<PAGE>

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                             UNITED STATES
                   SECURITIES AND EXCHANGE COMMISSION

                        Washington, D.C.  20549


                              FORM 10-Q



              Quarterly report pursuant to Section 13 or 15(d)
                  of the Securities Exchange Act of 1934


               For the quarterly period ended June 30, 1997


                    Commission File Number:  0-27008


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

                Texas                                  74-2654208
      (State or other jurisdiction of                (IRS Employer
      incorporation or organization)              Identification Number)

                          200 West Fourth Street
                           Austin, Texas  78701
                  (address of principal executive offices)

                            (512) 469-7500
                    (Registrant's telephone number)



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

               YES    X                       NO  
                   ------                        ------
     Indicate the number of shares outstanding of each of the issuer's 
classes of common stock, as of the latest practicable date.

                Class              Shares Outstanding at August 1, 1997
       Common Stock, no par value               5,548,672

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<PAGE>

                                 INDEX


<TABLE>
<CAPTION>

PART I.        FINANCIAL INFORMATION                               Page No.
                                                                   --------

<S>            <C>                                                 <C>
Item 1.        Consolidated Financial Statements

               Condensed Consolidated Balance Sheets --
               June 30, 1997 and December 31, 1996                    2
               
               Condensed Consolidated Statements of
               Income -- Three and Six Months Ended
               June 30, 1997 and June 30, 1996                        3
               
               Condensed Consolidated Statements of
               Stockholders' Equity -- Six Months Ended
               June 30, 1997 and the year ended December 31, 1996     4
               
               Condensed Consolidated Statements of
               Cash Flows -- Six Months Ended
               June 30, 1997 and June 30, 1996                         5
               
               Notes to Condensed Consolidated
               Financial Statements                                    6

Item 2.        Management's Discussion and Analysis of
               Financial Condition and Results of Operations           7

PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings                                       13

Item 2.        Changes in Securities                                   13

Item 3.        Defaults Upon Senior Securities                         13

Item 4.        Submission of Matters to a Vote of Security Holders     13

Item 5.        Other Information                                       13

Item 6.        Exhibits and Reports on Form 8-K                        14

</TABLE>

                                      1

<PAGE>

PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

                      SCHLOTZSKY'S, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                             JUNE 30,           DECEMBER 31,
                                                               1997                 1996
                                                           (UNAUDITED)
                                                           -----------          ------------
<S>                                                        <C>                  <C>
Assets
Current assets:
     Cash and cash equivalents                              $ 7,601,588          $ 5,638,958
     Restricted certificates of deposit                          18,000               18,000
     Royalties receivable                                       801,363              580,470
     Other receivables                                        2,374,683            1,573,483
     Notes receivable, current portion                          991,806              557,332
     Notes receivable - affiliates, current portion             183,130              595,000
     Real estate development, current portion                 2,421,093            8,458,301
     Prepaid expenses & other assets                            468,042              247,762
                                                            -----------          -----------
Total current assets                                         14,859,705           17,669,306

Other assets:
     Property, equipment & leasehold improvements, net        7,463,004            5,440,882
     Real estate development, less current portion            2,642,773            2,642,773
     Notes receivable, less current portion                   2,694,581            2,656,502
     Notes receivable - affiliates, less current portion      2,044,299            2,180,456
     Investments and advances                                 1,471,246            1,265,862
     Deferred federal income tax asset                          582,023              607,448
     Intangible assets, net                                  10,493,713            8,515,883
                                                            -----------          -----------
     Total Assets                                           $42,251,344          $40,979,112
                                                            -----------          -----------
                                                            -----------          -----------
Liabilities and Stockholder's Equity
Current liabilities:
     Current maturities of long-term debt                      $193,048          $   482,205
     Accounts payable                                           334,955            1,540,527
     Accrued liabilities                                      2,261,190            1,851,257
     Federal income tax payable                                 127,767                --
                                                            -----------          -----------
Total current liabilities                                     2,916,960            3,873,989

Other liabilities:
     Deferred revenue, net                                    1,216,075            1,663,765
     Long-term debt, less current portion                     3,645,659            3,129,337
                                                            -----------          -----------
     Total Liabilities                                        7,778,694            8,667,091

