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                                 UNITED STATES
                        SECURITIES & 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:  0-28234


                           CASA OLE RESTAURANTS, INC.
             (Exact name of registrant as specified in its charter)


                  TEXAS                               76-0493269
     (State or other jurisdiction of       (IRS Employer Identification Number)
      incorporation or organization)

      1135 EDGEBROOK, HOUSTON, TEXAS                  77034-1899
 (Address of Principal Executive Offices)             (Zip Code)


       Registrant's telephone number, including area code:  713/943-7574

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

          Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of class)


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

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

The aggregate market value of Common Stock held by non-affiliates of the
registrant, based on the sale trade price of the Common Stock as reported by
the Nasdaq National Market on March 20, 1998 was $8,817,195.  For purposes of
this computation, all officers, directors and 10% beneficial owners of the
registrant are deemed to be affiliates.  Such determination should not be
deemed an admission that such officers, directors or 10% beneficial owners are,
in fact, affiliates of the registrant.  Number of shares outstanding of each of
the issuer's classes of common stock, as of March 20, 1998:  3,597,705 shares
of common stock, par value $.01.


                      DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive proxy statement in connection with the Annual Meeting
of Shareholders to be held May 26, 1998, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
report.


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                                     PART 1

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements in this Form 10-K under "Item 1.  Business", "Item
3.  Legal Proceedings", "Item 7.  Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act").  Such forward-looking
statements involve known and unknown risks, uncertainties and other facts which
may cause the actual results, performance or achievements of Casa Ole
Restaurants, Inc. (the "Company"), its area developers, market partners,
franchisees and Casa Ole restaurants to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.  Such factors include, among others, the following:
general economic and business conditions; competition; success of operating
initiatives; development and operating costs; area developers' adherence to
development schedules; advertising and promotional efforts; brand awareness;
adverse publicity; acceptance of new product offerings; consumer trial and
frequency; availability, locations and terms of sites for store development;
changes in business strategy or development plans; quality of management;
availability, terms and development of capital; business abilities and judgment
of personnel; availability of qualified personnel; food, labor and employee
benefit costs; changes in, or the failure to comply with government
regulations; regional weather conditions; construction schedules; and other
factors referenced in the Form 10-K.  The use in this Form 10-K of such words
as "believes", "anticipates", "expects", "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements.  The success of the Company is dependent
on the efforts of the Company, its employees and its area developers, market
partners and franchisees and the manner in which they operate and develop
stores.

ITEM 1.          BUSINESS

GENERAL

         Casa Ole Restaurants, Inc. (the "Company") was incorporated under the
laws of the state of Texas in February 1996, and had its initial public
offering in April 1996.  The Company operates as a holding company for 14
corporations and conducts substantially all of its operations through its
subsidiaries.  Immediately prior to the initial public offering and pursuant to
a Master Contribution Agreement, the shareholders of 13 prior corporations
exchanged their shares in such corporations for shares in the Company, and
these corporations became wholly-owned subsidiaries of the Company.  All
references to the Company include the Company and its subsidiaries, unless
otherwise stated.

         The Company operates and franchises Mexican-theme restaurants
featuring various elements associated with the casual dining experience, under
the names Casa Ole, Monterey's, Little Mexico and Tortuga's.  The first Casa
Ole restaurant was opened in Pasadena, Texas in 1973, and today the Company
operates 49 restaurants and franchises 31 restaurants in various communities
across Texas, Louisiana, Oklahoma, Idaho, West Virginia and Tennessee.  The
Company's restaurants are designed to appeal to a broad range of middle-income
customers, and are located primarily in small and medium-sized communities and
middle-income areas of larger markets.  The restaurants offer fresh, quality
food, affordable prices, friendly service and comfortable surroundings.  Menus
feature a variety of traditional Mexican and Tex-Mex selections, complemented
by the Company's own original Mexican-based recipes designed to have broad
appeal.  The Company believes that the established success of the Company in
existing markets, its focus on middle-income customers, and the skills of its
management team provide significant opportunities to realize the value inherent
in the Mexican restaurant market, increase revenues in existing markets, and
penetrate new markets.

STRATEGY AND CONCEPT

         The Company's objective is to be perceived as the national value
leader in the Mexican segment of the full- service casual dining marketplace.
To accomplish this objective, the Company has developed strategies designed to
achieve and maintain high levels of customer loyalty, frequent patronage and
profitability.  The key strategic elements are:

         _       Offering consistent, high-quality, original recipe Mexican
                 menu items that reflect both national and local taste
                 preferences;

         _       Pricing menu offerings at levels below many family and
                 casual-dining restaurant concepts;

         _       Selecting, training and motivating its employees to enhance
                 customer dining experiences and the friendly casual atmosphere
                 of its restaurants;

         _       Providing customers with the friendly, attentive service
                 typically associated with the casual-dining experience; and

         _       Reinforcing the perceived value of the dining experience with
                 a comfortable and inviting  Mexican decor.


         MENU.  The Company's restaurants offer high-quality products with a
distinctive, yet mild taste profile with mainstream appeal.  Fresh ingredients
are a critical recipe component, and the majority of menu items are prepared
daily in the kitchen of each restaurant from original recipes.



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         The menus feature a wide variety of entrees including enchiladas,
combination platters, burritos, fajitas, coastal seafood and other house
specialties.  The menus also includes soup, salads, appetizers and desserts.
From time to time the Company also introduces new dishes designed to keep the
menus fresh.  Alcoholic beverages are served as a complement to meals and
represent a range of less than 5% of sales at its more family oriented
locations, and up to 20% in its more casual dining locations.  At Company-owned
restaurants the dinner menu entrees presently range in price from $3.99 to
$8.95, with most items priced between $4.99 and $5.99.  Lunch prices at
Company-owned restaurants presently range from $3.85 to $5.95.

         ATMOSPHERE AND LAYOUT.  The Company emphasizes an attractive interior
and exterior design for each of its restaurants.  The typical restaurant has an
inviting and interesting Mexican exterior.  The interior decor is comfortable
Mexican in appearance to reinforce the perceived value of the dining
experience.  Stucco, tile floors, plants and a variety of paint colors are
integral features of each restaurant's decor.  These decor features are
incorporated in a floor plan designed to provide a comfortable atmosphere.  The
Company's restaurant's designs are sufficiently flexible to accommodate a
variety of available sites and development opportunities, such as malls,
end-caps of strip shopping centers and free standing buildings, including
conversions.  The physical facility is also designed to serve a high volume of
customers in a relatively limited period of time.  The Company's restaurants
typically range in size from approximately 4,000 to 5,600 square feet, with an
average of approximately 4,500 square feet and a seating capacity of
approximately 180.

EXPANSION STRATEGY

         The Company believes that the unit economics of the various restaurant
concepts of the Company, as well as their value orientation and focus on middle
income customers, provide significant opportunities for expansion.  The
Company's strategy to capitalize on these expansion opportunities is comprised
of three key elements:

         INCREASED PENETRATION OF EXISTING MARKETS.  Increasing the number of
restaurants in existing Designated Market Areas ("DMAs") is a key component of
the Company's expansion strategy.  The DMA concept is a mapping tool developed
by the A.C. Nielsen Co. that measures the size of a particular market by
reference to communities included within a common television market.  The
Company's objective in increasing the density of Company-owned restaurants
within existing markets is to improve operating efficiencies in such markets
and to realize improved overhead absorption.  In addition, the Company believes
that increasing the density of restaurants in both Company-owned and franchised
markets will assist it in achieving effective media penetration while
maintaining or reducing advertising costs as a percentage of revenues in the
relevant markets.  The Company believes that careful and prudent site selection
within existing markets will avoid cannibalization of the sales base of
existing restaurants.  During 1998 the Company intends to open at least two
restaurants in the Houston Consolidated Metropolitan Area, with one of these
restaurants to be located in Galveston, Texas.

