------   -----------   ------------  --------------  ------------

Net income (loss) per common share       $       (.67) $      (1.42)  $      (3.00) $         .12   $       (.22)
                                         ============ =============   ============  ==============  ============

Weighted average shares outstanding            13,207        13,564         15,620         17,007         20,709

Total assets                             $    185,397  $    169,416   $    137,392  $     112,258   $    134,297
Long-term debt and obligations under
   capital leases                              97,784        94,141         97,958         69,564         68,444
Shareholders' equity                           62,527        53,487          6,672         19,365         41,513

Restaurants open at end of period
   Company                                        252           250            239            209            229
   Franchised                                     268           292            242            258            248
                                         ============ =============   ============  ==============  ============
Total                                             520           542            481            467            477
                                         ============ =============   ============  ==============  ============

</TABLE>
                                       12
<PAGE>
(1)  The fiscal year ended January 2, 1994 includes approximately $12.6 million
     charged against operations for a major business restructuring program and
     other restaurant closings.

(2)  The fiscal year ended January 1, 1995 includes approximately $17.3
     million charged against operations for changes in business strategies.

(3)  The fiscal year ended December 31, 1995 includes approximately $17.3
     million charged against operations for changes in business strategies and
     restaurant closings. The year also includes approximately $13.7 million
     related to the Company's implementation of Statement of Financial
     Accounting Standards No. 121. See Note 16 to the accompanying consolidated
     financial statements.

(4)  The extraordinary item for the fiscal year ended December 29, 1996 was a
     gain on the early retirement of debt, net of tax expense of $1,350,000. See
     Note 10 to the accompanying consolidated financial statements.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

     The following table provides a comparative view of the Company's
operations:
<TABLE>
<CAPTION>
                                                                        (In thousands)
                                                                      Fiscal Years Ended
                                                  --------------------------------------------------------
                                                   December 31,           December 29,        December 28,
                                                       1995                   1996                1997
                                                  ----------------      -----------------    -------------
<S>                                              <C>                 <C>                    <C>
Income (loss) from operations before restaurant
   closures and other                             $      (5,425)        $     4,110          $      3,478
Provision for restaurant closures and other             (31,045)                (20)                 (158)
                                                  -------------       -------------          ------------
     Income (loss) from operations                      (36,470)              4,090                 3,320

Total other expense, net                                 (9,910)             (8,057)               (7,381)
                                                  -------------       -------------          ------------

     Loss before income taxes and
            extraordinary item                          (46,380)             (3,967)               (4,061)
(Provision) benefit for income taxes                       (539)                675                  (455)
Extraordinary items, net of tax                               -               5,280                     -
                                                  -------------       -------------          ------------

     Net income (loss)                            $     (46,919)        $     1,988          $     (4,516)
                                                  =============       =============          ============
</TABLE>

     During 1997, the Company experienced an increase of 2.4% in the loss before
income taxes and extraordinary item. The 1996 extraordinary gain, net of tax, of
approximately $5.3 million, or $.31 per share from the Company's early
retirement of certain of its outstanding Senior Notes, at amounts below carrying
value, resulted in the Company reporting net income for fiscal 1996. The
transactions involving the Senior Notes were opportunities created by the
Company's conservation of cash during the second half of 1995 and the depressed
market price of the Senior Notes during the year. In addition, the transactions
resulted in a reduction of net interest expense in 1997 of approximately $2.1
million and $.8 million as compared to 1995 and 1996, respectively. These
transactions are more fully described in Note 10 to the accompanying
consolidated financial statements.

         As more fully discussed in Note 13 to the accompanying financial
statements, the Company's effective tax rates on its reported pre-tax losses
differ significantly from statutory rates, due primarily to concerns as to the
ultimate realizability of net operating loss carryforwards. Until circumstances
otherwise indicate that realization becomes more likely than not, no additional
benefit will be recognized.

         As evidenced in the table above, the provision for restaurant closures
and other was significantly reduced in 1996 and 1997 from the prior year levels.
These reductions are primarily attributable to the 1996 and early 1997
strengthening of the store level economics, which have improved the Company's
ability to recover, at a minimum, its store level investment and to prior
writedowns of underperforming assets, reducing the need at this time for
additional writedowns of Company assets. See the section below entitled
"Restaurant Closures and Other" for a more detailed discussion.

                                       13
<PAGE>

      The Company's income from operations before restaurant closures and other
in fiscal 1997 declined $0.8 million from the prior year. Improved restaurant
costs of sales in fiscal 1997 were offset by continued declining same store
sales. The Company continues to refine its turnaround strategy as results show
the relative success or the need for reassessment for the various components.
The plan contains four key strategies that are designed to create a consistently
profitable environment: (i) strengthen the balance sheet and reduce fixed costs,
(ii) improve store level profitability, (iii) establish an effective brand
positioning and (iv) pursue various growth opportunities. The results of and
plans for each strategy are more fully discussed below:

      Although the Company's debt level is still high, the Company has made
substantial progress in improving its balance sheet and reducing fixed costs.
Interest cost was reduced by another $1.2 million in 1997 after decreasing $2.1
million in 1996, interest was significantly reduced through the retirement of
approximately $22 million face value of the Company's Senior Notes in January
1996 and an additional $4.7 million during the fourth quarter of 1996. In
addition, $10.8 million in gross proceeds were generated through the Company's
Rights Offering completed in September, 1996. The proceeds from the Offering
were used to pay off debt of approximately $4.5 million and the remainder is
being used for new store construction, refurbishment of some existing
restaurants and for other general corporate purposes. Outstanding warrants from
a Rights Offering and from a separate issuance of 1,500,000 additional warrants
in December, 1996, (see "Liquidity and Capital Resources") if exercised, would
raise an additional $17.4 million in cash proceeds. The Company also made
progress in disposing of surplus assets in 1996 and 1997, as assets held for
sale declined by approximately $5 million from the end of 1995. On December 18,
1997, the Company acquired approximately 19.1 million shares of Checkers
Drive-In Restaurants ("Checkers") pursuant to an exchange agreement in which the
Company's common and preferred shares were issued as consideration. This
agreement aligns the Company with its counterpart in the double drive-thru
segment, and enhances the ability to create synergies that will benefit both
Companies. This is evidenced by the Management Services Agreement dated November
30, 1997, pursuant to which Checkers is providing certain management services to
the Company. The agreement creates the opportunity for the Company to continue
to show key reductions in general and administrative expense. In fiscal 1997,
the Company reduced its general and administrative costs by $1.0 million after a
$2.2 million reduction in the prior year.

         The Company has made progress in the second key strategy of its
turnaround plan, as store-level profitability has improved since 1995. Although
the Company has experienced a 10.9% decline in sales during 1997, the decline in
restaurant operating margins was only .5%. Much of the improvement since 1995
has resulted from the Company's cost reduction actions related to food, paper
and labor which were implemented in the beginning of the second quarter of 1996
and are further discussed in "Results of Operations." The primary impact of
these changes was realized during the third and fourth quarters of 1996 and was
reflected in the Company's store profit margins. Improvement in store level
profitability also resulted from the elimination of heavy discounting that drove
traffic increases but adversely affected the Company's profitability.

      The Company's third key strategy in its turnaround plan will be the
primary focus going into 1998. Although the Company generated net income from
operations in 1996 and 1997, same store sales have declined during that period.
To combat this negative trend in sales, management believes an effective brand
positioning is essential in order to grow same store sales. During 1997, the
Company's brand positioning included a "Bigger, Better, Burger" campaign, which
included the introduction of two new premium burgers, new and more impactful
menu boards, and new advertising. The Company believes that although elements of
this program showed promise, the positioning did not differentiate the Company
enough to reverse the decline in sales. Therefore, the positioning for 1998 has
evolved into a campaign focusing on taste, supported by advertising designed to
create a point of difference that the leaders in the fast food hamburger segment
will find difficult to duplicate.

      The final strategy in the Company's turnaround plan is to pursue growth
opportunities. In 1997, the Company opened nine stores and franchisees opened 19
stores. In addition to growth in the number of stores, the indoor dining test
being conducted in the Louisville market may provide customer count growth in
existing stores. The Company believes that a well-managed double drive-thru
concept can be profitable, but remaining exclusively in this arena excludes a
segment of the population that desires an indoor dining experience. Research has
indicated that a segment of the population does not even consider Rally's as a
place to eat because of the lack of indoor seating. As of March, 1998, the
Company had five dining rooms in test, where the passenger side drive-thru lane
had been removed and a 20 to 50 seat dining room was added to the side of the
existing unit. Early sales results at these units have been encouraging,
however, the Company continues to work to reduce the costs to construct these
dining rooms in order to improve the return on this investment. The Company also
plans to test other dining room designs that could retain the speed of service
expected with two drive-thru lanes.


                                       14
<PAGE>

     Further discussion of the factors affecting results of operations is
included below.

Restaurant Closures And Other

     Certain charges in fiscals 1995, 1996 and 1997 have been aggregated and
segregated into the caption "Provision for Restaurant Closures and Other" in the
accompanying Statements of Operations. These items represent estimates of the
impact of management decisions which have been made at various points in time in
response to the Company's sales and profit performance and the then-current
revenue building and profit enhancing strategies and are discussed in further
detail below.

     Prior to 1995, the Company's management had initiated efforts to franchise
or selectively divest itself of approximately 60 Company-Owned stores in
selected markets. This strategy was expected to allow the Company to concentrate
on regaining sales, profit and cash flow momentum in its other markets through
stronger focus on a smaller number of its most profitable markets. The Company
believed that franchisees would be better able to concentrate on the units that
had not been top performers and achieve near term improvements in the
performance of those units. Prior to 1995, the Company recorded a charge of $8.0
million which represented an estimate of the difference between the estimated
net realizable value, given the then most likely divestiture/disposal plan, and
the net book value of these restaurants and markets.

     Early in 1995, six of the 60 units, five of which were in one market, were
closed and sublet. During the third quarter, 1995, management concluded that it
was unlikely that much of the 1994 plan of disposal described above could be
executed. For this reason, the Company decided to close up to 16 of the
remaining restaurants, resulting in additional charges in the third quarter of
1995 of approximately $400,000 to reflect additional writedown of the property
and equipment to currently estimated net realizable values and approximately
$2.3 million to record reserves for expected future occupancy related costs.
Eight of these restaurants were closed as of December 31, 1995. Six additional
restaurants were closed in 1996. The Company decided in 1996 to continue to
operate 2 of these 16 restaurants until such time that the leases have expired
or the properties have been sublet. The Company decided to continue to operate
the remaining 38 stores previously included in the original 60 restaurants. With
the restaurant closures discussed above and without the burden of impending
closure associated with the prior plan regarding these markets, management
believes that the markets represent acceptable growth opportunities for future
development.

     Management also decided to close nine non-profitable restaurants in certain
of its core markets resulting in charges in the third quarter of 1995 of
approximately $1.9 million related to the writedown of assets to their net
realizable values and $1.9 million to record expected future occupancy related
costs. Seven of these restaurants were closed as of December 31, 1995. The
Company decided in 1996 to continue to operate two of these restaurants, one of
which is being operated by CKE, as part of a management agreement with the
Company.

     During the third quarter of 1995, charges were recorded of approximately
$3.3 million to dispose of the assets located on eight sites in the Houston,
Texas market which had been operated as Company units and then leased to a
former franchisee. The Company decided not to refranchise these units due to
failure to identify a suitable franchise candidate which management believed had
adequate and evident financial resources to successfully open the Houston
market. This charge consisted of a writedown of approximately $2.7 million of
the assets to their estimated net realizable values and reserves of
approximately $600,000 for expected future occupancy related costs.

     In 1995, 18 additional modular buildings became unutilized, as expected
Company development continued to be reduced and decisions were made regarding
other restaurant closures. At December 31, 1995, the Company had available for
sale 54 substantially completed modular restaurant buildings, which were not
expected to be assigned to future Company development. In order to recognize the
impact of the additional unutilized buildings and to more competitively price
all of the modular buildings available for sale, the Company recorded charges of
approximately $1.6 million in the third quarter of 1995 and $458,000 in the
fourth quarter of 1995. The charges of $2.3 million related to third quarter
1995 closure decisions, described above, also included approximately $1.5
million related to an additional writedown on modular buildings which were
previously utilized at those locations. During 1996 and 1997, the Company sold
20 buildings and 12 buildings, respectively. During 1996, the Company closed six
restaurants and during 1997 redeployed two buildings for corporate development.
At December 28, 1997, 26 buildings remain available for sale which are being
marketed to franchisees and others. Current expectations of net realizable value
are based on the Company's experience related to marketing the buildings.

                                       15
<PAGE>

     The Company recorded approximately $1.5 million in charges in the third
quarter of 1995 related to further writedowns on excess land idled by slowdowns
in the Company's expansion plans. Such land had been scheduled to be auctioned
during the fourth quarter of 1995. These auctions occurred in the fourth quarter
and closed in the first quarter of 1996. The absolute auctions generated lower
than anticipated sales prices, and additional losses of $1.1 million were
recorded in the fourth quarter of 1995. As further discussed in "Liquidity and
Capital Resources," these sales provided cash flow of approximately $2.4
million, primarily in the first quarter of 1996.

     During the fourth quarter, 1995 the sublessee of five of the six sites
closed under the November, 1994 plan, defaulted on the terms of the sublease
agreements, resulting in charges of $483,000 related to occupancy and $430,000
to reduce the carrying value of the tangible assets to management's estimate of
fair value less cost to sell.

     Due to concerns about obsolescence and abnormal wear and tear associated
with transport and storage of surplus equipment, management recorded an $820,000
writedown in December, 1995 of the equipment's carrying value. Additionally,
fourth quarter, 1995 charges totaling approximately $1.1 million were recorded
to reflect changes in the estimated net realizable values of the Company's
remaining surplus assets and properties.

     As described above, a substantial portion of the charges in fiscal year
1995 related to asset writedowns. The remainder of the charges related
substantially to the establishment of reserves for expected future
occupancy-related costs. During 1996, the Company revised its estimate of net
realizable value for five of its poor performing restaurants in Montgomery,
Alabama based upon an existing agreement to sell the restaurants to a
non-affiliated restaurant operator. Such change in estimate resulted in a
reduction of approximately $232,000 in related reserves. In addition, during the
fourth quarter of 1996, management decided to reopen three units previously
closed and to continue to operate a fourth unit that had been designated for
closure, resulting in a reduction in the reserves for future occupancy-related
costs of approximately $659,000. In addition, approximately $87,000 in other
charges for net changes in estimated asset recovery were recorded during 1996.
During 1997, the Company closed two restaurants and recorded provisions to
terminate leases on existing corporate office facilities and revised certain
reserves previously established, resulting in net provisions for restaurant
closures and other of $158,000. Such adjustments to the reserves are included in
the caption "Provision for restaurant closures and other" on the accompanying
Statement of Operations. As of December 28, 1997, approximately $4.6 million
remained in the reserve for expected future occupancy-related costs which is net
of estimated future sublease recoveries. Assets held for sale of $1.1 million at
December 28, 1997 resulting from the actions noted above consist mainly of
surplus land, buildings and equipment. The expected disposal dates for these
assets are over the next 12 months. The carrying amounts of such assets to be
disposed of are shown separately on the accompanying consolidated balance
sheets.