Stockholders' Equity
     Common stock, no par value, 30,000,000 shares
       authorized, 5,548,672 and 5,539,922 issued and
       outstanding at June 30, 1997 and December 31, 1996        44,345               44,257
     Additional paid in capital                              26,563,078           26,493,165
     Retained earnings                                        7,865,227            5,774,599
                                                            -----------          -----------
     Total Stockholders' Equity                              34,472,650           32,312,021
                                                            -----------          -----------
     Total Liabilities and Stockholders' Equity             $42,251,344          $40,979,112
                                                            -----------          -----------
                                                            -----------          -----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL 
                         STATEMENTS.

                                                       2

<PAGE>

                     SCHLOTZSKY'S, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                (UNAUDITED)

<TABLE>
<CAPTION>

                                                   THREE MONTHS ENDED           SIX MONTHS ENDED 
                                                  JUNE 30,    JUNE 30,      JUNE 30,       JUNE 30,
                                                    1997        1996          1997           1996
                                                  --------    --------      --------       --------
<S>                                               <C>         <C>           <C>            <C>
Revenues
     Royalties                                  $3,605,747   $2,674,835    $ 6,883,307    $4,920,512
     Franchise fees                                240,000      475,000        592,500       822,500
     Developer fees                                125,000      415,750        125,000     1,010,750
     Restaurant sales                            1,438,639      809,677      2,762,290     1,375,945
     Brand Contribution                            807,177      237,955      1,341,823       359,797
     Turnkey Development                           762,278       80,297      1,447,768       119,791
     Other fees and revenue                        361,674      277,130        522,379       478,218
                                                ----------   ----------    -----------    ----------
        Total revenues                           7,340,515    4,970,644     13,675,067     9,087,513

Expenses
     Service Costs:
        Royalties                                1,305,235      926,430      2,507,957     1,673,165
        Franchise fees                             132,500      249,250        312,500       448,250
     Restaurant Operations:
        Cost of sales                              443,146      251,599        840,875       461,606
        Labor cost                                 558,814      335,389      1,088,381       606,897
        Operating expenses                         451,815      222,017        850,543       339,693
     General and administrative                  2,419,146    1,762,897      4,429,352     3,282,541
     Depreciation and amortization                 264,200      197,024        513,940       393,909
                                                ----------   ----------    -----------    ----------
           Total expenses                        5,574,856    3,944,606     10,543,548     7,206,061
                                                ----------   ----------    -----------    ----------

Income from operations                           1,765,659    1,026,038      3,131,519     1,881,452

Other
     Interest income, net                          137,118      116,911        195,517       270,888
                                                ----------   ----------    -----------    ----------
     Income before income taxes                  1,902,777    1,142,949      3,327,036     2,152,340

     Provision for federal and state income taxes  740,963      428,606      1,276,646       808,897
                                                ----------   ----------    -----------    ----------
     Net Income                                 $1,161,814   $  714,343     $2,050,390    $1,343,443
                                                ----------   ----------    -----------    ----------
                                                ----------   ----------    -----------    ----------
Income per common share - primary:
     Income per common share                    $      .20   $      .13     $      .36    $      .24
                                                ----------   ----------    -----------    ----------
                                                ----------   ----------    -----------    ----------
     Weighted average shares outstanding         5,723,499    5,674,357      5,700,591     5,669,226
                                                ----------   ----------    -----------    ----------
                                                ----------   ----------    -----------    ----------
Income per common share - fully diluted:
     Income per common share                    $      .20   $      .13     $      .36     $     .24
                                                ----------   ----------    -----------    ----------
                                                ----------   ----------    -----------    ----------
     Weighted average shares outstanding         5,723,499    5,674,357      5,700,591     5,679,872
                                                ----------   ----------    -----------    ----------
                                                ----------   ----------    -----------    ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL 
                            STATEMENTS.