         EXPANSION INTO SELECTED NEW MARKETS.  In targeting markets for
expansion in the future, the Company intends to concentrate initially on three
to five major and middle markets located within easy commuting distance from
Houston, Texas.  In each such market, the Company will generally seek to open
only one or two restaurants to ensure procurement of top quality real estate
and to adapt recipes and menus to local market preferences.  In each new
market, special attention will be paid to adapting to local taste and food item
preferences to ensure product acceptance.

         The Company will continue on smaller and medium sized regional trade
center cities within Texas and Oklahoma.  Such cities, while not necessarily
large, are the primary retail and service centers within their respective
region.  Such cities typically have a large concentration of retail activity,
often including a regional mall and several large discount and specialty
retailers.  Such cities are also typically the entertainment and cultural
center for their region.  As a result of their smaller size, these regional
markets are frequently underserved by restaurant chains, and the Company
believes that they offer opportunities for significant growth.  In addition,
the Company believes that the ability to achieve cost-effective media
penetration with relatively few restaurants, as well as the value orientation
of these concepts, and the nature of the Company's customer base enhance the
attractiveness of these markets.  Areas identified by the Company as a "market"
generally coincide with the DMA's established for those areas.

         DEVELOPMENT OF FRANCHISED, MARKET PARTNER AND COMPANY-OWNED
RESTAURANTS.  In implementing its expansion strategy, the Company intends to
focus on adding a combination of franchised, market partner and Company-owned
restaurants.  (See "Item 1.  Business--Market Partner Program.")  The number of
such restaurants developed in any period will vary.  The Company believes that
a mix of franchised, market partner and Company-owned restaurants will enable
it to realize accelerated expansion opportunities, while maintaining majority
or sole ownership of a significant number of restaurants.  Generally the
Company does not anticipate opening franchised, market partner and
Company-owned restaurants within the same market.  In seeking franchisees and
market partners, the Company will continue to primarily target experienced
multi-unit restaurant operators with knowledge of a particular geographic
market and financial resources sufficient to execute the Company's development
strategy.  During fiscal 1997, the Company added franchisees to the system who
have had operations experience with full service family and casual dining
concepts, as well as experience with quick-serve concepts.  With the addition
of these new franchisees, the franchise system is anticipated to open four to
seven Casa Ole restaurants in 1998.





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         In adding to its Company-owned restaurants, the Company anticipates it
will continue to develop new units and to a lesser extent, selectively acquire
existing franchised restaurants.  During fiscal 1997, the Company constructed
and opened new units in Lubbock, Plainview and Bryan, Texas.  It also opened
market partner restaurants in Pocatello and Garden City,  Idaho.  The Pocatello
restaurant was later closed and will be sold.  The restaurant opened in 1996 in
Bellmead, Texas was sold to a franchisee in 1997.  Franchise restaurants were
opened in Pasadena and Wichita Falls, Texas, as well as Beckley, West Virginia
and Kingsport, Tennessee.

         SELECTIVE ACQUISITIONS.  As part of its expansion strategy the Company
also seeks selective acquisitions that meet its growth goals of increasing
penetration in existing markets and entering new markets.  Following this
strategic approach to growth the Company purchased 100% of the outstanding
stock of Monterey's Acquisition Corp. ("MAC") on July 2, 1997.  The Company
purchased the shares of common stock for $4.0 million, paid off outstanding
debt and accrued interest totaling $7.1 million and funded various other agreed
upon items approximating $500,000.  The transaction was funded using cash on
hand of approximately $3.0 million and funds available to the Company under its
amended credit facility.  At the time of acquisition, MAC owned and operated 26
restaurants in Texas and Oklahoma under the names "Monterey's Tex Mex Cafe",
"Monterey's Little Mexico", and "Tortuga Cantina."  The acquisition increased
the Company's penetration in existing Texas markets and gave the Company
effective penetration of the Tulsa, OK DMA.  It also increased the number of
Mexican dining formats for use at specific geographic locations.

         In adding to its Company-owned restaurant development, the Company
anticipates it will continue from time to time to selectively acquire existing
restaurants from franchisees and others.

         During fiscal 1997, the Company constructed and opened four new units
and purchased a franchised unit in Victoria, Texas.  Exclusive of the
acquisitions, the Company, including its market partners, is planning to open
approximately four  units and relocate one in 1998.

SITE SELECTION

         Execution of the expansion strategy requires locating, evaluating and
securing adequate sites.  Senior management devotes significant time and
resources to analyzing each prospective site.  Senior management has also
created and utilizes a site selection committee which reviews and approves each
site to be developed.  In addition, the Company conducts customer surveys to
precisely define the demographic profile of the customer base of each of the
Company's restaurant concepts.  The Company's site selection criteria focus on:

             1)  matching the customer profile of the respective restaurant
                 concept to the profile of the population of the target market;

             2)  easy site accessibility, adequate parking, and prominent
                 visibility of each site under consideration;

             3)  the site's strategic location within the marketplace;

             4)  the site's proximity to the major concentration of shopping
                 centers within the market;

             5)  the site's proximity to a large employment base to support the
                 lunch day-part; and

             6)  the impact of competition from other restaurants in the
                 market.


         The Company believes that a sufficient number of suitable sites are
available for Company, market partner and franchise development in existing and
target markets.  Based on its current planning and market information, the
Company expects to open approximately four Company-owned and/or market partner
restaurants in 1998 and believes that its franchisees will open approximately
four to seven additional restaurants.  As previously mentioned, the Company has
purchased or otherwise secured real estate for two of its targeted 1998
openings.  The company is also in the process of negotiating a letter of intent
for a property to be developed in Tulsa, Oklahoma.   The Company's ability to
open the number of restaurants contemplated by its expansion plans is subject
to certain risks.  See "Item 7.  Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors."  The anticipated
total investment for a 4,200 to 4,850 square foot restaurant, including land,
building, equipment, signage, site work, furniture, fixtures and decor ranges
between $900,000 and $1,350,000 (includes capitalized lease value).
Additionally, training and other pre-opening costs are anticipated to
approximate $50,000.  The cost of developing and operating a Company restaurant
can vary based upon fluctuations in land acquisition and site improvement
costs, construction costs in various markets, the size of the particular
restaurant and other factors.  Although the Company anticipates that
development costs associated with near-term restaurants will range between
$900,000 and $1,350,000, there can be no assurance of this.





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RESTAURANT OPERATIONS

         MANAGEMENT AND EMPLOYEES.  The management staff of each restaurant is
primarily responsible for managing the restaurant's operations.  Each
Company-owned restaurant operates with a general manager, one or two assistant
managers and a kitchen manager or a chef.  Including managers, restaurants have
an average of 50 full-time and part-time employees.  The Company historically
has spent considerable effort developing its employees, allowing it to promote
from within.  As an additional incentive to its restaurant management
personnel, the Company has a bonus plan in which restaurant managers can
receive monthly bonuses based on a percentage of their restaurants'
controllable profits.

         The Company's regional supervisors, who report directly to the
Company's Directors of Operation, offer support to the store managers.  Each
supervisor is eligible for a monthly bonus based on a percentage of
controllable profits of the stores under their control.

         As of December 1997, the Company employed 2,034 people, of whom 2,004
were restaurant personnel at the Company- owned restaurants and 30 were
corporate personnel.  The Company considers its employee relations to be good.
Most employees, other than restaurant management and corporate personnel, are
paid on an hourly basis.  The Company employees are not covered by a collective
bargaining agreement.