     In addition to the charges described above, 1995 results include
approximately $13.7 million of certain charges recorded in the fourth quarter
related to the adoption of Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). This charge represents impairment of the carrying
value of the assets of 37 stores based on management's future cash flow
estimates given then current base lines and reasonable trend assumptions.
Additional impairment reserves of approximately $824,000 were recorded during
1996, primarily related to three underperforming restaurants. No additional
restaurants were determined to be impaired in 1997. See Notes 3 and 16 to the
accompanying consolidated financial statements.

General

     Rally's revenues are derived primarily from Company-owned restaurant sales
and royalty fees from franchisees. The Company also receives revenues from the
award of exclusive rights to develop Rally's restaurants in certain geographic
areas (area development fees) and the award of licenses to use the Rally's brand
and confidential operating system (franchise fees). Systemwide sales consist of
aggregate revenues of Company-owned and franchised restaurants (including
CKE-operated restaurants). Company revenue also includes payments resulting from
an operating agreement with CKE, referred to as Owner fee income in the
accompanying consolidated financial statements. Restaurant cost of sales,
restaurant operating expenses, depreciation and amortization, and advertising
and promotion expenses relate directly to Company-owned restaurants. General and
administrative expenses relate to both Company-owned restaurants and franchise
operations. Owner expenses relate to CKE-operated restaurants and consist
primarily of depreciation and amortization.

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

                                       16

<PAGE>
<TABLE>
<CAPTION>

                                                                     Fiscal Years Ended
                                           -----------------------------------------------------------------------
                                            January 2,    January 1,   December 31,   December 29,   December 28,
                                               1994          1995          1995           1996           1997
                                           ------------- ------------- -------------  -------------  -------------
<S>                                       <C>              <C>         <C>           <C>             <C>
Revenues:
Restaurant sales                                 95.1%         95.8%         96.2%          96.1%          96.2%
Franchise revenues and fees                       4.9           4.2           3.8            3.6            3.3
Owner fee income                                    -             -             -             .3             .5
                                           ------------- ------------- -------------  -------------  -------------
                                                100.0%        100.0%        100.0%         100.0%         100.0%
                                           ------------- ------------- -------------  -------------  -------------
Costs and expenses:
Restaurant cost of sales (1)                     35.2%         35.0%         35.7%          34.3%          32.5%
Restaurant operating expenses (1)                42.5          43.3          46.0           44.2           42.8
General and administrative expenses              10.5          10.1          10.4           10.7           10.7
Advertising and promotion expenses (1)            7.0           6.1           7.3            5.0            7.1
Depreciation and amortization (1)                 6.1           7.9           7.2            6.3            6.5
Owner expense (2)                                   -             -             -          169.1          153.2
Warrant Expense                                     -             -             -              -             .6
Other charges (credits)                           7.2           9.3          16.4              -             .1

Income (loss) from operations                    (4.0)         (7.9)        (19.3)           2.5            2.3
Total other (expense)                            (3.7)         (5.1)         (5.3)          (5.0)          (5.1)
                                           ------------- ------------- -------------  -------------  -------------
Net income (loss) before income taxes
   and extraordinary items                       (7.7)        (13.0)        (24.6)          (2.5)          (2.8)

Net income (loss)                                (5.1)%       (10.3)%       (24.8)%          1.2%          (3.1)%
                                           ============= ============= =============  =============  =============

Number of restaurants:
Restaurants open at the beginning of              450           520           542            481            467
   period
                                           ------------- ------------- -------------  -------------  -------------
Company restaurants opened (closed or
   transferred), net during period                 55            (2)          (11)           (30)            20
Franchised restaurants opened (closed or
   transferred), net during period                 15            24           (50)            16            (10)
                                           ------------- ------------- -------------  -------------  -------------
Total restaurants opened (closed or
   transferred), net during period                 70            22           (61)           (14)            10
                                           ============= ============= =============  =============  =============
Total restaurants open at end of period           520           542           481            467            477
                                           ============= ============= =============  =============  =============
</TABLE>

--------------------------
(1)  As a percentage of restaurant sales.
(2)  As a percentage of owner fee income.


Results of Operations

Fiscal Year Ended December 28, 1997 Compared With Fiscal Year Ended
December 29, 1996

     Systemwide sales declined 8.4% for 1997 to approximately $290.1 million
compared with approximately $316.7 million a year ago. This decrease is
attributable primarily to same store sales declines of 8.2% systemwide. The
decline in same store sales is primarily due to the highly competitive
environment during 1997 during which many competitors continued to discount
their menu items.

     Total company revenues decreased 11% to approximately $144.9 million in
1997 compared with approximately $162.8 million in 1996. Company-owned
restaurant sales decreased 11% to approximately $139.4 million due to a 9.2%
decline in same stores sales and fewer Company units in operation. During the
year, the Company opened 9 new restaurants, re-opened three restaurants
previously closed, acquired 11 restaurants from franchisees, closed 2 units and
transferred 1 restaurant to a franchisee. Franchisees, exclusive of CKE, opened
19 new units, acquired 1 unit from the Company, closed 19 units and transferred
ownership of 11 restaurants to the Company.

     Restaurant cost of sales, as a percentage of sales, decreased to 32.5% for
1997 compared with 34.3% for 1996. This decrease is attributable primarily to
various cost reduction actions taken during 1997 and the second half of 1996.
Management's efforts to improve food and paper costs by implementing tighter
operational controls was supplemented by cost of sales reductions realized by
cooperating with CKE Restaurants, Inc. and Checkers to leverage the purchasing
power of the three entities to negotiate improved terms for their respective
contracts with suppliers.

                                       17
<PAGE>

     Restaurant operating expenses, the major component of which is labor and
related expenses, were 42.8% of sales for 1997 compared with 44.2% for 1996. The
improvement is primarily attributable to reductions in management and crew labor
that resulted from implemented changes in staffing levels and labor deployment.
The reduction in operating expenses was achieved despite the inclusion of
several expense categories that are fixed in nature. The closing of poorer
performing units and the transfer of operational responsibility for certain
higher fixed cost restaurants in Western markets to CKE that occurred on July 1,
1996 enabled the company to show improvement in this category despite the
decline in same store sales.

     General and administrative expenses decreased $1.9 million in 1997 due
primarily to reductions in the corporate and field operations staff and lower
levels of bad debt expense, partially offset by higher legal fees but remained
consistent as a percent of revenues due to the reductions in total revenues.

     Advertising expenses increased approximately $2.2 million to 7.1% of sales
for 1997 compared to 5.0% for 1996. During the first quarter of 1997, the
company initiated a new campaign that made greater use of television advertising
than in previous years which also contributed to the increased cost. Media
expenditures were curtailed during the fourth quarter of 1996 as management
worked with the new advertising agency on new creative and brand positioning.

     Depreciation and amortization decreased to approximately $9.1 million as
compared to approximately $9.8 million for the prior year. This decrease is
primarily due to a segregation into owner expense of depreciation and
amortization associated with the CKE-operated properties as of July 1, 1996 and
certain assets becoming fully depreciated during 1997.

     Owner expense of approximately $1.1 million for 1997 represent the
Company's segregated ownership cost related to the 29 units operated by CKE.
These expenses consist primarily of depreciation and amortization associated
with the properties.

     Warrant expense was approximately $940,000 in 1997 compared to
approximately $20,000 in 1996. The expense is related to warrants that were
issued to CKE and Fidelity National Financial, Inc. in a private placement on
December 20, 1996. See "Liquidity and Capital Resources" and Note 4 to the
accompanying consolidated financial statements, for further discussion.

     Interest expense decreased 13.8% to approximately $7.4 million for 1997 as
compared to approximately $8.6 million for 1996 primarily due to the early
extinguishment of debt during the fourth quarter of 1996. See "Liquidity and
Capital Resources" and Note 10 to the accompanying consolidated financial
statements, for further discussion.

     Interest income was higher for 1997 as compared to 1996 due to increases in
the average daily invested amounts.

     During the fourth quarter of 1997, the Company recorded equity in the loss
of affiliate of $720,000 based upon it's share of the losses of Checkers for
December 1997 and the amortization of related goodwill. See "Item 1: Business,
Recent Acquisitions" and Note 2 to the accompanying Consolidated Financial
Statements.

         The Company's 1997 tax provision is approximately $455,000 representing
estimated state taxes versus a prior year net tax provision of $675,000
(obtained by netting the tax benefit line with the tax expense of approximately
$1.4 million which has been netted against the extraordinary gain). Of the prior
year net amount, $575,000 related to state taxes expected to be payable and
$100,000 related to reduction of an IRS receivable for a NOL carryback to 1987,
1988, and 1989, further described in Note 13 to the accompanying consolidated
financial statements. See earlier discussion above concerning the extraordinary
gain.

Fiscal Year Ended December 29, 1996 Compared with Fiscal Year Ended
December 31, 1995

     Systemwide sales declined 11% for 1996 to approximately $316.7 million
compared with approximately $355.7 million in 1995. This decrease is
attributable to the comparatively lower number of units in operation in 1996 and
to same store sales declines of 7% systemwide. The decline in same store sales
is primarily due to the

                                       18

<PAGE>

lower customer counts experienced upon the elimination of deep discounting
programs in the third and fourth quarters of 1996 and to the reduced media
spending in the fourth quarter of 1996.

     Total Company revenues decreased 14% to approximately $162.8 million in
1996 compared with approximately $188.9 million in 1995. Company-owned
restaurant sales decreased 14% to approximately $156.5 million due to fewer
Company units in operation, a 6% decline in same store sales, and a decline of
approximately $9 million due to the Company's operating agreement with CKE, as
discussed in "Liquidity and Capital Resources." During 1996, the Company opened
6 units, closed 8 units, and transferred operational responsibility to CKE for
28 units. Franchisees, exclusive of CKE, opened 15 units and closed 26 units.
Five of the Company closures which were in the Montgomery DMA were sold in
September, 1996.

     Restaurant cost of sales, as a percentage of sales, decreased to 34.3% for
1996 compared with 35.7% for 1995. This decrease is attributable primarily to
various cost reduction actions taken during the second half of 1996, partially
offset by higher food and paper costs as a percentage of sales in the first six
months of 1996. These cost reduction actions include selective changes in some
product and packaging specifications as well as renegotiation of purchase terms
and selection of alternative vendors. The increase in cost of sales in the first
half of 1996 resulted primarily from a carryover of deep discounting programs in
the first quarter of 1996 and to a shift in product mix sold, reflecting the
impact of a larger percent of Big Buford(TM) sandwich sales in the first two
quarters of 1996 compared to the same period of 1995. While this product carries
a significantly higher dollar profit per unit, it does carry a higher food cost
percentage than did the products formerly comprising its share of the total
product mix. The Company from time to time negotiates purchase contracts for
certain items used in its restaurants in the normal course of business. Although
some of these contracts contain minimum purchase quantities, such quantities do
not exceed expected usage over the term of such agreements.
     Restaurant operating expenses were 45.5% of sales for 1996 compared with
46.4% for 1995. The reduction is primarily due to management's cost reduction
actions in the labor area and better fixed cost coverage in stores operating
during the second half of the year, partially offset by increased bonus costs
associated with store management compensation. This better fixed cost coverage
is the result of closing poorer performing units and of transferring operational
responsibility for certain higher fixed cost restaurants in Western markets to
CKE. The identified and implemented changes in staffing levels and labor
deployment in certain stores have yielded savings in management and crew labor.

     Advertising expenses decreased approximately $5.4 million to 5.0% of sales
for 1996 compared to 7.3% for 1995 due primarily to decreases in levels of radio
advertising, outdoor advertising, and television advertising. During the fourth
quarter, management decided to limit media spending until work with the new
advertising agency on new creative and brand positioning was completed.
Company-wide spending on the new advertising campaign did not begin until late
February 1997.

     General and administrative expenses decreased in 1996, on both a dollar and
a percentage of sales basis. This decrease is caused primarily by reductions in
the corporate and field operations staffs, and by lower levels of bad debt and
other dead project charges, partially offset by higher legal fees.

     Depreciation and amortization decreased to approximately $9.8 million in
1996 as compared to approximately $13.0 million for the prior year. This
decrease is primarily due to asset writedowns associated with the adoption of
SFAS 121 at the beginning of the fourth quarter 1995, to a decrease in the
number of properties being operated by the Company, and to a segregation into
Owner expense of depreciation and amortization associated with the CKE-operated
properties.

     Owner expense of approximately $744,000 for 1996 represent the Company's
segregated ownership cost related to the 28 units operated by CKE. These
expenses consist primarily of depreciation and amortization associated with the
properties.

     Interest expense decreased 19.3% to approximately $8.6 million for 1996 as
compared to approximately $10.7 million for 1995 primarily due to the early
extinguishment of debt, as previously discussed. See "Liquidity and Capital
Resources" and Note 10 to the accompanying consolidated financial statements,
for further discussion.

Interest income was higher for 1996 as compared to 1995 due to increases in the
average daily invested amounts.


                                       19
<PAGE>
     The Company's decrease in Other is due primarily to the current year
storage costs related to excess modular buildings.

         The Company's net tax provision is approximately $675,000 (obtained by
netting the tax benefit line with the tax expense of approximately $1,350,000
which has been netted against the extraordinary gain). Of the net amount,
$575,000 is related to state taxes expected to be payable and $100,000 related
to reduction of an IRS receivable for a NOL carryback to 1987, 1988, and 1989,
further described in Note 13 to the accompanying consolidated financial
statements. See earlier discussion above concerning the extraordinary gain.

Liquidity and Capital Resources

         The Company's cash flow from operating activity was approximately $8.3
million for 1997 compared with approximately $543,000 for 1996 and approximately
$8.5 million for 1995. The notable increase in 1997 from 1996 resulted primarily
from changes in working capital, specifically the increased balances in accounts
payable and accrued liabilities compared to a significant decreases in 1996. The
decreased balances in accounts payable in 1996 was due to decreased food and
paper costs as a percentage of sales and to decreased overall sales volumes. The
decreased overall sales volumes are attributable to the factors discussed above
in the year to year comparisons.

         Capital expenditures of approximately $6.8 million for 1997 were funded
primarily through sales of surplus properties and existing cash balances.
Approximately $4.8 million of these expenditures were for the construction or
conversion of new stores in 1997. Additionally, in 1997, $510,000 was spent to
add dining rooms to three test units and $158,000 had been spent adding dining
rooms to two other units, completion of which occurred during 1998. Remaining
capital expenditures in 1997 of $1.4 million were primarily for the purchase and
installation of certain replacement equipment and menuboards as well as the
purchase of the land.