                                                         3

<PAGE>

                    SCHLOTZSKY'S, INC. AND SUBSIDIARIES
        CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                               (UNAUDITED)


<TABLE>
<CAPTION>


                                              Common Stock                                      
                                     -------------------------         Additional                         Total
                                        Shares                          Paid-In         Retained       Stockholders'
                                     Outstanding        Amount          Capital         Earnings          Equity
                                     -----------        ------          -------         --------       -------------
<S>                                   <C>              <C>             <C>             <C>             <C>
Balance, January 1, 1996              5,509,998        $43,958         $26,238,964     $2,691,443       $28,974,365
Options exercised                        29,924            299             254,201       (111,819)          142,681
Net income                                                                              3,194,975         3,194,975
                                      ---------        -------         -----------     -----------      -----------
Balance, December 31, 1996            5,539,922         44,257          26,493,165      5,774,599        32,312,021
Options exercised                         8,750             88              69,913         40,238           110,239
Net income                                                                              2,050,390         2,050,390
                                      ---------        -------         -----------     -----------      -----------
Balance, June 30, 1997                5,548,672        $44,345         $26,563,078     $7,865,227       $34,472,650
                                      ---------        -------         -----------     -----------      -----------
                                      ---------        -------         -----------     -----------      -----------
</TABLE>

 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL 
                         STATEMENTS.

                                                           4

<PAGE>

                   SCHLOTZSKY'S, INC. AND SUBSIDIARIES
             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               SIX MONTHS ENDED
                                                                      JUNE 30,                 JUNE 30,
                                                                        1997                     1996
                                                                      --------                 --------
<S>                                                                 <C>                       <C>
Cash flows from operating activities                                $  659,357                $  240,373

Cash flows from/(used for) investing activities
   Purchase of real estate held for sale                            (8,293,914)               (5,759,579)
   Proceeds from sale of real estate                                14,275,761                 2,512,672
   Issuance of notes receivable (less collections)                    (342,853)                 (525,409)
   Acquisition of intangibles                                       (2,173,570)               (1,118,628)
   Purchase of property, equipment and leasehold improvements       (2,275,200)                 (404,775)
   Other                                                              (224,354)                  408,586
                                                                    -----------               -----------

Net cash from/(used for) investing activity                            965,870                (4,887,133)

Cash flows from/(used for) financing activities:
   Proceeds from issuance of long term debt                            679,361                   169,043
   Principal payments on long term debt                               (452,196)                 (819,342)
   Proceeds from exercises of options                                  110,238                    59,376
                                                                    -----------               -----------
Net cash provided by/(used for) financing activities                   337,403                  (590,923)
                                                                    -----------               -----------
Net increase/(decrease) in cash and cash equivalents                 1,962,630                (5,237,683)

Cash and cash equivalents at beginning of period                     5,638,958                12,344,682
                                                                    -----------               -----------
Cash and cash equivalents at end of period                          $7,601,588                $7,106,999
                                                                    -----------               -----------
                                                                    -----------               -----------
</TABLE>

 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL 
                              STATEMENTS.

                                                     5

<PAGE>

                               SCHLOTZSKY'S, INC. AND SUBSIDIARIES
                    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        (Unaudited)


June 30, 1997

NOTE 1. -- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been 
prepared in accordance with generally accepted accounting principles for 
interim financial information and with the instructions to Form 10-Q and 
Article 10 of Regulation S-X.  Accordingly, they do not include all of the 
information and footnotes required by generally accepted accounting 
principles for complete financial statements.  In the opinion of management, 
all adjustments, consisting of normal recurring accruals, considered 
necessary for a fair presentation have been included.  Operating results for 
the three and six months ended June 30, 1997, are not necessarily indicative 
of the results that may be expected for the year ended December 31, 1997.  
For further information, refer to the consolidated financial statements and 
footnotes thereto incorporated by reference in the Schlotzsky's, Inc. Annual 
Report on Form 10-K/A for the year ended December 31, 1996.

NOTE 2. -- SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

RECENT PRONOUNCEMENTS

In June, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 
No. 130, "Reporting Comprehensive Income," which establishes standards for 
reporting and display of comprehensive income and its components in a full 
set of general-purpose financial statements.  SFAS No. 130 is effective for 
fiscal years beginning after December 15, 1997.

Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments 
of an Enterprise and Related Information," which establishes standards for 
the way that public business enterprises report information about operating 
segments in annual financial statements and requires that those enterprises 
report selected information about operating segments in interim financial 
reports issued to shareholders.  It also establishes standards for related 
disclosures about products and services, geographic areas, and major 
customers.  SFAS No. 131 is effective for financial statements for periods 
beginning after December 15, 1997. 

                                      6

<PAGE>

NOTE 3. -- FINANCING ARRANGEMENTS

In February 1997, the Company secured a line of credit of up to $5 million to 
provide financing for the Turnkey Program.  As of June 30, 1997, the Company 
had not drawn against this line of credit.

In June 1997, the Company secured two lines of credit from a financial 
institution.  One line, in the amount of $3 million, will be used to retire 
approximately $1.5 million of existing debt.  The balance will be used to 
fund various capital expenditures budgeted to occur in 1997.  The other line 
of credit will provide up to $12 million of financing for the Company's 
Turnkey program.  As of June 30, 1997, neither of the new lines had been 
drawn upon.

Item 2.  Management's Discussion and Analysis of Financial Condition and 
Results of Operations.

RESULTS OF OPERATIONS 
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS ENDED JUNE 30, 1996

     REVENUES.  Total revenues increased 47.7% from $4,971,000 to $7,341,000.

     Royalties increased 34.8% from $2,675,000 to $3,606,000.  This increase 
was due to the addition of 124 restaurants opened during the period from July 
1, 1996, to June 30, 1997.  Also driving the increase was the growing 
influence of larger freestanding units with higher visibility, a 9.8% 
increase in average weekly sales and a 3.5% increase in same store sales.

     Franchise fees decreased 49.5% from $475,000 to $240,000.  This decrease 
was a result of 12 fewer domestic openings during the three-month period 
ended June 30, 1997, as compared to the three months ended June 30, 1996.  
Fewer openings in the current quarter are the result of merely the timing of 
completed stores being opened and the result of the Company's increasing 
emphasis on superior site selection for larger freestanding restaurants with 
higher visability.

     Developer fees decreased 69.9% from $416,000 to $125,000.  This decrease 
was primarily due to the sale of the rights to one domestic development area 
and one international market in the period ended June 30, 1997, as compared 
to two domestic development areas and two international markets in the three 
months ended June 30, 1996.

     Restaurant sales increased 77.7% from $810,000 to $1,439,000.  This 
increase was attributable to a 23% increase in sales volume of the Company's 
Flagship restaurant and the continued operation of two additional 
Company-owned stores compared to those in operation for the same period last 
year.  It is the Company's intention to re-market the units acquired from 
franchisees once their operations and profitablity have improved.  Management 
has not established a timeframe to re-market these restaurants.

     Private label licensing fees increased 239.2% from $238,000 to $807,000. 
The increase was the result of more favorable terms with certain major 
suppliers compared to the terms in place in the prior year, the increasing 
volume of system sales and greater franchisee participation in the Company's 
purchasing programs.

     Turnkey development revenue increased from $80,000 to $762,000.  Revenue 
in the current quarter included $76,000 of rental revenue for ten sites 
completed and under lease.  Eight of the ten completed sites were sold during 
the second quarter of 1997 and the gain on these sales comprises the balance 
of turnkey revenue generated this quarter.

     Other fees and revenues increased 30.5% from $277,000 to $362,000.  This 
change was primarily due to the increased level of supplier contributions to 
the Company's annual convention held in July 1997.

                                      7

<PAGE>

     The following table reflects a comparison of system performance for the 
three months ended June 30, 1997 and June 30, 1996.  The information reflects 
the growth of the franchise system, which has been principally responsible 
for the increased revenue as discussed above.