         TRAINING AND QUALITY CONTROL.  The Company requires its hourly
employees to participate in a formal training program carried out at the
individual restaurants, with the on-the-job training program varying from three
days to two weeks based upon the applicable position.  Managers of both
Company-owned and franchised restaurants are trained at one of the Company's
specified training stores by that store's general manager and then certified
upon completion of a four to six week program that encompasses all aspects of
restaurant operations as well as personnel management and policy and
procedures, with special emphasis on quality control and customer relations.
To evaluate ongoing employee service and provide rewards to employees, the
Company employs a "mystery shopper" program which consists of two anonymous
visits per month per restaurant.  The Company's franchise agreement requires
each franchised restaurant to employ a general manager who has completed the
Company's training program at one of the Company's specified training stores,
and at least one other manager.  Compliance with the Company's operational
standards is monitored for both Company-owned and franchised restaurants by
random, on-site visits by corporate management, regular inspections by regional
supervisors, the ongoing direction of a corporate quality control manager and
the mystery shopper program.

         MARKETING AND ADVERTISING.  The Company believes that when media
penetration is achieved in a particular market, investments in radio and
television advertising can generate significant increases in revenues in a
cost- effective manner.  During fiscal 1997, the Company spent approximately
3.5% of total revenues on various forms of advertising.  For fiscal 1998, the
Company expects to spend approximately 3.5% of total revenues on advertising.
With the addition of restaurants in existing DMAs and the increase in
advertising dollars during 1998, the Company has planned to be on television
and/or radio on an increased basis in fiscal 1998.  Besides radio and
television, the Company makes use of in-store promotions, involvement in
community activities, and customer word-of-mouth to maintain their performance.
Achieving effective media penetration in each market which it enters is a key
component of the Company's expansion strategy.

         PURCHASING.  The Company strives to obtain consistent quality products
at competitive prices from reliable sources.  The Company's Director of
Purchasing works with the Company's distributor and other purveyors to ensure
the integrity, quality, price and availability of the various raw ingredients.
The Company researches and tests various products in an effort to maintain
quality and to be responsive to changing customer tastes.  The Company operates
a centralized purchasing system that is utilized by all of the Company-owned
restaurants and is available to the Company's franchisees.  Under the Company's
franchise agreement, if a franchisee wishes to purchase from a supplier other
than a currently approved supplier, it must first submit the products and
supplier to the Company for approval.  Regardless of the purchase source, all
purchases must comply with the Company's product specifications.  The Company's
ability to maintain consistent product quality throughout its operations
depends upon acquiring specified food products and supplies from reliable
sources.  Management believes that all essential food and beverage products are
available from other qualified sources at competitive prices.

FRANCHISING

         The Company currently has 15 franchisees operating a total of 31
restaurants.  In 1997 the Company's franchisees opened three restaurants and
closed one location.  Subsequent to the end of the year, a franchisee has
opened one location.  In addition, two other locations are under construction,
and another location is owned and approved for development.  Franchising allows
the Company to expand the number of stores and penetrate markets more quickly
and with less capital than developing Company-owned stores.  Franchisees are
selected on the basis of various factors, including business background,
experience and financial resources.  In seeking new franchisees, the Company
targets experienced multi-unit restaurant operators with knowledge of a
particular geographic market and financial resources sufficient to execute the
Company's development schedule.  Under the current franchise agreement,
franchisees are required to operate their stores in compliance with the
Company's policies, standards and specifications, including matters such as
menu items, ingredients, materials, supplies, services, fixtures, furnishings,
decor and signs.  In addition, franchisees are required to purchase, directly
from the Company or its authorized agent, spice packages for use in the
preparation of certain menu items, and must purchase certain other items from
approved suppliers unless written consent is received from the Company.





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         FRANCHISE AGREEMENTS.  The Company enters into a franchise agreement
with each franchisee which grants the franchisee the right to develop a single
store within a specific territory at a site approved by the Company.  The
franchisee will have limited exclusive rights within the territory.  Under the
Company's current standard franchise agreement, the franchisee is required to
pay a franchise fee of $25,000 per restaurant.  The current standard franchise
agreement provides for an initial term of 15 years (with a limited renewal
option) and payment of a royalty of up to 5% of gross sales.  The termination
dates of the Company's franchise agreements with its existing franchisees
currently range from 1999 to 2015.

         Franchise agreements are not assignable without the prior written
consent of the Company.  Also, the Company retains rights of first refusal with
respect to any proposed sales by the franchisee.  Franchisees are not permitted
to compete with the Company during the term of the franchising agreement and
for a limited time, and in a limited area, after the term of the franchise
agreement.  The enforceability of such noncompete provisions varies from state
to state.  The Company has the right to terminate any franchise agreement for
certain specific reasons, including a franchisee's failure to make payments
when due or failure to adhere to the Company's policies and standards.  Many
state franchise laws, however, limit the ability of a franchisor to terminate
or refuse to renew a franchise.  See "Item 1.  Business--Government
Regulation."

         Prior forms of the Company's franchise agreements may contain terms
that vary from those described above, including with respect to the payment or
nonpayment of advertising fees and royalties, the term of the agreement, and
assignability, noncompete and termination provisions.

         AREA DEVELOPERS.  The area development agreement is an extension of
the standard franchise agreement.  The area development agreement provides area
developers with the right to execute more than one franchise agreement in
accordance with a fixed development schedule.  Restaurants established under
these agreements must be located in a specific territory in which the area
developer will have limited exclusive rights.  Area developers pay an initial
development fee generally equal to the total initial franchise fee for the
first franchise agreement to be executed pursuant to the development schedule
plus 10% of the initial franchise fee for each additional franchise agreement
to be executed pursuant to the development schedule.  Generally the initial
development fee is not refundable, but will be applied in the proportions
described above to the initial franchise fee payable for each franchise
agreement executed pursuant to the development schedule.  New area developers
will pay monthly royalties for all restaurants established under such franchise
agreements on a declining scale generally ranging from 5% of gross sales for
the initial restaurant to 3% of gross sales for the fourth restaurant and
thereafter as additional restaurants are developed.  It is intended that area
development agreements will not be assignable without the prior written consent
of the Company.  The Company will retain rights of first refusal with respect
to proposed sales of restaurants by the area developers.  Area developers are
not permitted to compete with the Company.  If an area developer fails to meet
its development schedule obligations, the Company can, among other things,
terminate the area development agreement or modify the territory in the
agreement.

         FRANCHISEE TRAINING AND SUPPORT.  Under the current franchise
agreement, each franchisee (or if the franchisee is a corporation, a manager
designated by the franchisee) is required to personally participate in the
operation of the franchise.  Before opening the franchisee's business to the
public, the Company provides training at its approved training facility for
each franchisee's general manager, assistant manager and chef.  The Company
recommends that the franchisee, if the franchisee is other than the general
manager, or if a corporation, its chief operating officer, attend such
training.  The Company also provides a training team to assist the franchisee
in opening its restaurant.  The team, supervised by the Director of Training,
will assist and advise the franchisee and/or its manager in all phases of the
opening operation for a seven to fourteen day period.  The formal training
program required of hourly employees and management, along with continued
oversight by the Company's quality control manager, promotes consistency of
operations.

MARKET PARTNER PROGRAM

         The Company has developed a market partner program whereby the Company
will form a partnership agreement with an individual to build a number of
Company owned restaurants.  In return for site selection work, training,
supervising and other operational activities, the market partner will receive
10% of the cash flow of each restaurant that he opens.  The Company, as a 90%
partner, will fund the majority of the costs associated with constructing and
opening each restaurant and will provide administrative and accounting support.
The Company has entered into agreements with one market partner in Idaho.  This
Market Partner has opened two restaurants and has one under construction.  One
restaurant developed by this Market Partner, in Pocatello, Idaho, has been
closed.  As with franchising, the market partner program will allow the Company
to expand the number of stores and penetrate markets more quickly than it could
with only 100% Company-owned units.  The partnership entity will be required to
sign the Company's standard franchise agreement.  Other than the payment of
royalties, which will be at a rate less than stipulated in the standard
franchise agreement, the partnership entity will be subject to all criteria
contained within the franchise agreement.