         In July 1997, the Company acquired 10 units located in Arkansas from a
franchisee for approximately $2.8 million, including $2.2 million in cash. In
addition, the Company assumed five ground lease obligations, five ground and
building lease obligations and entered into three additional ground leases. The
cash disbursed in payment of the purchase price was reduced by certain amounts
owed by the seller to the Company.

         The Company plans to use available cash flow to open additional indoor
dining facilities in 1998. The number of units to be opened will be dependent
on, among other factors, analysis of the five test units, permitting issues,
cost engineering issues and available cash flow.

         In January 1996, the Company repurchased, in two transactions,
approximately $22 million face value of its 9 7/8% Senior Notes due in the year
2000. The Notes were purchased from GIANT GROUP, LTD. ("GIANT") at a price of
$678.75 per $1,000 principal amount, representing the market closing price on
the last business day prior to the repurchase date. The first transaction
involved the repurchase of approximately $16 million face value of the Notes for
approximately $11.1 million in cash. The second transaction involved the
purchase of approximately $6 million face value of the Notes in exchange for a
short-term note of approximately $4.1 million due in three installments of
principal and interest, bearing interest at prime. The Company paid the final
installment together with accrued interest on this note on September 27, 1996.
Prior to the Senior Notes repurchases, the Company's Board of Directors had
received an independent opinion from an investment banking firm as to the
fairness of the transactions. Additionally, in four separate transactions during
the fourth quarter 1996, the Company repurchased approximately $4.7 million face
value of the Senior Notes from various other bondholders for approximately $4.5
million in cash. As a result of these debt repurchases, the annualized ongoing
interest payments on the Senior Notes have been reduced by approximately $2.6
million per year to approximately $5.8 million.

         Principal payments of debt and capital leases totaled approximately
$1.5 million during 1997. The Company is required to make a mandatory sinking
fund payment on June 15, 1999 calculated to retire 33 1/3% in aggregate
principal amount of the Senior Notes issued with the balance maturing on June
15, 2000. The repurchase discussed above reduces such sinking fund requirement
to approximately $1.6 million from approximately $28.3 million.


                                       20
<PAGE>
          The Company is actively marketing the assets included in the caption
"Assets held for sale" in the accompanying consolidated balance sheet and
expects realization in cash over the next 12 months, although actual timing of
such cash flows cannot be predicted. The Company expects cash generated from
these assets to decline as the amount of assets held for sale decreased from
$2.0 million in 1996 to $1.1 million in 1997. The assets contained in this
caption are recorded at management's current estimate of fair market value less
costs to sell. There can be no assurances that these values will be realized.

         On July 1, 1996, the Company entered into a ten-year operating
agreement with Carl Karcher Enterprises, Inc., a subsidiary of CKE Restaurants,
Inc. (collectively referred to as "CKE"). Pursuant to the agreement, 29 (2 of
which have been converted to a Carl's Jr. format) Rally's-owned restaurants
located in California and Arizona are being operated by CKE. The Company retains
ownership in the restaurants and receives from CKE a percentage of gross
revenues referred to in the financial statements as Owner fee income. This
income is offset by the Company's segregated ownership costs related to these
units, referred to as Owner expenses in the financial statements and consists
primarily of noncash expenses of depreciation and amortization. The agreement
has improved cash flow, generating cash flow of approximately $790,000 in 1997
and $340,000 in the last six months of 1996.

         The Company completed its Shareholder Rights Offering on September 20,
1996. The Offering raised over $10.8 million in gross proceeds, offset by legal
and other issuance costs of approximately $437,000. In addition to the
approximate $10.8 million of gross proceeds provided by the Offering, the
Warrants, if exercised, would provide approximately $10.8 million for the
Company's future growth. The proceeds from the Offering have been used in 1997
to retire debt of approximately $4.5 million and the remainder has been used
primarily in 1997 for new store construction, refurbishment of some existing
restaurants and for other general corporate purposes.

         On October 21, 1996, the Company was notified by the indenture trustee
that the noteholder consent it had been soliciting had been approved by the
required majority of the holders of record of its 9 7/8% Senior Notes due 2000.
The consent will allow two of the Company's current stockholders, CKE and
Fidelity National Financial, Inc. and/or their affiliates, to acquire 35% or
more of the outstanding shares of the Company's common stock without triggering
"Change in control" provisions requiring the Company to offer to purchase the
Senior Notes at 101% of their face value. This gives the Company greater
flexibility to raise capital in the future, and it gives two of its largest
stockholders the ability to increase their investment in the Company.

         On December 20, 1996, the Company issued warrants (the "Warrants") to
purchase an aggregate of 1,500,000 restricted shares of its Common Stock to CKE
and Fidelity National Financial, Inc. The Warrants have a three-year term and
became exercisable on December 20, 1997. The exercise price is $4.375 per share,
the closing price of the Common Stock on December 20, 1996. The underlying
shares of Common Stock have not been registered with the Securities and Exchange
Commission and, therefore, are not freely tradable. If exercised, the Warrants
would provide approximately $6.6 million in additional capital to the Company.
See Note 4 to the accompanying consolidated financial statements for further
discussion.

         Management has plans in place to improve profitability and cash flows
from operations. Additionally, management believes that, given the improvements
in operating results, the Company will realize the positive cash flows from the
exercise of Warrants discussed in Note 4. The Company believes existing cash
balances and cash flow from operations should be sufficient to fund its current
operations and obligations. The ability of the Company to satisfy its
obligations under the Senior Notes, however, continues to be dependent upon,
among other factors, the Company successfully increasing revenues and profits.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

         Not applicable.

                                       21
<PAGE>
<TABLE>
<CAPTION>

Item 8.  Financial Statements and Supplementary Data

                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except shares and per share amounts)

                                                                                                    December 29,   December 28,
                                                                                                     1996             1997
                                                                                                   -------------  --------------
<S>                                                                                                <C>            <C>    <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                                       $   2,285      $    4,008
   Restricted cash                                                                                     1,649           1,380
   Investments                                                                                         1,958             446
   Royalties receivable, net of a reserve for doubtful accounts of $1,405 and $231,                      437             394
     respectively
   Accounts and other receivables (including $565 and $1,078, respectively, from related
     parties), net of a reserve for doubtful accounts of $301 and $200, respectively                   1,698           1,555
   Inventory, at lower of cost or market                                                                 794           1,052
   Prepaid expenses and other current assets                                                             999           1,057
   Assets held for sale                                                                                  596           1,076
                                                                                                   -------------  --------------
         Total current assets                                                                         10,416          10,968

Assets held for sale                                                                                   1,426               -
Property and equipment, net                                                                           69,806          68,067
Investment in affiliate                                                                                    -          24,988
Notes receivable, (including $127 and $86, respectively, from related parties),  net of a
   reserve for doubtful accounts of $853 and $231, respectively                                          773             872
Goodwill, less accumulated amortization of $2,243 and $2,811, respectively                            10,482           9,913
Reacquired franchise and territory rights, less accumulated amortization of $1,984 and                11,439          12,758
  $2,991, respectively
Other intangibles, less accumulated amortization of $2,459 and $2,894, respectively                    4,769           4,334
Other assets, less accumulated amortization of $1,101 and $1,400, respectively                         3,147           2,397
                                                                                                   -------------  --------------
         Total assets                                                                              $ 112,258      $  134,297
                                                                                                   =============  ==============


LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
   Accounts payable                                                                                 $  4,884       $   7,076
   Accrued liabilities                                                                                13,600          13,507
   Current maturities of long-term debt and obligations under capital leases                           1,484           1,194
                                                                                                   -------------  --------------
         Total current liabilities                                                                    19,968          21,777

Senior notes, net of discount of $429 and $321, respectively                                          57,897          58,005
Long-term debt, less current maturities                                                                4,775           4,017
Obligations under capital leases, less current maturities                                              5,408           5,228
Other liabilities                                                                                      4,845           3,757
                                                                                                   -------------  --------------
         Total liabilities                                                                            92,893          92,784
                                                                                                   -------------  --------------

Commitments and contingencies (Note 12)

Shareholders' equity:
   Preferred stock, $.10 par value, 5,000,000 shares authorized,  -0- and 45,667 shares
     issued, respectively                                                                                  -               5
Common stock, $.10 par value, 50,000,000 shares authorized, 20,788,000 and 24,836,900 shares
   issued, respectively                                                                                2,079           2,484
Additional paid-in capital                                                                            71,023          97,277
Less:  Treasury stock, 273,445 shares, at cost                                                        (2,108)         (2,108)
Retained deficit                                                                                     (51,629)        (56,145)
                                                                                                   -------------  --------------
         Total shareholders' equity                                                                   19,365          41,513
                                                                                                   =============  ==============
         Total liabilities and shareholders' equity                                                $ 112,258      $  134,297
                                                                                                   =============  ==============
</TABLE>

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

                                       22

<PAGE>
<TABLE>
<CAPTION>

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

                                                                                 Fiscal Years Ended
                                                                 ----------------------------------------------------
                                                                  December 31,      December 29,      December 28,
                                                                      1995              1996              1997
                                                                 ----------------  ----------------  ----------------
<S>                                                               <C>               <C>               <C>
REVENUES:
   Restaurant sales                                               $     181,778     $     156,445     $     139,350
   Franchise revenues and fees                                            7,081             5,867             4,838
   Owner fee income                                                           -               440               742
                                                                  ----------------  ----------------  ----------------
         Total revenues                                                 188,859           162,752           144,930
                                                                  ----------------  ----------------  ----------------

COSTS AND EXPENSES:
   Restaurant costs of sales                                             64,813            53,712            45,241
   Restaurant operating expenses, exclusive of depreciation and
     amortization and advertising and promotion expenses                 83,671            69,164            59,629
   General and administrative expenses                                   19,606            17,397            15,451
   Advertising and promotion expenses                                    13,188             7,767             9,948
   Depreciation and amortization                                         13,006             9,838             9,106
   Owner expense                                                              -               744             1,137
   Warrant expense                                                            -                20               940
   Provision for restaurant closures and other                           31,045                20               158
                                                                  ----------------  ----------------  ----------------
         Total costs and expenses                                       225,329           158,662           141,610
                                                                  ----------------  ----------------  ----------------

Income (loss) from operations                                           (36,470)            4,090             3,320
                                                                  ----------------  ----------------  ----------------

OTHER INCOME (EXPENSE):
   Interest expense                                                     (10,682)           (8,622)           (7,431)
   Interest income                                                          538               614               749
   Equity in loss of affiliate                                                -                 -              (720)
   Other                                                                    234               (49)               21
                                                                  ----------------  ----------------  ----------------
         Total other (expense)                                           (9,910)           (8,057)           (7,381)
                                                                  ----------------  ----------------  ----------------

Loss before income taxes and extraordinary items                        (46,380)           (3,967)           (4,061)
PROVISION (BENEFIT) FOR INCOME TAXES                                        539              (675)              455
                                                                  ----------------  ----------------  ----------------

Loss before extraordinary items                                         (46,919)           (3,292)           (4,516)
EXTRAORDINARY ITEM (net of tax expense of $1,350)                             -             5,280                 -
                                                                  ----------------  ----------------  ----------------
Net income (loss)                                                  $    (46,919)    $       1,988     $      (4,516)
                                                                  ================  ================  ================

Earnings (loss) per common share:
   Loss before extraordinary item                                 $       (3.00)    $        (.19)    $        (.22)
   Extraordinary item                                                         -               .31                 -
                                                                  ----------------  ----------------  ----------------

Basic earnings (loss) per common share                            $       (3.00)    $         .12     $        (.22)

Diluted earnings (loss) per common share                          $       (3.00)    $         .12     $        (.22)
                                                                  ================  ================  ================
Weighted average shares outstanding                                      15,620            17,007            20,709
                                                                  ================  ================  ================
</TABLE>

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

                                       23
<PAGE>
                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                 (In thousands)
<TABLE>
<CAPTION>
                                                           Common Stock                Preferred Stock
                                                     ---------------------------- ----------------------------
                                                       Shares    Shares              Shares     Shares
                                                     Authorized  Issued    Amount  Authorized   Issued  Amount
                                                     ----------  ------    ------  ----------   ------- ------
<S>                                                   <C>        <C>      <C>       <C>         <C>     <C>
Balances at January 1, 1995                           25,000     15,837   $ 1,584      -          -     $  -

Amendment to the Charter (A)                          25,000       -          -        -          -        -
Issuance of common stock                                -            90         9      -          -        -
Treasury stock acquired                                 -          -          -        -          -        -
Net loss                                                -          -          -        -          -        -
                                                      ------     ------   -------    -----      ------  ------
Balances at December 31, 1995                         50,000     15,927     1,593      -          -        -

Issuance of common stock                                -            35         3      -          -        -
Authorization of preferred stock
 (B)                                                    -          -          -      5,000        -        -
Shareholders Rights Offering                            -         4,826       483      -          -        -
Compensatory stock options and
   warrants                                             -          -          -        -          -        -
Net income                                              -          -          -        -          -        -
                                                      ------     ------   -------    -----      ------  ------
Balances at December 29, 1996                         50,000     20,788     2,079    5,000        -        -

Issuance of common stock                                -           140        14      -          -        -
Compensatory stock options and
   warrants                                             -          -          -        -          -        -
Issuance of common stock and
   preferred to acquire
   investment in affiliate                              -         3,909       391      -          46       5
Net loss                                                -          -          -        -          -        -
                                                      ------     ------   -------    -----      ------  ------
Balances at  December 28, 1997                        50,000     24,837   $ 2,484    5,000        46    $  5
                                                      ======     ======   =======    =====      ======  ======

</TABLE>
<TABLE>
<CAPTION>
                                                             Treasury Stock
                                                             and Contingent
                                                                 Shares
                                                            ------------------
                                                                                Additional  Retained
                                                                                 Paid-In    Earnings     Total
                                                            Shares    Amount     Capital    (Deficit)   Equity
                                                            ------   --------   ---------   ---------  ---------
<S>                                                         <C>       <C>       <C>         <C>         <C>
Balances at January 1, 1995                                 (239)    $ 2,009)   $  60,610   $ (6,698)   $ 53,487

Amendment to the Charter (A)                                  -         -            -           -          -
Issuance of common stock                                      -         -             194        -           203
Treasury stock acquired                                      (34)        (99)        -           -           (99)
Net loss                                                      -         -            -       (46,919)    (46,919)
                                                            ------   --------   ---------   ---------    --------
Balances at December 31, 1995                               (273)     (2,098)      60,804    (53,617)       6,672

Issuance of common stock                                      -          -             74        -             77
Authorization of preferred stock
 (B)                                                          -          -            -          -           -
Shareholders Rights Offering                                  -          -          9,975        -         10,458
Compensatory stock options and
   warrants                                                   -          -            170        -            170
Net income                                                    -          -            -        1,988        1,988
                                                            ------   --------   ---------   ---------    --------
Balances at December 29, 1996                               (273)     (2,108)      71,023    (51,629)      19,365

Issuance of common stock                                      -          -            264        -            278
Compensatory stock options and
   warrants                                                   -          -            957        -            957
Issuance of common stock and
   preferred to acquire
   investment in affiliate                                    -          -         25,033        -         25,429
Net loss                                                      -          -            -       (4,516)      (4,516)
                                                            ------   --------   ---------   ---------    --------
Balances at  December 28, 1997                              (273)    $(2,108)   $  97,277   $(56,145)    $ 41,513
                                                            ======   ========   =========   =========    ========

</TABLE>
----------------------
(A)  On May 13, 1995, stockholders of the Company approved a proposal to amend
     the Certificate of Incorporation to increase the number of authorized
     shares of Common Stock from 25,000,000 shares to 50,000,000.