<TABLE>
<CAPTION>

         SYSTEM PERFORMANCE                        THREE MONTHS ENDED
                                               JUNE 30,          JUNE 30,
                                                 1997              1996
                                               --------          --------
         <S>                                   <C>               <C>
         Units Opened
             Domestic
                 Freestanding                     14                18
                 End Cap                           3                 9
                 Other                             2                 4
                                               --------          ---------
                     Total Domestic Openings      19                31
             International                         2                 2
                                               --------          ---------
                     Total Openings               21                33
         Units Closed                              3                 2
                                               --------          ---------
                     Net Unit Growth              18                31
                                               --------          ---------
                                               --------          ---------
         Sales:
         System-wide Sales (in thousands)      $66,951            $49,948
         Average Weekly Sales                  $ 8,756            $ 7,973
         Change in Average Weekly Sales           9.8%              14.6%
         Stores in Operation                       612                516
         Change in Same Store Sales               3.5%               4.6%

</TABLE>

     COSTS AND EXPENSES.  Royalty service costs increased 40.9% from $926,000 
to $1,305,000.  This increase was a direct result of the increase in royalty 
revenue for the three months ended June 30, 1997, as compared to the same 
period in the prior year.  Royalty service costs as a percentage of royalties 
grew from 34.6% to 36.2%.  This increase reflects the growing percentage of 
restaurants serviced by the area developer system.

     Restaurant cost of sales, which consists of food, beverage and paper 
costs, increased from $252,000 to $443,000, but as a percentage of restaurant 
sales decreased from 31.1% to 30.8%.  Likewise, restaurant labor costs 
increased from $335,000 to $559,000, but as a percentage of restaurant sales 
decreased from 41.4% to 38.8% for the same quarter in 1996.  These percentage 
decreases were primarily due to the improving operational efficencies 
attained in the various Company-owned restaurants.  Restaurant operating 
expenses have increased from $222,000 to $452,000, and as a percentage of 
restaurant sales increased from 27.4% to 31.4% for the three months ended 
June 30, 1997, as compared to the corresponding period in 1996.  The increase 
in operating expenses is due to the additional facility costs for the 
additional units the Company operates.

     General and administrative expenses grew from $1,763,000 to $2,419,000 
representing a 37.2% increase, but as a percentage of total revenues 
decreased from 35.5% to 33.0%.  The dollar increase is principally the result 
of additional personnel at the corporate office and the expensing of real 
estate costs of certain Turnkey sites which management has determined are no 
longer desirable locations for development.

     Depreciation and amortization increased from $197,000 to $264,000, but 
as a percentage of total revenues decreased from 4.0% to 3.6%.  The dollar 
increase was principally due to amortization of goodwill and other 
intangibles acquired in late 1996 and depreciation related to the May opening 
of an additional company-owned restaurant.

                                      8

<PAGE>

     OTHER.  Net interest income increased 17.3% from $117,000 to $137,000. 
This increase was a result of the higher level of funds invested during the 
more recent period.

     INCOME TAX EXPENSE.  Income tax expense reflects a combined federal and 
state effective tax rate of 38.9% for the three months ended June 30, 1997, 
which is slightly higher than the effective combined tax rate for the 
comparable period in 1996.  Based on projections of taxable income, the 
Company anticipates that its effective combined rate for federal and state 
taxes will be approximately 38% for 1997.

RESULTS OF OPERATIONS 
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

     REVENUES.  Total revenues increased 50.5% from $9,088,000 to $13,675,000.

     Royalties increased 39.9% from $4,921,000 to $6,883,000.  This increase 
was due to the addition of 124 restaurants opened during the period from July 
1, 1996 to June 30, 1997.  Also driving the increase was the growing 
influence of larger freestanding units with higher visibility, a 10.6% 
increase in average weekly sales and a 2.8% increase in same store sales.

     Franchise fees decreased 28.0% from $823,000 to $593,000.  This decrease 
was a result of nine fewer domestic openings during the six-month period 
ended June 30, 1997, as compared to the six months ended June 30, 1996.  The 
fewer number of openings is the result of the Company's increasing emphasis 
on superior site selection for larger freestanding restaurants with higher 
visability.

     Developer fees decreased 87.6% from $1,011,000 to $125,000.  This 
decrease was primarily due to the sale of the rights to one less domestic 
development area sold during the period ending June 30, 1997, than in the 
prior comparable period.  The development areas sold in 1997 are 
significantly smaller (in geographic area), and therefore generated less fees 
than those areas sold during 1996.

     Restaurant sales increased 100.8% from $1,376,000 to $2,762,000.  This 
increase was attributable to a 29% increase in sales volume of the Company's 
Flagship restaurant and the continued operation of two additional 
Company-owned stores compared to those in operation for the same period last 
year.  It is the Company's intention to re-market the units acquired from 
franchisees once their operations and profitability have improved.  
Management has not established a timeframe to re-market these restaurants.