COMPETITION

         The restaurant industry is intensely competitive.  Competition is
based upon a number of factors, including concept, price, location, quality and
service.  The Company competes against a broad range of other family dining
concepts, including those focusing on various other types of ethnic food, as
well as local restaurants in its various markets.  The Company also competes
against other quick service and casual dining concepts within the Mexican and
Tex-Mex food segment.  Many of the Company's competitors are well established
and have substantially greater financial and other resources than the Company.
Some of the Company's competitors may be better established in markets where
the Company's restaurants are or may be located.  The Company believes that it
competes with franchisors of other restaurants and various other concepts for
franchisees.





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         The restaurant business is affected by many factors, including changes
in consumer tastes and eating habits, national, regional or local economic and
real estate conditions, demographic trends, weather, traffic patterns, and the
type, number and location of competing restaurants.  In addition, factors such
as inflation, increased food, labor and benefit costs, and the availability of
experienced management and hourly employees may adversely affect the restaurant
industry in general and the Company's restaurants in particular.

GOVERNMENT REGULATION

         Each Company restaurant is subject to regulation by federal agencies
and to licensing and regulation by state and local health, sanitation, safety,
fire and other departments relating to the development and operation of
restaurants.  These include regulations pertaining to the environmental,
building and zoning requirements in the preparation and sale of food.  The
Company is also subject to laws governing the service of alcohol and its
relationship with employees, including minimum wage requirements, overtime,
working conditions and immigration requirements.  Difficulties or failures in
obtaining the required construction and operating licenses, permits, or
approvals could delay or prevent the opening of a specific new restaurant.  The
Company believes that it is operating in substantial compliance with applicable
laws and regulations that govern its operations.

         Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county or
municipal authorities, for a license or permit to sell alcoholic beverages on
the premises and to provide service for extended hours.  Typically licenses
must be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the
Company's restaurants, including minimum age of patrons drinking alcoholic
beverages and employees serving alcoholic beverages, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages.  The Company is also subject to "dramshop"
statutes which generally provide a person injured by an intoxicated person the
right to recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person.  The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance.
Additionally, within thirty days of employment by the Company, each Texas
employee of the Company who serves alcoholic beverages is required to attend an
alcoholic seller training program that has been approved by the Texas Alcoholic
Beverage Commission and endorsed by the Texas Restaurant Association and which
endeavors to educate the server to detect and prevent overservice of the
Company's customers.

         In connection with the sale of franchises, the Company is subject to
the United States Federal Trade Commission rules and regulations and state laws
that regulate the offer and sale of franchises and business opportunities.  The
Company is also subject to laws that regulate certain aspects of such
relationships.  Although certain potential compliance issues were historically
identified, the Company has had no claims with respect to its programs and,
based on the nature of the potential compliance issues identified, does not
believe that compliance issues associated with its historical franchising
programs will have a material adverse effect on its results of operations or
financial condition.  The Company believes that it is operating in substantial
compliance with applicable laws and regulations that govern franchising
programs.

         The Company is subject to various local, state and federal laws
regulating the discharge of pollutants into the environment.  The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations.  The Company conducts
environmental audits of a proposed restaurant site in order to determine
whether there is any evidence of contamination prior to purchasing or entering
into a lease with respect to such site.  To date the Company's operations have
not been materially adversely affected by the cost of compliance with
applicable environmental laws.

TRADEMARKS, SERVICE MARKS AND TRADE DRESS

         The Company believes its trademark, service marks and trade dress have
significant value and are important to its marketing efforts.  It has
registered the trademarks for "Casa Ole" and "Casa Ole Mexican Restaurant" with
the U.S. Patent Office.  The Company is also in the process of applying for
registration marks on its Casa Characters that are seen on the menu and
incorporated into the decor of certain of the restaurants.


ITEM 2.  PROPERTIES

         Casa Ole's executive offices are located in approximately 5,000 square
feet of office space in Houston, Texas.  The offices are currently leased by
the Company from CO Properties No. 3, a Texas partnership owned by Larry N.
Forehand and Michael D. Domec, under a gross lease (where the landlord pays
utilities and property taxes) expiring in April 1998, with rental payments of
$5,000 per month.  The Company is currently negotiating a one year renewal with
a one year option.  See "Notes to Consolidated Financial Statements--Related
Party Transactions." The Company believes that its properties are suitable and
adequate for its operations.

         The Company owns the land on 19 restaurant locations with the balance
of locations on leased sites.  Real estate leased for Company-owned restaurants
is typically leased under triple net leases that require the Company to pay
real estate taxes and utilities, to maintain insurance with respect to the
premises and in certain cases to pay contingent rent based on sales in excess
of specified amounts.  Generally the non-mall locations for the Company-owned
restaurants have initial terms of 10 to 20 years with renewal options.





                                       7
<PAGE>   8
         The following table provides information with respect to the existing
Company-owned restaurants and the five future locations which are either under
contract or are subject to an executed letter of intent:

<TABLE>
<CAPTION>
                                 DATE
                                 ----
LOCATION                   OPENED/ACQUIRED           LEASE OR OWN                  DMA
--------                   ---------------           ------------                  ---
<S>                      <C>                            <C>               <C>
Pasadena, Texas                12/1/73                   Own                     Houston
Pasadena, Texas                3/20/76                   Own                     Houston
Houston, Texas                 2/12/78                  Lease                    Houston
Odessa, Texas                  6/19/79                  Lease                Odessa/Midland
Lubbock, Texas                 4/14/80                  Lease                    Lubbock
Texas City, Texas               6/8/81                  Lease                    Houston
College Station, Texas         11/1/83                  Lease               Waco/Temple/Bryan
Stafford, Texas                6/11/84                  Lease                    Houston
Houston, Texas                 11/13/85                 Lease                    Houston
Lake Jackson, Texas            12/18/85                 Lease                    Houston
Waco, Texas                    4/13/86                  Lease               Waco/Temple/Bryan
Houston, Texas                 6/12/87                  Lease                    Houston
Temple, Texas                  7/10/89                  Lease               Waco/Temple/Bryan
Corpus Christi, Texas        10/14/96 (1)               Lease                Corpus Christi
Copperas Cove, Texas           10/28/96                  Own                Waco/Temple/Bryan
Victoria, Texas              12/30/96 (1)               Lease                   Victoria
Plainview, Texas               3/18/97                   Own                     Lubbock
Lubbock, Texas                  7/7/97                   Own                     Lubbock
Bryan, Texas                   6/18/97                   Own                Waco/Temple/Bryan
Corpus Christi             Targeted to sell              Own                 Corpus Christi
Garden City, Idaho             12/11/97                  Own                      Boise
Pocatello, Idaho (3), (4)  Targeted to sell              Own              Idaho Falls/Pocatello
Nampa, Idaho (3)         Target 2nd Qtr 1998             Own                      Boise
Boise, Idaho (3)         Target 1st Qtr 1999             Own                      Boise
Houston, Texas                  7/2/97                  Lease                    Houston
Houston, Texas                  7/2/97                  Lease                    Houston
Humble, Texas                   7/2/97                  Lease                    Houston
Houston, Texas                  7/2/97                  Lease                    Houston
Houston, Texas                  7/2/97                  Lease                    Houston
Houston, Texas                  7/2/97                  Lease                    Houston
Dickinson, Texas                7/2/97                  Lease                    Houston
Katy, Texas                     7/2/97                  Lease                    Houston
Clute, Texas                    7/2/97                  Lease                    Houston
Galveston, Texas                7/2/97                  Lease                    Houston
Bryan, Texas                    7/2/97                  Lease               Waco/Temple/Bryan
Grand Prairie, Texas            7/2/97                  Lease                    Dallas
Temple, Texas                   7/2/97                  Lease               Waco/Temple/Bryan
Bartlesville, Oklahoma          7/2/97                  Lease                     Tulsa
Tulsa, Oklahoma                 7/2/97                  Lease                     Tulsa
Tulsa, Oklahoma                 7/2/97                  Lease                     Tulsa
Houston, Texas                  7/2/97                   Own                     Houston
Pasadena, Texas                 7/2/97                   Own                     Houston
Houston, Texas                  7/2/97                   Own                     Houston
Houston, Texas                  7/2/97                   Own                     Houston
Houston, Texas                  7/2/97                   Own                     Houston
Alvin, Texas                    7/2/97                   Own                     Houston
Tulsa, Oklahoma                 7/2/97                   Own                      Tulsa
Webster, Texas                  7/2/97                   Own                     Houston
Houston, Texas                  7/2/97                  Lease                    Houston
Houston, Texas                  7/2/97                  Lease                    Houston
Baytown, Texas                 7/14/97                   Own                     Houston
Houston, Texas(2)        Target 2nd Qtr 1998             Own                     Houston
Galveston, Texas         Target 3rd Qtr 1998            Lease                    Houston
Tulsa, Oklahoma(2)       Target 3rd Qtr 1998            Lease                    Houston
</TABLE>