(B)  On July 10, 1996, stockholders of the Company ratified the authorization of
     5,000,000 shares of Preferred Stock at a par value of $.10.

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

                                       24

<PAGE>
<TABLE>
<CAPTION>


                                      RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF CASH FLOW
                                                    (In thousands)

                                                                                      Fiscal Years Ended
                                                                        -----------------------------------------------
                                                                         December 31,    December 29,    December 28,
                                                                             1995            1996            1997
                                                                        ---------------  --------------  --------------
<S>                                                                     <C>              <C>             <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Net income (loss)                                                       $   (46,919)     $     1,988     $      (4,516)
Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization                                           13,006           10,482            10,106
     Extraordinary items, before tax expense of $1,350                            -           (6,630)                -
     Provision for restaurant closures and other                             31,045               20               158
     Provision for losses on receivables                                      1,507              968              (392)
     Other                                                                    2,276            1,245               101
     Loss on sale of property and equipment                                       -                -             1,025
     Warrant expense                                                              -               20               940
     Equity in loss of affiliate                                                  -                -               720
     Changes in assets and liabilities net of effects from business
       combinations:
       (Increase) decrease in assets:
         Receivables                                                            775             (306)             (331)
         Inventory                                                              (63)             262              (196)
         Prepaid expenses and other current assets                              185              161              (376)
         Other assets                                                           292             (121)              221
       Increase (decrease) in liabilities:
         Accounts payable and accrued liabilities                             7,815           (6,011)            2,083
         Deferred income taxes                                                    -                -              (107)
         Other liabilities                                                   (1,424)          (1,535)           (1,178)
                                                                        ---------------  --------------  --------------
           Net cash provided by operating activities                          8,495              543             8,258
                                                                        ---------------  --------------  --------------

CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
   (Increase) decrease in investments                                          (848)           2,975             1,512
   Notes receivable                                                             154              312               256
   Pre-opening costs                                                            (45)            (156)             (237)
   Capital expenditures                                                      (3,405)          (2,306)           (6,845)
   Proceeds from the sale of property and equipment                           4,266            4,392             1,872
   (Increase) decrease in intangible assets                                    (111)             (39)                -
   Acquisition of businesses, net of cash acquired                           (1,931)               -            (2,172)
   Proceeds from the sale of a business                                       2,730                -                 -
                                                                        ---------------  --------------  --------------
           Net cash used in investing activities                                810            5,178            (5,614)
                                                                        ---------------  --------------  --------------

CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
   (Increase) in restricted cash                                               (683)            (966)              269
   Payment of organization and development costs                                 (3)               -                 -
   Principal payments of debt                                                (2,114)          (1,696)           (1,075)
   Senior Notes retirement                                                        -          (19,612)                -
   Issuance of common stock, net of costs of issuance                           203           10,535               298
   Principal payments on capital lease obligations                             (604)            (508)             (413)
                                                                        ---------------  --------------  --------------
           Net cash provided from (used in) financing activities             (3,201)         (12,247)             (921)
                                                                        ---------------  --------------  --------------
           Net increase (decrease) in cash                                    6,104           (6,526)            1,723

CASH AND CASH EQUIVALENTS, beginning of period                                2,707            8,811             2,285
                                                                       ----------------  --------------  --------------
CASH AND CASH EQUIVALENTS, end of period                                $     8,811      $     2,285     $       4,008
                                                                        ===============  ==============  ==============

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

</TABLE>

                                       25
<PAGE>

                    RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (tabular dollars in thousands, except per share amounts)



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a)  Financial Statement Presentation and Organization

              The accompanying consolidated financial statements include Rally's
         Hamburgers, Inc. and its wholly-owned subsidiaries, each of which is
         described below. Rally's Hamburgers, Inc. and its subsidiaries are
         collectively referred to herein as the context requires as "Rally's" or
         the "Company". The investment in affiliate, which is owned more than
         20% and less than 50% represents an investment in Checkers Drive-In
         Restaurants, Inc. and is recorded on the equity method (see Note 2).
         All significant intercompany accounts and transactions have been
         eliminated.

              Rally's is one of the largest chains of double drive-thru
         restaurants in the United States. At December 28, 1997, the Rally's
         system included 477 restaurants in 18 states, primarily in the Midwest
         and the Sunbelt, comprised of 229 Company-owned and operated, 221
         franchised and 27 Company-owned restaurants in Western markets which
         are operated as Rally's restaurants by CKE Restaurants, Inc. ("CKE"), a
         significant shareholder of the Company, under an operating agreement
         which began July, 1996. Two additional Company-owned stores covered by
         the operating agreement have been converted to the Carl's Jr. format
         and are not included in the above store count. The Company's
         restaurants offer high quality fast food. The Company serves the
         drive-thru and take-out segments of the quick-service restaurant
         industry. The Company opened its first restaurant in January 1985 and
         began offering franchises in November 1986.

              Rally's Hamburgers, Inc., Rally's of Ohio, Inc., Self Service
         Drive Thru, Inc. and Hampton Roads Foods, Inc. own and operate Rally's
         restaurants in various states. Additionally, Rally's Hamburgers, Inc.
         operates as franchisor of the Rally's brand. Rally's Management, Inc.
         provides overall corporate management of the Company's businesses.
         Rally's Finance, Inc. was organized for the purpose of making loans to
         Rally's franchisees to finance the acquisition of restaurant equipment
         and modular buildings. RAR, Inc. was organized for the purpose of
         acquiring and operating a corporate airplane and is currently inactive.
         The Company's wholly-owned subsidiary, ZDT Corporation, was formed to
         own the Zipps brand and franchise system. MAC 1 was organized for the
         purpose of acquiring a manufacturer of modular buildings. The
         manufacturing business was sold in January 1995.

              The preparation of the financial statements in conformity with
         generally accepted accounting principles requires management to make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities and disclosures of contingent assets and liabilities at
         the date of the financial statements and the reported amounts of
         revenues and expenses during the reporting period. Actual results could
         differ from those estimates, when actual transactions anticipated are
         consummated. Certain of the most significant estimates include useful
         lives assigned to depreciable/amortizable assets, fair value less costs
         to sell of long-lived assets held for sale, fair value of long-lived
         assets held for use, future net occupancy costs related to
         closed/disposable properties, accruals for the Company's self-insured
         and high deductible insurance programs, and disclosures regarding
         commitments and contingencies.

      b) Revenue Recognition

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

                                       26

<PAGE>
     c)  Property and Equipment

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

     d)  Inventory

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

     e)  Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>

                                                              Fiscal Years Ended
                                               -------------------------------------------------
                                                December 31,     December 29,     December 28,
                                                    1995             1996             1997
                                               --------------- ----------------- ---------------
<S>                                            <C>             <C>               <C>
Interest paid                                  $    10,679     $      8,639      $       7,013
Income taxes paid                                      212              983                545
Capital lease obligations incurred                   1,616              111                386
</TABLE>

              On December 18, 1997 the Company acquired approximately 26.3% of
         the outstanding common stock of Checkers Drive-In Restaurants, Inc. in
         exchange for common and preferred stock of the Company (see Note 2).

              On February 13, 1995, the Company acquired all of the shares of
         common stock of Hampton Roads Foods, Inc. (a Louisiana corporation) and
         certain of the assets of HRF, Inc. (a Virginia corporation),
         collectively referred to as "HRF." On July 9, 1997, the Company
         acquired from Arkansas Investment Group, Inc., substantially all the
         operating assets employed in the franchisee Rally's restaurants.

         The purchases were recorded as follows:
<TABLE>
<CAPTION>

                                                           Fiscal Year            Fiscal Year
                                                              Ended                  Ended
                                                         -----------------      -----------------
                                                           December 31,           December 28,
                                                               1995                   1997
                                                         -----------------      -----------------
<S>                                                      <C>                    <C>
           Fair value of assets acquired                 $     9,133            $     2,800
           Cash paid                                          (2,125)                (2,200)
                                                         =================      =================
           Liabilities assumed, receivables forgiven     $     7,008            $       600
                                                         =================      =================
</TABLE>

              On January 30, 1995, the Company sold all of the shares of common
         stock of Beaman Corporation, its wholly-owned modular building
         subsidiary, for approximately $3.1 million, of which approximately $2.7
         million was received in cash. As a result of the sale of Beaman, the
         Company recorded the net present value of a non-interest bearing note
         of approximately $347,000.

              The Company recorded in 1996 approximately $547,000 in notes
         receivable primarily as the result of the sale of five of its
         restaurants in Montgomery, Alabama. These non-cash transactions have
         been excluded from the consolidated statements of cash flows.

              During fiscal 1995, 1996, and 1997, the Company accepted notes due
         within two to five years, bearing interest at rates previously
         specified in the underlying franchise agreements, for certain
         receivables from franchisees in the aggregate amount of approximately
         $542,000 for 1995, approximately $340,000 for 1996 and approximately
         $493,000 for 1997.

                                       27
<PAGE>

              For purposes of the consolidated statement of cash flows, the
         Company considers all highly liquid debt instruments with an original
         maturity of three months or less at the date of purchase to be cash
         equivalents. Cash equivalents at December 29, 1996 and December 28,
         1997 were approximately $976,000 and $2.3 million, respectively.

     f)  Earnings (Loss) Per Common Share

              Basic earnings (loss) per common share is calculated based upon
         the Company's reported income and the weighted average common shares
         outstanding of 15,620; 17,007 and 20,709 for fiscal years 1995, 1996
         and 1997, respectively. The income and average shares outstanding for
         purposes of the computation of diluted earnings per share are the same
         as for the computation of basic earnings per share. Potentially
         dilutive convertible preferred stock (see Note 2), common stock
         warrants (see Notes 4 and 17) and common stock options (see Notes 4 and
         14) have no effect as they are anti-dilutive for all periods presented.

     g)  Stock Options

              As discussed in Note 14, the Company adopted the disclosure-only
         provisions of Statement of Financial Accounting Standards No. 123 (SFAS
         123), "Accounting for Stock-Based Compensation".

     h)   Impairment of Long-Lived Assets

              As discussed in Note 16, during the fourth quarter of 1995, the
         Company early adopted Statement of Financial Accounting Standards No.
         121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
         Assets to be Disposed Of" (SFAS 121).

     i)   Income Taxes

              The Company accounts for income taxes under the asset or liability
         method whereby 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. 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.

     j)   Disclosures about Fair Values of Financial Instruments

              The balance sheets as of December 29, 1996 and December 28, 1997,
         reflect the fair value amounts which have been determined, using
         available market information and appropriate valuation methodologies.
         However, considerable judgement is necessarily required in interpreting
         market data to develop the estimates of fair value. Accordingly, the
         estimates presented herein are not necessarily indicative of the
         amounts that the Company could realize in a current market exchange.
         The use of different market assumptions and/or estimation methodologies
         may have a material effect on the estimated fair value amounts.

              Cash and cash equivalents, receivables - Due to the short maturity
         of these items, the carrying amounts are a reasonable estimate of their
         fair value.

                                       28
<PAGE>


              Investments and Senior Notes - The fair values of investments and
         Senior Notes are based upon quoted market prices.

              Long-term debt - The fair value of long-term debt approximates the
         carrying value due to all significant amounts bearing interest at rates
         which are variable or approximate a rate estimated to be available
         currently.

              The following summarizes the carrying values and fair values of
financial instruments:
<TABLE>
<CAPTION>

                                                  December 29, 1996                  December 28, 1997
                                                  -----------------                  -----------------
                                           Carrying Value     Fair Value      Carrying Value     Fair Value
                                          ---------------------------------------------------------------------
<S>                                               <C>              <C>               <C>              <C>
Cash and Cash Equivalents                         $  3,934         $  3,934          $  5,388         $  5,388
Investments                                          1,958            1,958               446              446
Senior Notes                                        57,897           54,500            58,005           55,200
Long-term debt                                       5,874            5,874             4,798            4,798
</TABLE>


     k)  Goodwill, Reacquired Franchise Rights, Other Intangibles and Other
Assets

              Goodwill, reacquired franchise and territory rights, other
         intangibles and other assets are being amortized using the
         straight-line method over the following periods:

                                             Amortization
                                                Period
                                           ------------------
Goodwill                                    5, 20-25 years
Reacquired franchise and territory            5-20 years
   rights
Other intangibles                             3-25 years
Other assets                                  3-25 years

              Subsequent to the intangibles' acquisition, the Company evaluates
         whether later events and circumstances have occurred that indicate the
         remaining estimated useful life of goodwill and other intangibles may
         warrant revision or that the remaining balance of goodwill and other
         intangibles may not be recoverable. When factors indicate that goodwill
         or other intangibles should be evaluated for possible impairment, the
         Company utilizes the procedures as set forth in SFAS No. 121 and
         discussed in Note 16, Impairment of Long-Lived Assets.

     l)  Owner Fee Income and Expense

              Revenue received as a result of the operating agreement with CKE
         is referred to as Owner fee income in the accompanying consolidated
         financial statements. Expenses related to the ongoing investment in the
         CKE-operated restaurants consist primarily of depreciation and
         amortization and are referred to as Owner expenses in the accompanying
         consolidated financial statements.

     m)  Advertising Costs

              It is the Company's policy to expense advertising costs as
         incurred in accordance with Statement of Position 93-7. The amounts
         expensed for fiscal years ended December 31, 1995, December 29, 1996
         and December 28, 1997 were approximately $13,188,000, $7,767,000 and
         $9,948,000, respectively, as reflected on the Consolidated Statements
         of Operation.

     n)  Reclassifications

              Certain items have been reclassified in the accompanying
         consolidated financial statements for prior periods in order to be
         comparable with the classification adopted for the fiscal year ended
         December 28, 1997. Such reclassifications had no effect on previously
         reported net income.