     Private label licensing fees increased 272.9% from $360,000 to 
$1,342,000. The increase was the result of more favorable terms with certain 
major suppliers than those terms in place in the prior year, as well as the 
increasing volume of system sales and greater franchisee participation in the 
Company's purchasing programs.

     Turnkey development revenue increased from $120,000 to $1,448,000.  
Revenue in the six months ended June 30, 1997 included $253,000 of rental 
revenue for 17 sites completed and under lease.  Fifteen of the seventeen 
completed sites were sold during the six months ended June 30, 1997, and the 
gain on these sales comprises the balance of turnkey revenue generated 
through the second quarter.

     Other fees and revenues increased 9.2% from $478,000 to $522,000.  This 
change was primarily due to the increased level of supplier contributions to 
the Company's annual convention held in July 1997.

                                      9

<PAGE>

      The following table reflects a comparison of system performance for the 
six months ended June 30, 1997 and June 30, 1996.  The information reflects 
the growth of the franchise system, which has been principally responsible 
for the increased revenue as discussed above.

<TABLE>
<CAPTION>

         SYSTEM PERFORMANCE                         SIX MONTHS ENDED
                                              JUNE 30,             JUNE 30,
                                                1997                 1996
                                              --------             --------
          <S>                                 <C>                  <C>
          Units Opened
               Domestic
                  Freestanding                   36                   32
                  End Cap                         7                   16
                  Other                           4                    8
                                              --------             --------
                     Total Domestic  Openings    47                   56
               International                      3                    5
                                              --------             --------
                     Total Openings              50                   61
          Units Closed                           11                    8
                                              --------             --------
                     Net Unit Growth             39                   53
                                              --------             --------
                                              --------             --------
          Sales:
          System-wide Sales (in thousands)    $127,955              $91,392
          Average Weekly Sales                $  8,487              $ 7,671
          Change in Average Weekly Sales         10.6%                13.3%
          Stores in Operation                      612                  516
          Change in Same Store Sales              2.8%                 2.8%

</TABLE>

     COSTS AND EXPENSES.  Royalty service costs increased 49.9% from 
$1,673,000 to $2,508,000.  This increase was a direct result of the increase 
in royalty revenue for the six months ended June 30, 1997, as compared to the 
same period in the prior year.  Royalty service costs as a percentage of 
royalties grew from 34.0% to 36.4%.  This increase reflects the growing 
percentage of restaurants serviced by the area developer system.

     Restaurant cost of sales, which consists of food, beverage and paper 
costs, increased from $462,000 to $841,000, but as a percentage of restaurant 
sales decreased from 33.5% to 30.4%.  Also, restaurant labor costs increased 
from $607,000 to $1,088,000, but as a percentage of restaurant sales 
decreased from 44.1% to 39.4% for the same period in 1996.  These percentage 
decreases were primarily due to the improving operational efficencies 
attained in the various Company-owned stores.  Restaurant operating expenses 
have increased from $340,000 to $851,000, and as a percentage of restaurant 
sales increased from 24.7% to 30.8% for the six months ended June 30, 1997, 
as compared to the same corresponding period in 1996.  The increase in 
operating expenses is due to the additional facility costs for the additional 
units the Company operates.

     General and administrative expenses grew from $3,283,000 to $4,429,000 
representing a 34.9% increase, but as a percentage of total revenues 
decreased from 36.1% to 32.4%.  The change is principally the result of 
additional personnel at the corporate office and the expensing of real estate 
costs of certain Turnkey sites which management has determined are no longer 
desirable locations for development.

                                     10

<PAGE>

      Depreciation and amortization increased from $394,000 to $514,000, but 
as a percentage of total revenues decreased from 4.3% to 3.8%.  The dollar 
increase was principally due to amortization of goodwill and other 
intangibles acquired in late 1996 and depreciation related to the additional 
units the Company was operating in the more recent period.

     OTHER.  Net interest income decreased 27.8% from $271,000 to $196,000. 
This decrease was a result of a lower level of funds invested during the more 
recent period.