----------
(1) Date operations assumed by the Company from the prior franchisee.
(2) Property is under a non-binding letter of intent.
(3) Market partner restaurant whereby the market partner will own 10% of the
    cash flow from the restaurant.
(4) The Pocatello location is closed.





                                       8
<PAGE>   9

ITEM 3.  LEGAL PROCEEDINGS

         Special Note:  Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.

         From time to time the Company is party to certain legal proceedings
arising in the ordinary course of business.  Although the amount of any
liability that could arise with respect to these proceedings cannot be
predicted accurately, in the opinion of the Company, any liability that might
result from such claims will not have a material adverse effect on the Company
or its business.  Nevertheless, a future lawsuit or claim could result in a
material adverse effect on the Company or its business.


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

         No matter was submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 27, 1997.

                                    PART II

ITEM 5.          MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                 MATTERS

         The Company's Common Stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol "CASA."  The following table sets
forth the range of quarterly high and low closing sale prices of the Company's
Common Stock on the Nasdaq National Market during each of the Company's fiscal
quarters since the inception of trading on April 25, 1996.


<TABLE>
<CAPTION>
                                                                 HIGH               LOW
                                                                 ----               ---
<S>                                                             <C>                <C>
FISCAL YEAR 1996:
     First Quarter (ended April 19, 1996) . . . . . . . . . .       N/A               N/A
     Second Quarter (ended July 12, 1996) . . . . . . . . . .    15 1/4            13 3/8
     Third Quarter (ended October 4, 1996)  . . . . . . . . .    14 1/8            12 7/8
     Fourth Quarter (ended December 27, 1996) . . . . . . . .    13 1/2             8 3/4


FISCAL YEAR 1997:
     First Quarter (ended April 18, 1997) . . . . . . . . . .         9             8 7/8
     Second Quarter (ended July 11, 1997) . . . . . . . . . .         9             8 5/8
     Third Quarter (ended October 3, 1997)  . . . . . . . . .   6 13/16             6 3/4
     Fourth Quarter (ended December 26, 1997) . . . . . . . .     3 3/4             3 1/2

FISCAL YEAR 1998:
     First Quarter (through March 18, 1998) . . . . . . . . .     4 1/4            4 1/16
</TABLE>


         As of March 12, 1998, the Company estimates that there were
approximately 500 beneficial owners of the Company's Common Stock, represented
by approximately 28 holders of record.

         Since its initial public offering, the Company has not paid cash
dividends on its Common Stock.  The Company intends to retain earnings of the
Company to support operations and to finance expansion and does not intend to
pay cash dividends on the Common Stock for the foreseeable future.  The payment
of cash dividends in the future will be at the discretion of the Board of
Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors.  In addition, the Company's current credit
agreement prohibits the payment of any cash dividends.

         During certain periods prior to the Company's initial public offering
in 1996, substantially all of the corporations were treated for federal and
state income tax purposes as S corporations under Subchapter S of the Code, and
accordingly, such corporations made S corporation distributions to its
shareholders to pay federal income taxes on the earnings taxed directly to the
shareholders thereof and to provide a return on the shareholders' investment.
During fiscal years 1994 and 1995, such corporations declared aggregate
distributions of $1.8 million and $1.5 million, respectively, to its
shareholders.  During fiscal 1996, distributions of $1.5 million, representing
a combination of the 1995 working capital balance of approximately $618,000 and
earnings of the prior corporations through the date of the initial public
offering of approximately $866,000, were paid to the then existing
shareholders.  No distributions to shareholders were made in fiscal 1997.





                                       9
<PAGE>   10
ITEM 6.  SELECTED FINANCIAL DATA

         Balance sheet data as of December 31, 1993, December 30, 1994,
December 29, 1995, December 27, 1996 and December 28, 1997, and income
statement data for the fiscal years then ended have been derived from combined
and consolidated financial statements audited by KPMG Peat Marwick LLP,
independent certified public accountants. The selected pro forma financial
information presented below is for informational purposes only and may not
necessarily be indicative of the results of operations and financial position
of the Company as they may be in the future.  The selected financial data set
forth below should be read in conjunction with and are qualified by reference
to the Consolidated Financial Statements and the Notes thereto included in Item
8. hereof and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7. hereof.

<TABLE>
<CAPTION>
                                                                 FISCAL YEAR ENDED
                                           -------------------------------------------------------------
                                            DEC. 31,     DEC. 30,     DEC. 29,    DEC. 27,      DEC. 28,
                                            1993(1)        1994         1995        1996          1997
                                            -------        ----         ----        ----          ----
                                                 (Dollars in thousands, except per share amounts)
<S>                                         <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA(2):
Revenues:
  Restaurant sales  . . . . . . . . . .     $ 18,762     $ 17,420     $ 16,691     $ 17,574     $ 34,301
  Franchise fees and royalties  . . . .          795          885          930          998        1,037
  Other . . . . . . . . . . . . . . . .          125           67           69           90          132
                                            --------     --------     --------     --------     --------
         Total revenues . . . . . . . .       19,682       18,372       17,690       18,662       35,470
                                            --------     --------     --------     --------     --------
Costs and expenses:
  Cost of sales . . . . . . . . . . . .        4,595        4,427        4,199        4,405        8,893
  Restaurant operating expenses . . . .       11,521       10,264        9,791        9,609       19,431
  General and administrative  . . . . .        1,947        2,222        1,987        2,081        3,632
  Depreciation and amortization . . . .          374          342          266          208        1,245
  Restaurant closure costs  . . . . . .          339          265         --           --            433
                                            --------     --------     --------     --------     --------

         Total costs and expenses . . .       18,776       17,520       16,243       16,303       33,634
                                            --------     --------     --------     --------     --------
Operating income  . . . . . . . . . . .          906          852        1,447        2,359        1,836
Other income (expense)  . . . . . . . .           41          143           32          367         (171)
                                            --------     --------     --------     --------     --------

Income before income tax expense  . . .     $    947     $    995     $  1,479     $  2,726     $  1,665
                                            ========     ========     ========     ========     ========

Net income  . . . . . . . . . . . . . .     $    831     $    927     $  1,404     $  1,868     $  1,015
                                            ========     ========     ========     ========     ========

Pro forma net income (3)  . . . . . . .                               $  1,449     $  1,819
                                                                      ========     ========

Net income per share (diluted) (4). . .                               $   0.52     $   0.53     $   0.28
                                                                      ========     ========     ========
</TABLE>


<TABLE>
<CAPTION>
                                                                           FISCAL YEAR
                                           ---------------------------------------------------------------------------
                                           DEC. 31,         DEC. 30,         DEC. 29,         DEC. 27,         DEC. 28,
                                             1993             1994             1995             1996             1997
                                             ----             ----             ----             ----             ----
                                                                      (Dollars in thousands)
<S>                                         <C>              <C>              <C>             <C>             <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . .     $   547          $   134          $   618         $  6,857        $(2,023)
Total assets  . . . . . . . . . . . . .     $ 3,547          $ 2,890          $ 2,858         $ 12,146        $ 26,508
Long-term debt, less
  current portion . . . . . . . . . . .     $   257          $    82          $    62         $     --        $ 10,107
Total stockholders' equity  . . . . . .     $ 2,091          $ 1,614          $ 1,934         $ 10,720        $ 11,735
</TABLE>


----------
(1)      The fiscal year ended December 31, 1993 consisted of 53 weeks.  All
         other fiscal years presented consisted of 52 weeks.