                                       29
<PAGE>

2.    ACQUISITIONS

         On July 9, 1997, the Company acquired from Arkansas Investment Group,
     Inc. ("AIGI") (an Arkansas corporation) substantially all the operating
     assets employed in the operation of AIGI's franchised Rally's restaurants
     for approximately $2.8 million. The cash disbursed in payment of the
     purchase price was reduced by certain amounts owed by AIGI to the Company.
     Actual cash disbursed was approximately $2.2 million. In addition, the
     Company assumed five of AIGI's ground lease obligations and five of its
     ground and building lease obligations, and entered into three additional
     ground leases. AIGI owned and operated a total of ten Rally's restaurants
     in the Little Rock, Arkansas market. The acquisition of the AIGI operating
     assets was accounted for as a purchase. The Company believes that the $2.8
     million represents the fair value of the acquired assets. The impact on
     operations of this acquisition was not significant for any of the periods
     presented, and therefore, proforma amounts are not presented giving effect
     to this acquisition.

         On December 18, 1997, the Company acquired approximately 19.1 million
     shares (the "Checkers Shares") of the common stock, $0.001 par value per
     share (the "Checkers Common Stock"), of Checkers Drive-In Restaurants,
     Inc., a Delaware corporation ("Checkers"), pursuant to that certain
     Exchange Agreement, dated as of December 8, 1997 (the "Exchange
     Agreement"), between Rally's, CKE Restaurants, Inc, ("CKE"), Fidelity
     National Financial, Inc. ("Fidelity"), GIANT GROUP, LTD. ("GIANT") and the
     other parties named in the Exchange Agreement. CKE, Fidelity and GIANT
     beneficially owned 5,278,015 shares, 2,759,788 shares and 3,136,849 shares,
     respectively, of Rally's Common Stock prior to the consummation of the
     Exchange Agreement, approximately 23.9%, 12.7% and 15.2% of the then
     outstanding shares of Rally's Common Stock. In addition, Terry Christensen,
     William Foley, II, David Gotterer, Andrew Puzder, Burt Sugarman and C.
     Thomas Thompson, who are Directors of Rally's, are parties to the Exchange
     Agreement. Mary Hart Sugarman, AJ Sugarman and Al Sugarman, who also
     participated in the exchange, are related to Burt Sugarman.

         In consideration of the acquisition of the Checkers Shares, Rally's
     issued 3,909,336 shares of its common stock, $.10 par value per share (the
     "Rally's Common Stock"), and 45,667 shares of its Series A Participating
     Preferred Stock, $.10 par value per share (the "Rally's Preferred Stock").
     A dividend of $43.50 per share will accrue on the Rally's Preferred Stock
     unless converted to Rally's Common Stock prior to July 31, 1998. The
     parties to the Exchange Agreement, who own a majority of Rally's Common
     Stock, have agreed to vote in favor of conversion. The Rally's Preferred
     Stock will be converted into 4,566,700 shares of Rally's Common Stock upon
     approval of such conversion by Rally's stockholders. The exchange ratio
     used to determine the number of shares of Rally's Common Stock (including
     the shares to be issued upon conversion of the Rally's Preferred Stock) to
     be issued pursuant to the Exchange Agreement was based upon the average
     closing price of the Checkers Common Stock and the Rally's Common Stock for
     the five trading days preceding the public announcement of the proposed
     exchange on September 19, 1997.

         This stock acquisition was accounted for as a long term asset under
     "Investment in Affiliate" using the equity method of accounting with an
     initial investment value of $25.4 million, based upon the market value of
     the Rally's Common Shares issued and issuable upon conversion of the
     Rally's Preferred Stock issued. This investment represented 26.3% interest
     in Checkers. The allocation of the purchase price of this investment has
     not yet been finalized. For purposes of computing Rally's 1997 equity in
     the loss of Checkers, the $12.5 million excess of the investment over the
     pro-rata portion of Checkers' book value acquired has been treated as an
     intangible asset with a 20 year life. The 1997 equity in the loss of
     affiliate of $720,000 includes $52,000 of intangible amortization.

3.   RESTAURANT CLOSURES AND OTHER

         Certain charges in fiscal years 1995, 1996 and 1997 have been
     aggregated and segregated into the caption "Provision for Restaurant
     Closures and Other" in the accompanying Statements of Operations. These
     items represent estimates of the impact of management decisions, which have
     been made at various points in time in response to the Company's sales and
     profit performance and the then-current revenue building and profit
     enhancing strategies.

                                       30

<PAGE>

         In summary and chronologically, the decisions that had been reached in
     1994 were to abandon additional real estate development projects and
     certain investment in infrastructure (approximately $5.3 million) and to
     abandon additional projects and franchise or otherwise dispose of up to 60
     Company restaurants (approximately $12.0 million). During 1995, the Company
     concluded that much of its 1994 plan of disposal would not be executable.
     As a result, the Company decided to (i) close up to 16 of the original 60
     restaurants included in the 1994 disposal plan, (ii) close nine poor
     performing restaurants in its core markets, (iii) write-off estimated
     exposure resulting from the default of a subleasee/franchisee in a former
     Company market, (iv) record additional writedowns of modular building
     value, (v) record writedowns to sales price less cost to sell of all
     properties auctioned in fourth quarter of 1995 (vi) record asset writedowns
     and occupancy exposure related to the default of a tenant for five of the
     units closed under the 1994 plan and (vii) record other changes in
     estimates related to the Company's surplus properties. The charges for the
     above 1995 items totaled approximately $17.3 million. Also reflected in
     this caption for fiscal 1995 is an approximate $13.7 million charge related
     to the Company's adoption of Statement of Financial Accounting Standards
     No. 121 ("SFAS 121) further discussed in Note 16.

         Included in this caption for fiscal 1996 are charges of approximately
     $911,000 related to the write-down and sale of assets offset by
     approximately $891,000 resulting from a reduction in surplus property
     reserves related to Management's decision to re-open three units previously
     closed and to continue to operate a fourth unit that had been designated
     for closure. During 1997, the Company recorded provisions of $33,000 and
     $199,000 to write-off leasehold improvements and future rental costs
     associated with the Louisville corporate office and regional offices.
     Additionally in 1997, the Company recorded gains on held for sale
     properties of $74,000.

         The following summarizes the components of the provision for restaurant
     closures and other as well as the year end balances of certain related
     reserves.
<TABLE>
<CAPTION>

                                                December           December            December
                                                31, 1995           29, 1996            28, 1997
                                                --------           --------            --------
<S>                                            <C>               <C>                 <C>
Provisions -
----------
Abandoned projects & expected store closings
    Fixed asset writedowns                     $     5,484       $         87         $        33
    Future occupancy costs                           5,283                  -                 199
Modular building writedowns                          2,058                  -                   -
Excess land writedowns                               2,600                  -                   -
Surplus equipment writedowns                         1,920                  -                   -
Reduction in loss estimate on previously
    reserved locations                                   -              (891)                (74)

SFAS 121 impairment writedowns (see
    Note 16)                                        13,700                824                   -
                                               ------------       ------------        ------------
PROVISION FOR RESTAURANT
   CLOSURES AND OTHER                               31,045                 20                 158
                                               ============       ============        ============
Reserves -
--------
Closed store reserve - current (see Note 8)          2,767              1,964               1,493
Closed store reserve - long term (see Note 9)        6,908              3,881               3,065
                                               ============       ============        ============
TOTAL CLOSED STORE RESERVES                          9,675              5,845               4,558
                                               ============       ============        ============
</TABLE>

                                       31
<PAGE>

4.   RELATED PARTY TRANSACTIONS

     a)  Issuance of Warrants

              On December 20, 1996, the Company issued warrants (the "Warrants")
         to purchase an aggregate of 1,500,000 restricted shares of its Common
         Stock to CKE and Fidelity National Financial, Inc. The Warrants were
         granted as an incentive to CKE and Fidelity to continue to participate
         in the identification and exploitation of synergistic opportunities
         with the Company. The Warrants have a three-year term and became
         exercisable on December 20, 1997. The exercise price is $4.375 per
         share, the closing price of the Common Stock on December 20, 1996. The
         underlying shares of Common Stock have not been registered with the
         Securities and Exchange Commission and, therefore, are not freely
         tradable. If exercised, the Warrants would provide approximately $6.6
         million in additional capital to the Company. The Company obtained a
         valuation analysis from an investment banking firm of national
         standing. Such analysis estimated the value of the Warrants to be
         approximately $960,000. Approximately $20,000 and $940,000 was expensed
         in 1996 and 1997, respectively.

     b)  West Coast Operating Agreement

              On July 1, 1996, the Company entered into a ten-year Operating
         Agreement with Carl Karcher Enterprises, Inc., a subsidiary of CKE
         Restaurants, Inc. (collectively referred to as "CKE"). CKE is the
         operator of the Carl's Jr. restaurant chain. Pursuant to the agreement,
         29 Rally's owned restaurants located in California and Arizona are
         being operated by CKE, two of which are converted to a Carl's Jrs.
         format. Such agreement is cancelable after an initial five-year period,
         at the discretion of CKE. A portion of these restaurants, at the
         discretion of CKE, will be converted to the Carl's Jr. format. To date,
         two restaurants have been converted. The agreement was approved by a
         majority of the independent Directors of the Company. Prior to the
         agreement, the Company's independent Directors had received an opinion
         as to the fairness of the agreement, from a financial point of view,
         from an investment banking firm of national standing.

              Under the terms of the Operating Agreement, CKE is responsible for
         any conversion costs associated with transforming restaurants to the
         Carl's Jr. format, as well as the operating expenses of all the
         restaurants. Rally's retains ownership of all 29 (two of which are
         Carl's Jrs.) restaurants and is entitled to receive a percentage of
         gross revenues generated by each restaurant. In the event of a sale by
         Rally's of any of the 29 restaurants, Rally's and CKE would share in
         the proceeds based upon the relative value of their respective capital
         investments in such restaurant.

     c)  Option Grants to Non-employees

              During 1996, the Company granted 150,000 options to certain
         individuals not employed by the Company for services provided.
         Approximately $84,000 has been expensed for these grants in General and
         Administrative Expenses in the accompanying 1996 Statement of
         Operations. Such options were granted at the market values on the dates
         of grant, were immediately exercisable and expire in five years.

     d)  Other Transactions

              The Company has had transactions with certain companies or
         individuals which are related parties by virtue of having stockholders
         in common, by being officers/directors or because they are controlled
         by significant stockholders or officers/directors of the Company. Such
         transactions which impacted the Company's consolidated financial
         statements are summarized below. Information with respect to related
         party rent is disclosed in Note 12. The Company and its franchisees
         each pay 1/2% of sales to the Rally's National Advertising Fund (the
         "Fund"), established for the purpose of creating and producing
         advertising for the chain. The Fund is not included in the consolidated
         financial statements, although the Company's contributions to the Fund
         are included in the Advertising and Promotion Expenses in the Company's
         consolidated Statements of Operations.

                                       32
<PAGE>

              Effective November 30, 1997, the Company entered into a Management
         Services Agreement, pursuant to which certain of the management of
         Checkers Drive-In Restaurants, Inc. ("Checkers") is providing key
         services to Rally's, including executive management, financial planning
         and accounting, franchise administration, purchasing and human
         resources. In addition, Rally's and Checkers share certain of their
         executive officers, including Chief Executive Officer and the Chief
         Operating Officer. The total cost of these services was $95,000 in
         1997.

              See Note 2. Acquisitions for other related party transactions
         "the Exchange Agreement".

         Summary of Related Party Transactions
         -------------------------------------
<TABLE>
<CAPTION>

                                                                  December 29,       December 28,
                                                                     1996               1997
                                                                 ---------------------------------
         Balance Sheet Amounts
         ---------------------
<S>                                                              <C>                   <C>
         Accounts receivable                                     $     565             $     1,078
         Notes receivable                                              127                      86
         Investment in affiliate                                         -                  24,988
         Accounts payable                                               95                     520
         Accrued liabilities                                            60                      65

</TABLE>
<TABLE>
<CAPTION>
                                                                     Fiscal Years Ended
                                                     ---------------------------------------------------
                                                      December 31,     December 29,      December 28,
                                                          1995             1996              1997
                                                     ---------------  ---------------- -----------------
<S>                                                 <C>                   <C>             <C>
         Revenue and Transaction Amounts
         -------------------------------
         Repurchase of Senior Notes (gross gain)     $         -           $    6,339      $          -
         Royalty fees                                      2,407                    -                 -
         Owner fee income                                      -                  440               742
         Rental income                                       262                    -                 -
         Interest income                                      16                   49                52
                                                     =============       ==============    ==============
                                                     $     2,685           $    6,828      $        794
                                                     =============       ==============    ==============
</TABLE>
<TABLE>
<CAPTION>
<S>                                                 <C>                <C>              <C>
         Expense Amounts
         ---------------
         Legal                                       $       777        $      1,024     $       1,017
         Rent Expense                                        292                 470               396
         Owner expense                                         -                 744             1,137
         Interest expense                                      -                 180                 -
         Compensatory stock options and
            Warrants                                           -                 170               940
         Management Services Agreement                         -                   -                95
                                                     ===============    ==============  ================
                                                     $     1,069        $      2,588      $      3,585
                                                     ===============    ==============  ================
</TABLE>

5.   RESTRICTED CASH

         Restricted cash consists of amounts held in various Certificates of
     Deposit as collateral for Letters of Credit and daily Automated Clearing
     House ("ACH") transactions.

6.   INVESTMENTS

         All of the Company's investment securities are deemed as
     "available-for-sale" under SFAS 115, "Accounting for Certain Investments in
     Debt and Equity Securities". Accordingly, investments are reported at fair
     value with unrealized holding gains and losses, excluding those losses
     considered to be other than temporary, reported as a net amount in a
     separate component of shareholders' equity. Provisions for declines in
     market value are made for losses considered to be other than temporary.
     Realized gains or losses from the sale of investments are based on the
     specific identification method.


                                       33
<PAGE>

         No unrealized gains or losses were recorded for any period presented,
     due to the quoted market prices of the Company's investments approximating
     the cost. Investments consist of:
<TABLE>
<CAPTION>

                                                         December 29,      December 28,
                                                             1996              1997
                                                       ----------------- -----------------
<S>                                                            <C>             <C>
                 US Government and Agencies                    $    500        $        -
                 Mortgage - backed Securities                     1,458               446
                                                       ================= =================
                                                                $ 1,958        $      446
                                                       ================= =================
</TABLE>

         The contractual maturity of the mortgage-backed securities as of
     December 28, 1997 was: $43 within five years, $403 over 10 years.