     INCOME TAX EXPENSE.  Income tax expense reflects a combined federal and 
state effective tax rate of 38.4% for the six months ended June 30, 1997, 
which is slightly higher than the effective combined tax rate for the 
comparable period in 1996.  Based on projections of taxable income, the 
Company anticipates that its effective combined rate for federal and state 
taxes will be approximately 38% for 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's financial position remained strong through the first six 
months of 1997 as a continuing result of its initial public offering in 
December 1995.  Proceeds from the offering continue to fund the operations of 
the Turnkey Program.  Exceeds funds from operations and proceeds from the 
Turnkey Program are being reinvested in the Turnkey Program and invested in 
money market accounts.

     The Company generated cash flow from the sale of completed turnkey sites 
of $14,276,000 while investing cash of $8,294,000 to continue the development 
of other sites during the first six months of 1997.  In contrast, during this 
period in 1996, cash generated from the sale of real estate was only 
$2,513,000 while $5,760,000 of cash was invested in turnkey development.  The 
Company invested $2,174,000 in the reacquisition of two domestic development 
territories, and in its planned expansion in the Austin, Texas market.  Also 
contributing to the change in cash position were purchases of property, 
equipment and leasehold improvements of $2,275,000.  These purchases were for 
additional Company-owned units and are the result of the increased staffing 
levels at the corporate headquarters.

     Bee Cave/Westbank, Ltd., a limited partnership in which the Company and 
its subsidiary, Schlotzsky's Real Estate, Inc., own a combined 40% interest 
in capital and profits, obtained an interim loan of $1,150,000 from a bank in 
December 1994 to finance the construction of a retail shopping center.  The 
Company is liable for the full amount of this loan.  The loan, which had an 
outstanding balance of $1,133,000 on March 31, 1997, was renewed in April 
1996 at a rate of prime plus 1.25% and matures April 2001.  The loan balance 
as of June 30, 1997, was $1,128,000, and monthly payments are being made by 
the partnership.

     The Company believes that cash flow from operations, cash reserves, 
collections from notes receivable and borrowings under existing credit 
facilities described above, will be sufficient to meet the Company's 
anticipated cash needs through the end of 1997.  Thereafter, the Company 
believes that new store openings will result in increasing cash flow from 
operations which, together with borrowings under credit facilities, should be 
sufficient to meet the Company's anticipated cash needs, although there can 
be no assurance in this regard.  Substantially all of the Company's royalties 
have been pledged to secure Company debt in the past.  However, the proceeds 
of its offering were used to repay most of these obligations.  Accordingly, 
these assets are available to secure future financing.  The Company 
guarantees certain leases of its franchisees for limited periods of time, 
which may affect its ability to obtain financing in the future.  To the 
extent that credit facilities and cash flow from operations are insufficient 
to finance the Company's future expansion plans, the Company intends to seek 
additional funds for this purpose from future debt financing or additional 
offerings of equity securities, although there can be no assurance of the 
availability of such funds on acceptable terms in the future.

                                     11

<PAGE>

REAL ESTATE DEVELOPMENT

Under the Turnkey Program, the Company works with an area developer to 
identify superior store sites within a territory.  The Company will purchase 
or lease a selected site, design and construct a Schlotzsky's Deli restaurant 
on the site and sell, lease or sublease the completed store to a franchisee.  
Where the Company does not sell the property to a franchisee, the Company 
then sells the improved property, or, in the case of a leased property, 
assigns the lease and any sublease, to an investor.  The Company charges the 
franchisee approximately $20,000 per site for managing the construction of 
the store.  This construction management fee is recognized when the store is 
opened.  Upon sale of the store, the Company realizes a gain (or loss) on the 
asset and recognizes such in the period in which it occurs.  The Company 
believes that the Turnkey Program enhances the ability of area developers to 
recruit qualified franchisees by developing high profile restaurant sites and 
achieving critical mass for advertising purposes more quickly in selected 
markets.

At the end of 1996, 22 properties were in various stages of development and 
seven were under lease generating rental income.  Of these sites, eight have 
been completed, seven sold and one being operated as a Company-owned 
restaurant (see "Results of Operations").  Four sites remain in the 
pre-development stage, four are under construction, two undeveloped sites 
were sold and four sites in pre-development were abandoned.  At June 30, 
1997, there were 42 properties in various stages of development.