                                       10
<PAGE>   11
(2)      Includes the results of operations of the Non-contributed Restaurants
         (except where otherwise indicated).  The Non-contributed Restaurants
         were closed during the periods presented.  See "Item 7.  Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations--General."  Summarized operating results of the
         Non-contributed Restaurants included in the above combined financial
         data are as follows:

<TABLE>
<CAPTION>
                                                                Fiscal Year Ended
                                   -----------------------------------------------------------------------------
                                    Dec. 31,         Dec. 30,         Dec. 29,         Dec. 27,            Dec 28,
                                     1993             1994             1995             1996               1997
                                     ----             ----             ----             ----               ----
<S>                                <C>              <C>             <C>             <C>                 <C>
Revenues . . . . . . . . . . .     $ 2,223          $ 1,199         $    432        $      --           $     --
Restaurant closure costs . . .        (339)            (265)              --               --                 --
Net loss . . . . . . . . . . .        (823)            (511)            (194)              --                 --
</TABLE>


(3)      For fiscal 1995, the pro forma income statement data reflect
         adjustments to eliminate historical executive compensation for Larry
         N. and Robert L. Forehand ($470,000) and related party expense
         arrangements ($679,000), and to add salaries of new management
         ($329,000) to conform to compensation arrangements applicable
         subsequent to the Company's initial public offering.  For fiscal 1996,
         the pro forma income statement data reflect adjustments to eliminate
         executive compensation for Larry N. and Robert L. Forehand ($126,500)
         and related party expense arrangements ($35,200) through the date of
         the Company's initial public offering.  Elimination of costs related
         to executive compensation and other related party arrangements are
         necessary adjustments as these costs were primarily income
         distribution techniques used by the S corporation owners.  Also, an
         adjustment has been made to reflect federal and state income taxes (at
         an assumed rate of 37%) that would have been paid had the Company been
         taxed as a C corporation.  See "Item 7.  Management's Discussion and
         Analysis of Financial Condition and Results of Operations--General."

(4)      For fiscal 1995, the computation of pro forma net income per share is
         based upon 2,732,705 weighted average shares of Common Stock
         outstanding issued to the shareholders of the 13 corporations that
         were party to the reorganization and 60,411 shares assumed to be
         issued at an initial public offering price of $11.00 per share (after
         deducting the estimated underwriting discount), to fund S corporation
         distributions of approximately $618,000.  For fiscal 1996, it was
         assumed that the number of shares up to the date of the public
         offering were the same as weighted average shares outstanding for
         fiscal 1995.  Basic income per share for fiscal 1996 is $0.54.


ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                 AND RESULTS OF OPERATIONS

         Special Note:  Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.

         The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Report.

GENERAL

         The Company was organized under the laws of the State of Texas on
February 16, 1996.  Pursuant to the reorganization of the Company in
preparation for the initial public offering, the shareholders of the prior
corporations contributed to the Company all outstanding shares of capital stock
of each corporation, and the Company issued to such shareholders in exchange
therefor an aggregate of 2,732,705 shares of its Common Stock.  The exchange
transaction was completed April 24, 1996, and, as a result, the corporations
became wholly owned subsidiaries of the Company, and each shareholder of the
Company received a number of shares of Common Stock in the Company.  In
addition, subsequent to the completion of the offering, the Company purchased
1,135,000 shares of Common Stock owned by Michael D. Domec, an original
principal of the Company, at an aggregate purchase price of $11.35 million, or
$10.00 per share.

         The Company's audited financial statements for each of the fiscal
years presented in this Form 10-K prior to fiscal 1996 include the results of
operations of four restaurants that were closed prior to the Company's public
offering.  These restaurants did not conform to the Company's operating model
at the time of the offering in one or more important respects (such as location
demographics, exterior identification or menu format) or were operated by
persons other than shareholders of the Company (the "Non-contributed
Restaurants").  Although the operations of the Non- contributed Restaurants
affected the Company's results of operations in each of the prior fiscal years,
the majority of the costs associated with the closure of these restaurants
impacted fiscal 1993 and fiscal 1994.  Two Non-contributed Restaurants were
closed during each of fiscal 1994 and fiscal 1995.  The Non-contributed
Restaurants located in Abilene and Midland were managed by persons other than
the shareholders of the Operating Corporations, and the Midland restaurant
lacked the signage and other elements of the exterior decor associated with the
Casa Ole concept.  The other Non-contributed Restaurants, located in Lubbock
and The Woodlands, were in-line shopping center locations.  The Midland
restaurant also featured an upscale menu, while The Woodlands restaurant was
located in an affluent suburb of Houston.





                                       11
<PAGE>   12
The Company's primary source of revenues is the sale of food and beverages at
Company-owned restaurants also derives revenues from franchise fees, royalties
and other franchise-related activities.  Under the terms of the Company's
current franchise agreement, franchisees are generally required to pay a
franchise fee of $25,000 per restaurant and royalty fees of up to 5% of gross
sales.  The royalty fees vary from franchise to franchise.  Area developers
(franchisees who plan to develop more that one restaurant) will be required to
pay an initial development fee equal to the total initial franchise fee for the
first franchise agreement to be executed pursuant to the development schedule
specified in the agreement, plus 10% of the initial franchise fee payable for
each additional franchise agreement.  The development fee will be
non-refundable, but will be applied proportionately to the franchise fees
associated with additional restaurants.  New area developers will be required
to pay monthly royalties for all restaurants developed pursuant to such
franchise agreements on a declining scale ranging from 5% to 3% of gross sales.
Franchise fee revenue from an individual franchise sale is recognized when all
services relating to the sale have been performed and the restaurant has
commenced operation.  Initial franchise fees relating to area franchise sales
are recognized ratably in proportion to services that are required to be
performed pursuant to the area franchise or development agreements and
proportionately as the restaurants within the area are opened.

         Prior to the Company's initial public offering in April 1996, a
significant portion of the Company's operating expenses was attributable to the
compensation of Larry N. Forehand and Michael D. Domec, the original principals
of the Company, and payment of compensation and fees to certain of their
respective affiliates.  Subsequent to the offering, Mr. Domec has continued to
serve as a director of the Company, but is no longer an employee and has
instead focused on development of additional Casa Ole restaurants in his
capacity as a franchisee.  In fiscal 1997, Mr. Forehand became Director of
Franchise Services and remains as a member of the Board of Directors.  In
addition, certain transactions and compensation arrangements between the
Company and affiliates of Messrs. Forehand and Domec were terminated subsequent
to the offering.  The Company has employment agreements with each of Louis P.
Neeb, Curt Glowacki and Andrew Dennard.  The pro forma effect of the
elimination of Mr. Domec's compensation and payments to certain entities
related to Messrs. Domec and Forehand, the reduction in Mr. Forehand's
compensation and the compensation arrangements for the new executive officers
is reflected in the Financial Statements and Supplementary Data--Consolidated
Statements of Income found elsewhere in this Report.