         The proceeds from the sale of investments and related gross gains and
     losses for the twelve months ended December 31, 1995, December 29, 1996 and
     December 28, 1997 were as follows:

<TABLE>
<CAPTION>
                                                                             Fiscal Years Ended
                                                          ---------------------------------------------------------
                                                            December 31,        December 29,        December 28,
                                                                1995                1996                1997
                                                          -----------------    ----------------    ----------------
<S>                                                       <C>                  <C>                 <C>
                  Proceeds from the sale of investments   $      15,653        $     10,531        $         3,674
                  Gross gains realized                               56                -                         6
                  Gross losses realized                            -                     (4)                     -
</TABLE>

7.   NET PROPERTY AND EQUIPMENT

         Property and equipment consists of the following:
<TABLE>
<CAPTION>
                                                                  December 29,      December 28,
                                                                      1996              1997
                                                                 ----------------  ----------------
<S>                                                              <C>               <C>
                  Land                                           $      14,074     $       14,145
                  Buildings and leasehold improvements                  47,463             52,196
                  Equipment, furniture and fixtures                     41,312             40,582
                                                                 ----------------  ----------------
                                                                       102,849            106,923
                  Less accumulated depreciation                        (37,518)           (42,872)
                                                                 ----------------  ----------------
                                                                        65,331             64,051
                                                                 ----------------  ----------------
                  Property held under capital lease                      6,145              6,145
                  Less accumulated amortization                         (1,670)            (2,129)
                                                                 ----------------  ----------------
                                                                         4,475              4,016
                                                                 ================  ================
                  Net property and equipment                     $      69,806     $       68,067
                                                                 ================  ================
</TABLE>

8.   ACCRUED LIABILITIES

         Accrued liabilities (current) consist of the following:
<TABLE>
<CAPTION>

                                                                    December 29,    December 28,
                                                                        1996            1997
                                                                   --------------- --------------
<S>                                                                <C>              <C>
                  Payroll and payroll taxes                        $     2,245      $    1,944
                  Closed store reserve                                   1,964           1,493
                  Workers compensation                                   2,367           2,272
                  Bonuses and severance                                    979             712
                  Step leases                                              975             984
                  Accrued income taxes                                     935             828
                  Sales taxes                                              783           1,013
                  Legal fees and settlements                               380           1,478
                  Other                                                  2,972           2,783
                                                                   =============== ==============
                                                                   $    13,600      $   13,507
                                                                   =============== ==============
</TABLE>

                                       34
<PAGE>

9.   OTHER LIABILITIES

         Other liabilities (non-current) consist of the following:

                                               December 29,    December 28,
                                                   1996            1997
                                              --------------- ----------------

Closed store reserve                          $      3,881      $     3,065
Unfavorable lease loss                                 748              590
Other                                                  216              102
                                              =============== ================
                                              $      4,845      $     3,757
                                              =============== ================

10.  SENIOR NOTES

         On March 9, 1993, the Company sold approximately $85 million of 9 7/8%
     Senior, Notes due 2000 (the "Notes"). The Company is required to make a
     mandatory sinking fund payment on June 15, 1999 to retire 33 1/3% in
     aggregate principal amount of the Notes issued. The Notes are carried net
     of the related discount, which is being amortized over the life of the
     Notes. Interest is payable June 15 and December 15. The Notes include
     certain restrictive covenants, which, among other restrictions, limit the
     Company's ability to obtain additional borrowings and to pay dividends as
     well as impose certain change of control provisions, as defined.

         On January 29, 1996, the Company repurchased, in two transactions, at a
     price of approximately $678.75 per $1,000 principal amount, approximately
     $22 million face value of its 9 7/8% Senior Notes due in the year 2000 from
     GIANT GROUP, LTD. ("GIANT"). The price paid in each transaction represented
     the market closing price on January 26, 1996. The first transaction
     involved the repurchase of approximately $16 million face value of the
     Notes for approximately $11.1 million in cash. The second transaction
     involved the purchase of approximately $6 million face value of Notes in
     exchange for a short-term note of approximately $4.1 million, due in three
     installments of principal and interest, issued by Rally's. The Company paid
     the final installment on this note, together with accrued interest thereon,
     on September 27, 1996. The purchases were approved by a majority of the
     independent Directors of the Company. Prior to the purchases, the Company's
     independent Directors had received an opinion as to the fairness of the
     transactions, from a financial point of view, from an investment banking
     firm of national standing.

         Additionally, in four separate transactions during the fourth quarter
     1996, the Company repurchased approximately $4.7 million face value of the
     Notes from various other bondholders for approximately $4.5 million in
     cash.

         These purchases resulted in extraordinary gains in 1996 net of tax,
     totaling approximately $5.3 million or $.31 per share. As a result of these
     debt repurchases, the annualized ongoing interest payments on the Senior
     Notes have been reduced by approximately $2.6 million per year to
     approximately $5.8 million. In addition, these repurchases have reduced the
     sinking fund requirement discussed above to approximately $1.6 million from
     approximately $28 million.

         The remaining outstanding Notes are publicly traded and at December 28,
     1997 had a market value of approximately $55.2 million based on the quoted
     market price for such notes.

         On September 5, 1996 by Consent Solicitation Statement, the Company
     solicited consent of its bondholders whereby the beneficial ownership of
     35% or more of the voting stock of the Company by GIANT, Fidelity National
     Financial, Inc., CKE and/or any of their affiliates would not constitute a
     change of control for purposes of Section 4.14 of the Indenture. On October
     21, 1996, the bondholder consent was approved by a majority of the holders
     of record as of the date of the Consent Solicitation.

                                       35
<PAGE>


11.  LONG-TERM DEBT

     Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                  December      December
                                                                                  29, 1996      28, 1997
                                                                                ------------  -----------
<S>                                                                             <C>           <C>
   Notes payable to banks, maturing at various dates through November 10, 2001,
      secured by property and/or equipment, bearing interest ranging from 1/2%
      above prime to 9.25%. The notes are payable in monthly principal and
      interest installments ranging from $1,531 to 13,333. Interest is payable   $    1,006    $      530
      monthly.

   Note payable to finance company due September 1998, secured by certain
      equipment, bearing interest at a rate of 7.3%. The note is payable in
      monthly principal and interest installments of $6,762.                            133            59

   Note payable to Company for acquisition of certain markets, secured by
      certain property and equipment, bearing interest of 8.3%. The note is
      payable in monthly principal and interest installments of $11,494.                 79             0

   Secured notes payable to a bank used to finance equipment and/or modular
      buildings for franchisees (the Franchisee Loans), maturing at various
      dates through July 15, 2000, bearing interest at prime plus1/2%. The notes
      are payable in monthly principal installments of $4,875. Interest is
      payable monthly.                                                                  195           136

   Notes payable to former owners for acquisition of market, secured by
      common stock of Hampton Roads Foods, maturing March 13, 2001, with
      outstanding balances due after last monthly payments, bearing interest of
      9.0%. The notes are payable in monthly principal and interest installments
      ranging from $4,742 to $50,211.                                                 4,461         4,073
                                                                                ------------  ------------
                                                                                      5,874         4,798
   Less - Current portion                                                            (1,099)         (781)
                                                                                         --            --
                                                                                ============  ============
                                                                                 $    4,775    $    4,017
                                                                                ============  ============
</TABLE>

         At December 28, 1997, the prime rate was 8.50%.

         The following are the remaining annual maturities of long-term debt:

                       Year
                -------------------
                       1998                                     $       781
                       1999                                             727
                       2000                                             578
                       2001                                           2,712
                                                                ============
                                                                $     4,798
                                                                ============


         The Company is subject to certain restrictive covenants under its debt
     agreements.

         The market value of the Company's long-term debt approximated book
     value at December 28, 1997. Debt related to the acquisition of Hampton
     Roads Foods was entered into in 1995 and bears interest at rates which
     approximate current rates for debt with similar terms. The majority of the
     remaining long-term debt has contractual rates which vary based on
     fluctuations in market rates.

12.  COMMITMENTS AND CONTINGENCIES

     (a) Lease Commitments

         The Company leases certain land and buildings generally under
     agreements with terms of or renewable to 15 to 20 years. Some of the leases
     contain contingent rental provisions based on percentages of gross sales.
     The leases generally obligate the Company for the cost of property taxes,
     insurance and maintenance.

                                       36

<PAGE>


         Following is a schedule by year of future minimum lease commitments
     under all leases at December 28, 1997:
<TABLE>
<CAPTION>

                                                              Capital          Operating
                            Year                              Leases            Leases
        ---------------------------------------------       -----------       -----------
<S>     <C>                                                 <C>               <C>
        1998                                                $    1,035        $    8,466
        1999                                                       997             7,733
        2000                                                       931             6,826
        2001                                                       897             6,489
        2002                                                       889             5,620
        Thereafter                                               5,650            22,165
                                                            -----------       ------------
        Total minimum lease commitments                         10,399        $   57,299
                                                            ===========       ============
        Less amounts representing interest,
           discounted at rates ranging from 10% to              (4,758)
           12%
                                                            -----------
        Present value of minimum lease payments                  5,641
        Current portion of capital lease obligations              (413)
                                                            -----------
        Long-term lease obligations                         $    5,228
                                                            ===========
</TABLE>

         The discount rates applicable to the Company's capital leases
     approximate currently available market rates. Minimum operating lease
     payments have not been reduced by minimum sublease rentals of $5.6 million
     due in the future under noncancellable subleases.

         Rent expense consists of:
<TABLE>
<CAPTION>

                                                           Fiscal Years Ended
                                            --------------------------------------------
                                            December 31,     December 29,     December
                                                1995             1996         28, 1997
                                            --------------   --------------   ----------
<S>                                            <C>              <C>            <C>
Minimum rentals - related parties              $     292        $    470       $    396
Minimum rentals - others                           6,641           4,681          4,322
Contingent rentals - others                          173             122             98
                                            ==============   ==============   ==========
                                               $   7,106        $  5,273       $  4,816
                                            ==============   ==============   ==========
</TABLE>

(b)   Litigation

         In January and February 1994, two putative class action lawsuits were
     filed, purportedly on behalf of the stockholders of Rally's, in the United
     States District Court for the Western District of Kentucky, against
     Rally's, Burt Sugarman and GIANT and certain of Rally's present and former
     officers and directors and its auditors. The complaints allege defendants
     violated the Securities Exchange Act of 1934, among other claims, by
     issuing inaccurate public statements about the Company in order to
     arbitrarily inflate the price of its common stock. The plaintiffs seek
     unspecified damages. On April 15, 1994, Rally's filed a motion to dismiss
     and a motion to strike. On April 5, 1995, the Court struck certain
     provisions of the complaint but otherwise denied Rally's motion to dismiss.
     In addition, the Court denied plaintiffs' motion for class certification;
     the plaintiffs renewed this motion, and despite opposition by the
     defendants, the Court granted such motion for class certification on April
     16, 1996, certifying a class from July 20, 1992 to September 29, 1993. In
     October 1995, the plaintiffs filed a motion to disqualify Christensen,
     Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen, Miller")
     as counsel for defendants based on a purported conflict of interest
     allegedly arising from the representation of multiple defendants as well as
     Ms. Glaser's position as both a former director of Rally's and a partner in
     Christensen, Miller. Defendants filed an opposition to the motion, and the
     motion to disqualify Christensen, Miller was denied. Fact discovery is set
     to close in April 1998. No trial date has been scheduled yet. Management is
     unable to predict the outcome of this matter at the present time or whether
     or not certain available insurance coverages will apply. The defendants
     deny all wrongdoing and intend to defend themselves vigorously in this
     matter. Discovery is proceeding. Because these matters are in a preliminary
     stage, the Company is unable to determine whether a resolution adverse to
     the Company will have a material effect on its results of operations or
     financial condition. Accordingly, no provisions for any liabilities that
     may result upon adjudication have been made in the accompanying financial
     statements. An estimate of defense costs reimbursable under the Company's
     directors' and officers' insurance is included in "Other Assets" in the
     accompanying consolidated financial statements.

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

                                       37
<PAGE>

     Court. Harbor named Rally's as a nominal defendant. Harbor claims that the
     directors and officers of both Rally's and GIANT, along with GIANT,
     breached their fiduciary duties to the public shareholders of Rally's by
     causing Rally's to repurchase from GIANT certain Rally's Senior Notes at an
     inflated price. Harbor seeks "millions of dollars in damages", along with
     rescission of the repurchase transaction. In the fall of 1996, all
     defendants moved to dismiss the action. The Chancery Court conducted a
     hearing on November 26, 1996and denied the motions to dismiss on April 3,
     1997. The Company denies all wrongdoing and intends to vigorously defend
     the action. It is not possible to predict the outcome of this action at
     this time.

         In December 1994, Rally's entered into two franchise agreements with
     Kader Investments, Inc. ("Kader") for the development and operation of
     Rally's Hamburgers restaurants in Anaheim, California and Tustin,
     California. Rally's assisted the franchisee in developing and opening the
     restaurants. On November 27, 1996, Kader filed a six-count Complaint
     against Rally's in the California Superior Court for Orange County (Case
     No. 772257) alleging material misrepresentation, respondent superior,
     breach of contract, breach of the implied covenant of good faith and fair
     dealing, fraud and unfair competition. These claims arise out of
     allegations concerning Rally's offer and sale of two franchises (under a
     two-store development agreement), and Rally's actions during the term of
     the agreements. The Complaint seeks as relief rescission of the parties'
     franchise and development agreements; general damages of at least
     $1,494,277 and $1,400,000 for the material misrepresentation and fraud
     counts, respectively; general damages in unspecified amounts as to the
     other counts; punitive damages in unspecified amounts; and attorneys' fees.
     Rally's filed an Answer, and intends to file a Cross-Complaint alleging
     breach of contract. In settlement of the litigation, on December 18, 1997,
     the parties entered into a memorandum of understanding pursuant to which
     the Company would purchase Kader's restaurants for $1.65 million. The
     purchase price will consist of $855,000 in cash, $375,000 in restricted
     stock and $420,000 in notes, and the transaction is currently scheduled to
     close on or about April 7, 1998, subject to completion of all necessary
     documentation and final dismissal. Accordingly, a provision of $754,000 for
     these liabilities, net of assets to be received upon adjudication, have
     been made in the accompanying financial statements.

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

(c)  Other Commitments

         The Company is contingently liable on certain franchisee lease
     commitments totaling approximately $294,000. The Company from time to time
     negotiates purchase contracts for certain items used in its restaurants in
     the normal course of business. Although some of these contracts contain
     minimum purchase quantities, such quantities do not exceed expected usage
     over the term of such agreements.

13.  INCOME TAXES

         The asset and liability method contemplated by Statement of Financial
     Accounting Standards No. 109 requires recognition of deferred tax assets
     and liabilities for the expected future tax consequences of substantially
     all temporary differences between the tax bases and financial reporting
     bases of assets and liabilities (excluding goodwill).