A summary of turnkey sites for the six months ended June 30, 1997 is as 
follows:
     
<TABLE>
<CAPTION>

                                            Number of   Invested at   Estimates to
                                              Units    June 30, 1997     Complete
                                            ---------  -------------  ------------
     <S>                                    <C>        <C>            <C>
     Open and Sold                              15          N/A           N/A
     Open (receiving rent and royalties)         2     $1,056,000         N/A
     Under Construction                          6      2,235,000       2,683,000
     Pre-acquisition                            36        150,000      34,911,000
     Other                                       5      1,623,000         --
                                            ---------  -------------  ------------
     Total                                      64     $5,064,000     $37,594,000
                                            ---------  -------------  ------------
                                            ---------  -------------  ------------
</TABLE>


Estimates above are based upon information from third parties and 
management's assessment of conditions in existence at the time of this 
filing.  There can be no assurance that conditions (such as general or 
regional economic conditions) will not change significantly requiring greater 
investment of resources or a longer period of time to satisfactorily complete 
construction or market the properties.

FORWARD LOOKING STATEMENTS

This report contains forward looking statements within the meaning of Section 
27A of the Securities Act of 1933, as amended, and Section 21E of the 
Securities Exchange Act of 1934, as amended, that are not historical facts.  
Such statements may include, but not be limited to, projections of revenues, 
income, capital expenditures, plans for future operations, financing needs or 
plans, and plans relating to products or services of the Company, as well as 
assumptions relating to the foregoing.  These statements involve management 
assumptions and are subject to risks and uncertainties, along with factors 
set forth in the Company's Annual Report on Form 10-K/A in "Business" pages 
1-13.

                                     12

<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

None


ITEM 2.  CHANGES IN SECURITIES.

None


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None


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

The Annual Meeting of the Shareholders of the Company was held on May 30, 
1997. At the meeting, the following items were voted on:

1)   Election of Directors, whose terms expired at the meeting.

<TABLE>
<CAPTION>

                                   FOR          WITHHELD      NONVOTE
                               ---------       ----------    ---------
     <S>                       <C>             <C>           <C>
     John M. Rosillo           3,736,573          7,333      1,804,766
                                                                      
     Floor Mouthaan            3,736,573          7,333      1,804,766
                                                                      
     John L. Hill, Jr.         3,736,573          7,333      1,804,766

</TABLE>

2)   Proposal to approve the Third Amended and Restated 1993 Stock Option 
     Plan.

<TABLE>
<CAPTION>

            FOR             AGAINST            ABSTAIN/NONVOTE
         -----------       ----------         -----------------
<S>       <C>              <C>                <C>
          3,638,024          88,877               1,821,771

</TABLE>

3)   Proposal to ratify and approve the selection of Coopers & Lybrand, 
L.L.P.,      as the Company's auditors for the fiscal year ending December 
31, 1997.

<TABLE>
<CAPTION>

            FOR             AGAINST            ABSTAIN/NONVOTE
         -----------       ----------         -----------------
<S>       <C>              <C>                <C>
          3,729,701          4,215                1,814,756

</TABLE>

ITEM 5.  OTHER INFORMATION

None

                                     13

<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     a.  Exhibits

<TABLE>
<CAPTION>

       Exhibit                                                            Sequentially
         No.                                                             Numbered Page
       -------                                                           -------------
        <S>    <C>                                                       <C>
        11.1   Statement regarding computation of per share earnings.          15

        27     Financial Data Schedule.                                        16

</TABLE>

     b.  Current Reports on Form 8-K:   None









                               SIGNATURE

     Pursuant to the requirements 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.

                            SCHLOTZSKY'S, INC.




                              By:  /s/ John C. Wooley
                                   -------------------------
                                   John C. Wooley, President
                                   Chief Executive Officer


                              By:  /s/ Monica Gill
                                   -------------------------
                                   Monica Gill, Controller
                                   Chief Accounting Officer


Austin, Texas
August 13, 1997

                                     14

<PAGE>