         Concurrent with the initial public offering and the reorganization,
the Company terminated the S corporation status of the prior corporations that
had elected to be taxed as S corporations under the Code, and such corporations
became taxable as C corporations, adopting the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109").  Accordingly, a pro forma provision for federal and state income taxes,
using a combined 37% effective rate, is presented for fiscal 1995 and the first
quarter of fiscal 1996, as if the Company was taxed in its entirety as a C
corporation.  Income taxes for the restaurants originally structured as C
corporations have historically been calculated in accordance with SFAS 109.

FISCAL YEAR

         The Company has a 52/53 week fiscal year ending on a Sunday nearest
December 31, 1997.  References in this Report to fiscal 1995, 1996 and 1997
relate to the periods ended December 29, 1995 and December 27, 1996 and
December 28, 1997, respectively.  All fiscal years presented herein consisted
of 52 weeks.

RESULTS OF OPERATIONS

FISCAL 1997 COMPARED TO FISCAL 1996

         REVENUES.  Fiscal 1997 revenues increased $16.8 million, or 90.1%,
over revenues in fiscal 1996.  Restaurant sales increased $16.7 million,
primarily due to the acquisition of MAC, which added $11.2 million in
restaurant sales, and due to new store development, which added approximately
$5.4 million.  The average sales volume for the 13 same- stores was $1.3
million for fiscal 1997, and same-store sales increased .1%, or $13,329.

         Franchise fees and royalties and other revenues had a combined
increase of  $80,912 or 7.4%, which was related to additional royalties from
three new franchised stores, along with increased sales of marketing materials
(primarily menus and promotional items) to the franchise system.

         COSTS AND EXPENSES.  Cost of sales increased $4.5 million or 101.9%,
over fiscal 1996.  As a percentage of restaurant sales, cost of sales was 25.9%
for fiscal 1997 as compared to 25.1% for fiscal 1996.  This increase is
attributable to an increase in the proportion of MAC units, which have a higher
average cost of sales than Casa Ole units.

         Restaurant operating expenses increased $9.8 million, or 102.2%, in
fiscal 1997.  As a percentage of restaurant sales, restaurant operating
expenses increased to 56.6% in fiscal 1997 as compared to 54.7% in fiscal 1996.
Labor and other related expenses as a percentage of restaurant sales increased
by 0.7% to 33.7% in fiscal 1997 as compared to 33.0% in fiscal 1996.  Much of
the increase resulted from an increase in the statutory minimum wage rate.
Further, several of the new restaurants experienced higher than average labor
costs.  Other restaurant operating expenses, which primarily includes rent,
utilities, repair and maintenance and advertising, increased by 0.7% to 22.4%
in fiscal 1997 as compared to 21.7% in fiscal 1996.  A substantial portion of
these expenses are fixed or indirectly variable.





                                       12
<PAGE>   13
         General and administrative expenses (G&A) increased $1.6 million, or
74.5%, over fiscal 1996.  As a percentage of total revenues, G&A decreased 1.0%
to 10.2% in fiscal 1997 as compared to 11.2% in fiscal 1996.  Excluding the
impact of MAC, general and administrative expenses increased $830,000 over
fiscal 1996.  $241,000 of the increase was related to special charges for
severance packages, costs incurred in an unsuccessful acquisition attempt and
the write down of the Company's investment in a franchise restaurant.
Relocation, training, and recruitment expenses accounted for an additional
$200,000 of the increase.  Additionally, increases in professional and legal
expenses accounted for $162,000 of the increase.

         Depreciation and amortization expense as a percentage of total
revenues increased from 1.1% in fiscal 1996 to 3.5% in fiscal 1997.  This
increase was primarily due to the  MAC acquisition.  Further, eight new Casa
Ole restaurants have been added since the initial public offering in 1996, the
first opening in October of 1996.  With the exception of one long-term land
lease, all new stores are owned by the Company.

         In the fourth quarter of fiscal 1997, the Company evaluated certain
properties and restaurants to determine if continued operation was consistent
with the Company's strategy.  As a result of this exercise, it was determined
that certain assets were impaired and the Company expensed $433,173 related to
restaurant closure costs.

         OTHER INCOME (EXPENSE).  Net other income (expense) decreased from
income to an expense for fiscal 1997, a change of $538,000.  The net decrease
was due to the constant reduction in interest income as the proceeds from the
1996 initial public offering were used for construction projects and debt was
incurred related to the acquisition of MAC.  Total interest expense for fiscal
1997 was $451,000.  The Company earned $141,000 in interest income and $73,000
in miscellaneous income, which was primarily due to vender rebates.

         INCOME TAX EXPENSE.

         The Company's effective tax rate for fiscal 1997 was 39.1% which is
higher than the expected rate of 34% due to state tax (4.5%) and non-deductible
expenses.

FISCAL 1996 COMPARED TO FISCAL 1995

         REVENUES.  Fiscal 1996 revenues increased $972,000, or 5.5%, over
revenues in fiscal 1995.  Comprising this increase were restaurant sales, up
5.3%, franchise fees and royalties, up 7.3%, and other revenues, up 31.1%.  The
increase of $883,000 in restaurant sales was attributed to a same-store sales
increase of 5.1%, or $829,000, new store sales of approximately $424,000 and
sales of $62,000 from conforming changes in operating periods for predecessor
companies, offset by the loss of approximately $432,000 in sales from
Non-contributed Restaurants closed during fiscal 1995 that did not conform to
the Company's current operating model.  The average sales volume for the 13
same-stores was $1.3 million for fiscal 1996, up from $1.25 million in fiscal
1995.

         Franchise fees and royalties and other revenues had a combined
increase of  $89,000, or 8.9%, which was related to additional royalties from
three new franchised stores, along with increased sales of marketing materials
(primarily menus and promotional items) to the franchise system.

         COSTS AND EXPENSES.  Cost of sales increased $207,000 or 4.9%, over
fiscal 1995.  As a percentage of restaurant sales, cost of sales was 25.1% for
fiscal 1996, as compared to 25.2% for fiscal 1995.  This slight decrease as a
percentage of restaurant sales was due to modest fluctuations in ingredient
costs, coupled with a slight menu price increase that was implemented late in
the third quarter of the current fiscal year.

         Restaurant operating expenses decreased $182,000, or 1.9%, in fiscal
1996.  As a percentage of restaurant sales, restaurant operating expenses
decreased to 54.7% in fiscal 1996 as compared to 58.7% in fiscal 1995.  The
significant components of this decrease were a reduction in repair and
maintenance costs of $146,000, the elimination of $200,000 of franchise fee
expense, savings of $63,000 in the employee benefits area and savings of
$118,000 in property and casualty insurance premiums.  As an offset to these
decreases, the Company implemented television advertising during fiscal 1996
and increased its use of radio marketing, the combination of which increased
advertising expense by $147,000, or 0.7%, over fiscal 1995.  Additionally, with
the opening of two new stores during 1996 and the acquisition of a franchised
unit, labor costs increased by $130,000, or 0.7%.  Finally, the Company accrued
$68,000 related to the annual manager's bonus program, which was implemented
during fiscal 1996.

         General and administrative expenses (G&A) increased $94,000, or 4.7%,
over fiscal 1995.  As a percentage of total revenues, G&A remained flat at
11.2%.  The dollar increase was attributed to various new expenses related to
being a publicly traded company, as well as expenses necessary for the
execution of the Company's growth strategy.  Specifically, the Company incurred
an additional $209,000 in salaries, benefits and travel related to training,
store review and corporate-level bonuses.  Legal and professional fees, board
of director fees and directors and officers liability insurance also
contributed to the increase by $178,000.  Offsetting these increases was a
reduction of $293,000 in officer salaries, which related to the officers of the
Company prior to the initial public offering.