                                       38
<PAGE>


         The major components of the Company's computation of deferred tax
     assets and liabilities at December 29, 1996 and December 28, 1997 are as
     follows:
<TABLE>
<CAPTION>
                                                                            December 29,     December
                                                                                1996         28, 1997
                                                                            --------------  ------------
<S>                                                                         <C>             <C>
     Excess of tax depreciation over book depreciation                      $    8,430      $   9,316
     Acquired intangibles with no tax basis                                      2,070          2,070
     Other                                                                          30             17
                                                                            --------------  ------------
       Gross deferred tax liabilities                                       $   10,530      $  11,403
                                                                            ==============  ============

     Net operating loss carryforwards                                       $   12,824      $  17,488
     Amounts accrued for financial  reporting purposes not yet deductible       12,885         10,742
        for tax purposes
     Alternative minimum tax and targeted jobs tax credit carryforwards            937            937
     Other                                                                       1,514          1,230
                                                                            --------------  ------------
       Gross deferred tax assets                                                28,160         30,397
     Less valuation allowance                                                   17,630         18,994
                                                                            --------------  ------------
       Net deferred tax asset                                               $   10,530      $  11,403
                                                                            ==============  ============
</TABLE>

         The alternative minimum tax credit carryforward has no expiration. The
     net operating loss carryforwards will expire approximately $641,000 in
     2008, approximately $20.2 million in 2009, approximately $17.5 million in
     2010, approximately $1.6 million in 2011 and approximately $10.5 million in
     2012. The targeted jobs tax carryforward expires approximately $118,000 in
     2006, approximately $184,000 in 2007 and approximately $200,000 in 2008. A
     valuation allowance of approximately $19.0 million has been established due
     to the uncertainty of realizing the benefit associated with the net
     operating loss carryforwards generated in the current and previous years.
     In addition, pursuant to Section 382 of the Internal Revenue Code of 1986,
     as amended, the utilization of the Company's net operating loss
     carryforwards to offset future taxable income may be limited if the Company
     experiences a change in ownership of more than 50 percentage points within
     a three-year period. The Company is in the process of determining whether
     it has experienced one or more ownership changes pursuant to Section 382.
     If the transactions in 1997 or earlier caused an ownership change(s), the
     Company may be significantly limited in utilizing its tax net operating
     loss carryforwards arising before such ownership change(s) to offset future
     federal taxable income. Similarly, the Company may be limited in utilizing
     its tax credit carryforwards arising before such ownership change(s) to
     offset future federal taxable income.

         Income tax expense, including the tax provision on the extraordinary
     item in 1996, consists of the following:
<TABLE>
<CAPTION>
                                                Fiscal Years Ended
                                      ----------------------------------------
                                       December      December      December
                                       31, 1995      29, 1996      28, 1997
                                      ------------  ------------  ------------
<S>                                     <C>            <C>           <C>
     Current                            $     539      $    675      $    455
     Deferred                                -                -
                                      ============  ============  ============
     Total tax (benefit) expense         $    539      $    675      $    455
                                      ============  ============  ============
</TABLE>

         Income tax expense for the year ended December 28, 1997 consist of
$455,000 in state income tax expense.

         A reconciliation of the provisions for income taxes with the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
                                                        Fiscal Years Ended
                                             -----------------------------------------
                                               December    December 29,    December
                                               31, 1995        1996        28, 1997
                                             ------------- -------------- ------------
<S>                                           <C>              <C>         <C>
     Provision (benefit) computed at          $  (15,770)      $    905    $  (1,330)
        statutory rate
     Tax effect of equity in loss of                   -              -          245
        affiliate
     State and local income taxes, net of
        federal income tax benefit                   736            575          455
     Change in deferred tax asset valuation
        allowance                                 15,352         (1,169)       1,364
     Other                                           221            364         (279)
                                             ============= ============= =============
                                              $      539       $    675    $     455
                                             ============= ============= =============
</TABLE>

                                       39
<PAGE>

14.  STOCK-BASED COMPENSATION PLANS

         The Company currently has three stock option plans in effect, the 1990
     Stock Option Plan (the "Employees' Plan"), the 1990 Stock Option Plan for
     Non-Employee Directors (the "1990 Directors' Plan"), and the 1995 Stock
     Option Plan for Non-Employee Directors (the "1995 Directors' Plan").
     Additionally, the Company has an employee stock purchase plan (the "1993
     Purchase Plan"). Although there are existing options outstanding under the
     1990 Directors' Plan, no additional grants will be made pursuant to this
     plan. The Company accounts for these plans under APB Opinion No. 25, under
     which approximately $66,000 of compensation cost has been recognized in
     fiscal 1996 related to 157,000 options granted to directors under the 1995
     Directors Plan. Such compensation represents the difference between the
     market values on the dates of grant and the measurement date, July 10,
     1996, the date when the grants were ultimately approved by the shareholders
     at the annual meeting. No compensation cost was recognized in any other
     period presented.

         During 1996, a total of 350,000 additional options were granted to five
     of the current directors. These options were not granted pursuant to an
     option plan. The options were granted at a price equal to the stock's
     market price on the date of grant. The options were immediately exercisable
     and expire after five years.

         Had compensation cost for all option grants to employees and directors
     been determined consistent with FASB Statement No. 123, the Company's net
     income and earnings per share would have been reduced to the following pro
     forma amounts:
<TABLE>
<CAPTION>

                                                               1995             1996              1997
                                                               ----             ----              ----
<S>                                                   <C>                <C>                <C>
         Net Income (Loss):      As Reported          $     (46,919)     $       1,988      $     (4,516)
                                 Pro Forma                  (47,154)              (699)           (5,577)
         Earnings (Loss) Per
            Common Share:        As Reported          $       (3.00)     $         .12      $       (.22)
                                 Pro Forma                    (3.02)              (.04)             (.27)
</TABLE>

         Because the Statement 123 method of accounting has not been applied to
     options granted prior to January 2, 1995, the resulting pro forma
     compensation cost may not be representative of that to be expected in
     future years. Additionally, the pro forma amounts include approximately
     $16,000, $12,000 and $17,000 in 1995, 1996 and 1997, respectively, related
     to the purchase discount offered under the 1993 Purchase Plan.

         The Company may sell up to 500,000 shares of stock to its employees
     under the 1993 Purchase Plan. The Company has sold approximately 51,000
     shares, 28,000 shares and 33,000 shares in 1995, 1996, and 1997,
     respectively, and has sold approximately 161,000 shares through December
     28, 1997 since the inception of this plan in 1993. The Company sells shares
     at 85% of the stock's market price at date of purchase. The weighted
     average fair value of shares sold in 1995, 1996 and 1997 was approximately
     $2.06, $3.04 and $3.06, respectively.

         Options to purchase an aggregate of 5.5 million shares of the Company's
     Common Stock may be granted under the stock option plans, at a price not
     less than the market value on the date of grant. The Company has granted
     options on approximately 2.5 million shares under the stock option plans.
     Outstanding options under the Employees' Plan generally expire ten years
     after grant. Certain options granted to a former President and Chief
     Executive Officer of the company expire five years from the date of grant.
     Options outstanding under the two directors' plans expire five years after
     grant. Options are exercisable over various periods ranging from immediate
     to three years after grant depending upon their grant dates and the plan
     under which the options were granted.

                                       40
<PAGE>


         A summary of the status of all options granted to employees and
     directors, as well as those options granted to non-employees (see Note 4),
     at December 31, 1995, December 29, 1996 and December 28, 1997, and changes
     during the years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
                                        December 31, 1995            December 29, 1996            December 28, 1997
                                   -------------------------    ------------------------    --------------------------
                                                   Wtd. Avg.                    Wtd. Avg.                    Wtd. Avg
                                      Shares       Ex Price        Shares       Ex. Price      Shares        Ex. Price
                                     ---------    ------------    ---------     ----------    ----------    ------------
<S>                                     <C>             <C>          <C>            <C>           <C>             <C>
Outstanding at beginning of year        2,225           $4.74        2,219          $4.24         3,664           $2.98
Granted at price equal to market          676            2.88        2,154           2.63           863            3.00
Granted  at  price   greater   than        --              --          176           1.75            --              --
market
Exercised                                  --              --          (9)           3.05          (78)            2.48
Forfeited                               (412)            3.93        (207)           3.34         (429)            2.75
Expired                                 (270)            5.38        (669)           5.62         (161)            3.63
                                     ---------                    ---------                   ----------
Outstanding at end of year              2,219            4.24        3,664           2.92         3,859            2.99
                                     =========                    =========                   ==========
Exercisable at end of year              1,048           $5.09        2,359          $3.21         2,921           $3.07
Weighted  average  of fair value of
options granted                         $1.76                        $1.31                        $1.78
</TABLE>

     The Company had approximately 2,225,000 options outstanding as of January
1, 1995, with prices ranging form $2.67 to $9.333. At January 1, 1995,
approximately 756,000 options were exercisable at prices ranging from $2.67 to
$6.50.

     The following table summarizes information about stock options outstanding
at December 28, 1997:
<TABLE>
<CAPTION>

                                 Options Outstanding                                      Options Exercisable
       ------------------------------------------------------------------------     --------------------------------
                                                 Wtd. Avg.
          Range of           Outstanding         Remaining         Wtd. Avg.         Exercisable        Wtd. Avg.
       Exercise Prices          as of           Contractual         Exercise            as of            Exercise
                            Dec. 28, 1997           Life             Price          Dec. 28, 1997         Price
       ----------------    ----------------    ---------------    -------------     ---------------    -------------
<S>     <C>      <C>           <C>                  <C>               <C>              <C>                 <C>
        $1.25 to 2.50          874,279              6.7 years         $1.93            420,422             $1.94
         2.50 to 3.75        1,997,330              4.3                2.90          1,813,137              2.91
         3.75 to 5.00          987,350              5.7                4.12            687,350              4.17
                           ------------                                             -----------

        $1.25 to 5.00        3,858,959              5.2                2.99          2,920,909              3.07
                           ============                                             ===========
</TABLE>

         For purposes of the pro forma disclosures assuming the use of the fair
     value method of accounting, the fair value of each option grant is
     estimated on the date of grant using the Black-Scholes option pricing model
     with the following weighted-average assumptions used for grants in fiscal
     1995, 1996 and 1997, respectively: expected volatility of 45.0 percent,
     45.7 percent, and 47.0 percent; risk-free interest rates of 6.75 percent,
     6.82 percent and 6.26 percent for options granted to employees and 6.54
     percent, 6.59 percent and 6.47 percent for options granted to directors;
     and expected lives for fiscal 1995, 1996 and 1997 of eight years for
     options granted to employees and five years for options granted to
     directors. An expected dividend yield of 0 percent was used for all periods
     based on the Company's history of no dividend payments.


                                       41
<PAGE>

15.  UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>

                                     First        Second       Third        Fourth
                                     Quarter      Quarter      Quarter      Quarter       Total
                                    -----------  -----------  -----------  -----------  -----------
<S>                                 <C>           <C>        <C>           <C>        <C>
Year Ended December 29, 1996
   Revenues                         $  41,912    $  47,357    $  38,781    $  34,702    $ 162,752
   Income (loss) from operations       (3,369)       2,413        2,632        2,414        4,090
   Net income                             838          111          414          625        1,988
   Earnings (loss) per common
   share:
      Earnings (loss) before             (.24)         .01          .01          .01         (.19)
   extraordinary item
      Extraordinary item                  .29         -             .02          .02          .31
                                    -----------  -----------  -----------  -----------  -----------
   Earnings per common share        $     .05    $     .01    $     .03    $     .03    $     .12
                                    ===========  ===========  ===========  ===========  ===========

Year Ended December 28, 1997
   Revenues                         $  32,595    $  38,090    $  38,522    $  35,723    $ 144,930
   Income from operations               1,015        1,806          543          (44)       3,320
   Net income (loss)                     (952)          92       (1,148)      (2,508)      (4,516)
                                    -----------  -----------  -----------  -----------  -----------
   Loss per common share            $    (.05)   $       -    $    (.06)   $    (.11)   $    (.22)
                                    ===========  ===========  ===========  ===========  ===========
</TABLE>


16.  IMPAIRMENT OF LONG-LIVED ASSETS

         The Company adopted Statement of Financial Accounting Standards No.
     121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
     Assets to Be Disposed of " (SFAS 121), at the beginning of the fourth
     quarter, 1995. This Statement establishes accounting standards for the
     impairment of long-lived assets, certain identifiable intangibles and
     goodwill related to those assets to be held and used, and for long-lived
     assets and certain identifiable intangibles to be disposed of. SFAS 121
     requires that impairment for long-lived assets and identifiable intangibles
     to be held and used, if any, be based on the fair value of the asset.
     Long-lived assets and certain identifiable intangibles to be disposed of
     are to be reported at the lower of carrying amount or fair value less cost
     to sell. For purposes of applying this statement, the Company determines
     fair value utilizing the present value of expected future cash flows using
     a discount rate commensurate with the risks involved.

         Long-lived assets considered for impairment under SFAS 121 are required
     to be grouped at the "lowest level for which there are identifiable cash
     flows that are largely independent of the cash flows of other groups." The
     Company believes the most correct application of this standard is obtained
     by examining individual restaurants where circumstances indicate that an
     impairment issue may exist. This belief is primarily based on the fact that
     it is at individual restaurant level that most investment and closure
     decisions are made on an ongoing basis. In addition, if an asset being
     tested for recoverability was acquired in a business combination accounted
     for using the purchase method, the goodwill that arose in that transaction
     is included as part of the asset being evaluated and in determining the
     amount of any impairment.

         Prior to the issuance of SFAS 121, the Company recorded impairment of
     long-lived assets deemed to be permanently impaired. Generally, such
     assessment of permanent impairment arose concurrent with a management
     decision to dispose of such an asset at which time the asset was written
     down to estimated net realizable value. In general, other long-lived assets
     were reviewed for impairment only if there were dramatic changes in
     operating results or cash flows of a segregable group of outlets,
     indicating a likelihood that a permanent impairment has occurred.

         The Company's past practices of estimating net realizable value for
     assets to be disposed of are consistent with the Statement's requirements
     to write down such assets to fair market value less costs to sell and no
     adjustment regarding such assets was necessary upon adoption of the
     Statement. The expected disposal dates for these assets are over the next
     12 months and consist mainly of surplus land, buildings and equipment. The
     carrying amounts of such assets to be disposed of are shown separately on
     the accompanying balance sheets. The majority of assets held for sale
     resulted from constriction of the Company's development plan and other
     associated store closings further discussed in Note 3.

         The Company's fourth quarter, 1995 review relating to assets to be held
     and used indicated that 37 of its 238 operating restaurants met the
     Company's criteria for impairment review. All of the indicated restaurants
     were deemed to be impaired based on current estimates of their underlying
     cash flows and a provision for


                                       42
<PAGE>

     impairment was recorded in the fourth quarter, 1995 of approximately $13.7
     million related to writedowns of the assets associated with these
     restaurants. Approximately $825,000 of associated intangible assets was
     included in this writedown. The writedown is included in the caption
     "Provision for restaurant closures and other." The writedown of these
     assets resulted in reduced depreciation and amortization expense in the
     fourth quarter, 1995 of approximately $351,000.

         The magnitude of the writedown noted above resulted primarily from two
     factors: (1) the review of assets to be held and used at individual
     restaurant level, a lower level than used in the past and (2) the recent
     historical and continuing poor operating performance of the restaurants
     themselves (including the restaurant's 1995 full year performance).

         During 1996, three additional restaurants, due to their continued poor
     operating performance, were determined to be impaired, resulting in charges
     of approximately $824,000 included in the caption, "Provision for
     restaurant closures and other". No additional restaurants were determined
     to be impaired in 1997. As required by the SFAS 121, the Company will
     continue to periodically review its assets for impairment where
     circumstances indicate that such impairment may exist.


17.  SHAREHOLDER RIGHTS OFFERING

         A Shareholder Rights Offering (the "Offering") was completed on
     September 20, 1996. The Company distributed to holders of record of its
     Common Stock, as of the close of business on July 31, 1996 (the "Record
     Date"), transferable subscription rights ("Right(s)") to purchase Units
     consisting of one share of Common Stock and one Warrant to purchase an
     additional share of Common Stock. Stockholders received one Right for each
     share of Common Stock held on the Record Date. For each 3.25 Rights held, a
     holder had the right to purchase one Unit for $2.25 each. The Offering
     consisted of 4,825,805 Units. Each Warrant may be exercised to acquire an
     additional share of Common Stock at an exercise price of $2.25 per share
     and expires on September 26, 2000. The Company may redeem the Warrants, at
     $.01 per Warrant, upon 30 days' prior written notice in the event the
     closing price of the Common Stock equals or exceeds $6.00 per share for 20
     out of 30 consecutive trading days ending not more than 30 days preceding
     the date of the notice of redemption. The Offering was fully subscribed and
     raised over approximately $10.8 million in gross proceeds, offset by legal
     and other issuance costs of approximately $437,000. The net proceeds from
     the Offering were attributable primarily to the sale of the Company's
     common stock. The amount attributable to the warrants is included in
     "Additional paid-in capital."

         In addition to the approximately $10.8 million provided by the Rights
     Offering, the Warrants issued, if exercised, could provide an additional
     $10.8 million in proceeds. The Company had 15,683,869 shares of Common
     Stock outstanding on the Record Date. Immediately after the Offering,
     20,509,674 shares of Common Stock and 4,825,805 Warrants were outstanding.
     As of December 28, 1997, 4,813,757 of these Warrants were outstanding. The
     Warrants are publicly traded and at December 28, 1997 had a market value of
     approximately $6.3 million based on the quoted market price for such
     warrants.

     18.  SUBSEQUENT EVENTS

         On January 8, 1998, the Company announced it intends to acquire in open
     market purchases, from time to time, up to 1,000,000 shares of Common Stock
     of Checkers Drive-In Restaurants, Inc. As of January 22, 1998, 30,000
     shares had been purchased at a price of $1.07 per share.

                                       43
<PAGE>


                    Report of Independent Public Accountants
                    ----------------------------------------


To Rally's Hamburgers, Inc.:

     We have audited the accompanying consolidated balance sheets of Rally's
Hamburgers, Inc. (a Delaware corporation) and subsidiaries as of December 29,
1996 and December 28, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 28, 1997. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits. We did not
audit the financial statements of Checkers Drive-In Restaurants, Inc.
(Checkers), the investment in which is reflected in the accompanying financial
statements using the equity method of accounting. The investment in Checkers
represents 19 percent of the Company's total assets as of December 28, 1997, and
the equity in its net loss represents 16 percent of the Company's net loss. The
statements of Checkers were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for Checkers, is based solely on the report of the other auditors.

     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, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Rally's Hamburgers, Inc. and subsidiaries as of
December 29, 1996 and December 28, 1997, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended December
28, 1997, in conformity with generally accepted accounting principles.

     Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


                                                        /s/ ARTHUR ANDERSEN LLP

Louisville, Kentucky
     February 27, 1998


                                       44
<PAGE>



Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

     None.


                                    PART III
                                    --------

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

         The information required by these items is omitted because the Company
is filing a definitive proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Report which includes
the required information. The required information contained in the Company's
proxy statement is incorporated herein by reference.


                                     PART IV
                                     -------


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

<TABLE>
<CAPTION>
                                                                                 Page Number in
                                                                                 This Form 10-K
                                                                                ------------------
<S>                                                                             <C>
(a)(1)       Index to Consolidated Financial Statements:
             Report of Independent Public Accountants                                  44
             Consolidated Balance Sheets as of December 29, 1996 and
                December 28, 1997                                                      22
             Consolidated Statements of Operations for each of the three
                years in the period ended December 28, 1997                            23
             Consolidated Statements of Shareholders' Equity for each of the
                three years in the period December 28, 1997                            24
             Consolidated Statements of Cash Flow for each of the three
                years in the period ended December 28, 1997                            25
             Notes to Consolidated Financial Statements                                26

(a)(2)       Index to Financial Statement Schedules:
             Report of Independent Public Accountants                                  44
             Schedules as of and for each of the three years in the period
                ended December 28, 1997:
             Schedule II - Valuation and Qualifying Accounts                           50
</TABLE>

     All other schedules have been omitted because the required information is
not applicable, not required or is included elsewhere in the financial
statements and notes thereto.


                                       45
<PAGE>


(a)(3)   Exhibits:

   Exhibit
   Number     Description of Document
   -------    -----------------------

      3.1      Restated Certificate of Incorporation. (Filed as Exhibit 3.1 to
               Rally's Quarterly Report on Form 10-Q for the quarter ended
               September 29, 1996, and incorporated herein by reference.)

      3.2      Restated By-Laws. (Filed as Exhibit 3.3 to Form 8 Amendment
               No. 1 to Rally's Annual Report on Form 10-K dated September 28,
               1990, and incorporated herein by reference.)

      4.1      Indenture dated as of March 1, 1993, between the Company, certain
               of its subsidiaries and PNC Bank Kentucky, Inc., as Trustee,
               relating to the issuance of $85,000,000 principal amount of the
               Company's 9 7/8% Senior Notes due 2000. (Filed as Exhibit 4.1 to
               Rally's Annual Report on Form 10-K for the year ended January 3,
               1993, and incorporated herein by reference.)

      4.2      Specimen form of 9 7/8% Senior Note due 2000. (Filed as Exhibit
               4.2 to Rally's Annual Report on Form 10-K for the year ended
               January 3, 1993, and incorporated herein by reference.)

      4.3      Form of Common Stock Certificate. (Filed as Exhibit 4 to Rally's
               Registration Statement on Form S-1, dated October 11, 1989, and
               incorporated herein by reference.)

      4.4      Form of Warrant Agreement between Rally's Hamburgers, Inc. and
               American Stock Transfer & Trust Company, as Warrant Agent,
               including form of Warrant Certificate (incorporated by reference
               to Exhibit 4.4 to Rally's Annual Report on Form 10-K for the
               fiscal year ended December 29, 1996 (the "1996 10-K")).

      4.5      Form of Warrant  Agreement between Rally's  Hamburgers,  Inc. and
               CKE  Restaurants,  Inc.,  including  form of Warrant  Certificate
               (incorporated by reference to Exhibit 4.5 to the 1996 10-K).

      4.6      First Amendment to the Indenture (incorporated by reference
               to Exhibit 4.6 to the 1996 10-K).

      4.7      Other Debt Instruments - Copies of debt instruments for which the
               related debt is less than 10% of the Company's total assets will
               be furnished to the Commission upon request.

      4.8      Certificate of Designation for Rally's Series A Participating
               Preferred Stock.

     10.1      Form of Indemnity Agreement between the Company and its directors
               and officers. (Filed as Exhibit 10.2 to Rally's Registration
               Statement on Form S-1, dated October 11, 1989, and incorporated
               herein by reference.)

    *10.2      Amended and Restated Non-qualified Stock Option Plan.
               (Filed as Exhibit 10.3 to Amendment No. 1 to Rally's Registration
               Statement on Form S-1, dated October 11, 1989, and incorporated
               herein by reference.)

    *10.3      First Amendment to the Amended and Restated Non-qualified Stock
               Option Plan, dated as of October 26, 1989. (Filed as Exhibit 10.4
               to Rally's Registration Statement on form S-1, dated December 29,
               1989, and incorporated herein by reference.)

     10.4      Lease between Blue Ridge Associates and the Company dated
               November 17, 1987. (Filed as Exhibit 10.6 to Rally's Registration
               Statement on Form S-1, dated October 11, 1989, and incorporated
               herein by reference.)

     *10.5     Rally's, Inc. 1990 Stock Option Plan, as amended
               (incorporated by reference to Exhibit 10.5 to the 1996 10-K).
* Compensatory plan required to be filed as an exhibit pursuant to Item 14c of
Form 10K.


                                       46
<PAGE>
    *10.6      Rally's Hamburgers, Inc. 1995 Stock Option Plan for
               Non-employee Directors. (Filed as Exhibit A to Rally's definitive
               Proxy Statement, dated June 19, 1996, for the Annual Meeting of
               Stockholders held on July 10, 1996, and incorporated herein by
               reference.)

    *10.7      Employment Agreement between the Company and Evan G. Hughes dated
               March 28, 1995. (Filed as Exhibit 10.13 to Rally's Quarterly
               Report on Form 10-Q for the quarter ended April 2, 1995, and
               incorporated herein by reference.)

    *10.8      Employment Agreement between the Company and Donald E. Doyle
               dated March 1, 1996. (Filed as Exhibit 10.12 to Rally's Annual
               Report on Form 10-K for the year ended December 31, 1995, and
               incorporated herein by reference.)

    *10.9      Supplemental Employment Agreement between the Company and Donald
               E. Doyle, dated February 11, 1997 (incorporated by reference to
               Exhibit 10.12 to the 1996 10-K).

     10.10     Operating Agreement by and between Rally's Hamburgers, Inc. and
               Carl Karcher Enterprises. (Filed as Exhibit 10.43 to CKE
               Restaurants, Inc.'s Quarterly Report on Form 10-Q for the quarter
               ended May 20, 1996, and incorporated herein by reference.)

     10.11     Consulting Agreement by and between Rally's Hamburgers,  Inc. and
               CKE Restaurants,  Inc (incorporated by reference to Exhibit 10.16
               to the 1996 10-K).

     10.12     Exchange Agreement, dated as of December 8, 1997, between Rally's
               Hamburgers, Inc., CKE, Fidelity, GIANT and the other parties
               named in Exhibit A thereto (incorporated by reference to Exhibit
               A to Rally's Statement on Schedule 13D, dated December 18, 1997.

   **10.13     Management Services Agreement, dated November 30, 1997,
               between Checkers Drive-In Restaurants, Inc. and Rally's
               Hamburgers, Inc..

   **10.14     Employment Agreement dated November 10, 1997, between the
               Company, Checkers Drive-In Restaurants, Inc. and Jay Gillespie.

   **10.15     Certificate of Designation  of Series A  Participating  Preferred
               Stock of Rally's Hamburgers, Inc., dated December 8, 1997.

     10.16     Form 10-K of Checkers Drive-In Restaurants, Inc., filed with the
               commission on March 30, 1998

     21        Subsidiaries of the Company:
               (a)     Rally's of Ohio, Inc., an Ohio corporation.
               (b)     Self-Service Drive-Thru, Inc., a Louisiana corporation.
               (c)     Rally's Finance, Inc., a Delaware corporation.
               (d)     Rally's Management, Inc., a Kentucky corporation.
               (e)     ZDT Corporation, a Missouri corporation.
               (f)     RAR, Inc., a Delaware corporation.
               (g)     MAC1, Inc., a Delaware corporation.
               (h)     Hampton Roads Foods, Inc., a Louisiana corporation.

     23        Consent of Arthur Andersen LLP

     23.1      Consent of KPMG Peat Marwick, LLP

*    Compensatory  plan required to be filed as an exhibit  pursuant to
     Item 14c of Form 10K.
**   File herewith

(b)      Reports on Form 8-K:

         No reports on Form 8-K were filed during the last quarter of year 1997.

                                       47

<PAGE>

(c)      Exhibits Required by Item 601 of Regulation S-K:

         Described in Item 14(a)(3) of this Annual Report on Form 10-K.

(d)      Financial Statement Schedules:

         Described in Item 14(a)(2) of this Annual Report on Form 10-K.


                                       48

<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         RALLY'S HAMBURGERS, INC.
Date:


                                    By:           /s/William P. Foley, II
                                          --------------------------------------
                                                 William P. Foley, II
                                                 Chairman and Director



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

             Signature                                     Title                              Date
             ---------                                     -----                              ----
<S>                                    <C>                                               <C>
/s/ William P. Foley, II               Chairman and Director                             March 27, 1998
-------------------------------------
William P. Foley, II

/s/ Jay Gillespie                      President, Chief Executive Officers and           March 27, 1998
-------------------------------------   Director (Principal Executive Officer)
Jay Gillespie

/s/ Joseph N. Stein                    Executive Vice President,                         March 27, 1998
-------------------------------------    Chief Financial Officer
Joseph N. Stein                          (Principal Financial and Accounting Officer)

/s/ Terry N. Christensen               Director                                          March 27, 1998
-------------------------------------
Terry N. Christensen

/s/ Willie D. Davis                    Director                                          March 27, 1998
-------------------------------------
Willie D. Davis

/s/ David Gotterer                     Director                                          March 27, 1998
-------------------------------------
David Gotterer

/s/ Ronald Maggard                     Director                                          March 27, 1998
-------------------------------------
Ronald Maggard

/s/ Andrew Puzder                      Director                                          March 27, 1998
-------------------------------------
Andrew Puzder

                                       Director                                          March 27, 1998
-------------------------------------
Burt Sugarman
</TABLE>

                                       49
<PAGE>



                                Rally's Hamburgers, Inc. and Subsidiaries
                                               Schedule II
                                    Valuation and Qualifying Accounts

                                             (In thousands)
<TABLE>
<CAPTION>

                                                           Additions
                                                    --------------------------
                                      Balance at    Charged to    Charged to
                                       Beginning     Costs and       Other                      Balance at
            Description                 of Year      Expenses      Accounts      Deductions     End of Year
------------------------------------  ------------  ------------  ------------  --------------  ------------
<S>                                  <C>            <C>           <C>           <C>             <C>
Year Ended December 31, 1995
   Accounts receivable                $       176   $       376   $        18   $          117   $       453
   Royalties receivable                       402           838          (267)              51           922
   Notes receivable                          -              293           249                -           542
                                      ============  ============  ============  ==============  ============
                                      $       578   $     1,507   $         -   $          168   $     1,917
                                      ============  ============  ============  ==============  ============

Year Ended December 29, 1996
   Accounts receivable                        453            54             0              206           301
   Royalties receivable                       922           697           (81)             133         1,405
   Notes receivable                           542           200            81              (30)          853
                                      ============  ============  ============  ==============  ============
                                      $     1,917   $       951   $         0   $          309   $     2,559
                                      ============  ============  ============  ==============  ============
Year Ended December 28, 1997
   Accounts receivable                $       301   $       136   $       (39)  $         (198)  $       200
   Royalties receivable                     1,405          (316)         (114)            (744)          231
   Notes receivable                           853          (212)          148             (558)          231
                                      ------------  ------------  ------------  --------------  ------------
                                      $     2,559   $      (392)  $        (5)  $       (1,500)  $       662
                                      ============  ============  ============  ==============  ============

</TABLE>

                                       50