         Depreciation and amortization expense as a percentage of total
revenues decreased from 1.5% in fiscal 1995 to 1.1% in fiscal 1996.  This
decrease was the result of certain equipment being fully depreciated, combined
with the relatively small amount of equipment placed in service by the Company
throughout fiscal 1995 and most of fiscal 1996.




                                       13
<PAGE>   14
         OTHER INCOME (EXPENSE).  Net other income increased to 2.0% of total
revenues, an increase of $335,000 over fiscal 1995.  The Company earned
$271,000 in interest related to the investment of the proceeds from the initial
public offering.  During the year the Company also received a refund of $60,000
related to the overpayment of rent that occurred over the past four years.

         INCOME TAX EXPENSE.  Effective with the initial public offering, the
Company became subject to federal and state taxes as a C corporation.  The
Company's effective tax rate since becoming a C corporation in fiscal 1996 was
37%.  During the Company's first fiscal quarter when substantially all of the
corporations were taxed as S corporations under the provisions of Subchapter S
of the Code, the federal income taxes on the net income of the corporations
were payable personally by the shareholders.  The provision for income taxes
reflected in the first quarter of fiscal 1996 is for state franchise taxes on
all restaurants and for federal income taxes on the corporations which were
taxable as C corporations.

LIQUIDITY AND CAPITAL RESOURCES

         In late April 1996, the Company received the proceeds from its initial
public offering of 2,000,000 shares of Common Stock.  On May 1, $11.35 million
of the proceeds were used to redeem 1,135,000 shares of Common Stock owned by
Michael D. Domec.  Approximately $2.3 million of the proceeds were used to cover
offering related costs, including underwriting discounts and commissions.  The
remaining proceeds were used for the development or acquisition of additional
restaurants, the purchase of 100% of the outstanding shares of  MAC on July 2,
1997, the continued implementation of the point-of-sale system, the remodel of
existing restaurants and for general corporate purposes.

         The Company met fiscal 1997 capital requirements with cash generated
by operations, remaining proceeds from the fiscal 1996 initial public offering
and with draws on its credit facilities.  In fiscal 1997, the Company's
operations generated approximately $ 2.6 million in cash, as compared with $2.4
million in fiscal 1996 and $1.7 million in fiscal 1995.  As of December 28,
1997, the Company had a working capital deficit of approximately $2.0 million,
compared with a working capital surplus of approximately $6.9 million at
December 27, 1996.  A working capital deficit is common in the restaurant
industry, since restaurant companies do not typically require a significant
investment in either accounts receivable or inventory.

         The Company's principal capital requirements are the funding of new
restaurant development or acquisitions and remodeling of older units.  During
fiscal 1997, capital expenditures on property, plant and equipment were
approximately $8.3 million as compared to approximately $2.8 million for fiscal
1996.  The Company constructed and opened six new units, purchased or otherwise
secured three real estate sites, acquired a franchise unit, remodeled several
of the older restaurants and installed a point of sale system in many of the
stores.  Opening additional Company-owned restaurants is a key component of its
expansion strategy, and management plans to open a combination of four
Company-owned and market partner restaurants during the balance of fiscal 1998.
Currently the Company has one site under construction and one site nearing
ground-breaking.  The estimated capital needed for such 1998 openings, along
with preparing for 1999 openings and for general corporate purposes, including
the remodel of an estimated eight units, is approximately $7.6 million. This
estimate is based upon an anticipated total investment up to $1,400,000 per
restaurant, of which approximately $350,000 is anticipated to represent
furniture, fixtures and equipment and approximately $50,000 represents training
and pre-opening expenses, and is inclusive of the capitalized cost of leasing or
acquiring real estate.  This estimate, however, does not include any amounts
related to any significant acquisitions.

         The acquisition of MAC in July 1997 was funded using cash on hand of
approximately $3.0 million and funds available to the Company under its amended
credit facility with NationsBank of Texas, N.A.. The terms of the amended credit
facility are similar to those in the original facility; however, the facility
was expanded to $13 million, with $6 million designated as a term note payable
over six years, and the remaining $7 million designated as a revolving credit
line. The interest rate on both components of the credit agreement is either the
prime rate or LIBOR plus a stipulated percentage. Accordingly, the Company is
impacted by changes in the prime rate and LIBOR. The Company is subject to a
non-use fee of 0.25% on the unused portion of the revolver from the date of the
credit agreement. Within the terms of the credit agreement, the Company must
meet certain financial covenants.  In fiscal 1997, the Company was in technical
non-compliance with certain debt covenants due to special charges incurred in
the third and fourth quarters.  The bank either amended or waived all technical
non-compliance matters.  The revolving line may be used for certain
acquisitions, construction of new units and other working capital needs. At
December 28, 1997, the Company had $ 5.7 million outstanding under the term
facility and approximately $ 5.0 million outstanding under the revolver.

         In addition to developing new restaurants, the Company intends to add
Company-owned restaurants through selective acquisitions of existing
franchisees.  As mentioned above, the Company acquired its second  franchise
restaurant during fiscal 1997 and acquired its first franchise restaurant in
fiscal 1996.

         The Company's management is currently negotiating a sale leaseback
agreement that will include forward commitments for new unit development for
fiscal 1998 and fiscal 1999.  Management believes that a sale leaseback
arrangement, along with operating cash flow and the Company's revolving line of
credit with NationsBank, will be sufficient to meet its operating requirements
and to finance its expansion plans (exclusive of any significant acquisitions)
through the end of the 1998 fiscal year.


                                       14
<PAGE>   15
RISK FACTORS

         The Company cautions readers that its business is subject to a number
of risks, any of which could cause the actual results of the Company to differ
materially from those indicated by forward-looking statements made from time to
time in releases, including this Form 10-K, and oral statements.  Such risks
were presented in the Company's Form S-1 registration statement, which was
declared effective on April 24, 1996, and the related prospectus, and are being
presented again in this Form 10-K.  Certain risk factors have been presented
throughout this document, including, among others, expansion strategy; site
selection; attracting and retaining franchisees, managers and other employees;
availability of food products; competition and government regulation.  Certain
other risks to which the Company is subject include:

         SEASONALITY.  The Company's sales and earnings fluctuate seasonally.
Historically the Company's highest sales and earnings have occurred in the
third and fourth calendar quarters, which the Company believes is typical of
the restaurant industry and consumer spending patterns in general with respect
to the third quarter and is due to increased holiday traffic at the Company's
mall restaurants for the fourth quarter.  In addition, quarterly results have
been and, in the future are likely to be, substantially affected by the timing
of new restaurant openings.  Because of the seasonality of the Company's
business and the impact of new restaurant openings, results for any calendar
quarter are not necessarily indicative of the results that may be achieved for
a full fiscal year and cannot be used to indicate financial performance for the
entire year.

         IMPACT OF INFLATION & MARKET RISKS.  The Company does not believe that
inflation has materially impacted net income during the past three years.
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses, could have a significant impact on the Company's
operating results to the extent such increases cannot be passed along to
customers.  If operating expenses increase, management intends to attempt to
recover increased costs by increasing prices to the extent deemed advisable
considering competitive conditions.  The Company does not have or participate
in transactions involving derivative, financial and commodity instruments.

         ACCELERATING GROWTH STRATEGY.  The Company's ability to expand by
adding Company-owned, market partner and franchised restaurants will depend on
a number of factors, including the availability of suitable locations, the
ability to hire, train and retain an adequate number of experienced management
and hourly employees, the availability of acceptable lease terms and adequate
financing, timely construction of restaurants, the ability to obtain various
government permits and licenses and other factors, some of which are beyond the
control of the Company, its franchisees and market partners.  The opening of
additional franchised restaurants will depend, in part, upon the ability of
existing and future franchisees to obtain financing or investment capital
adequate to meet their market development obligations.  There can be no
assurance that the Company will be able to open the number of restaurants it
currently plans to open or that new restaurants can be operated profitably.  In
addition, the Company intends to expand into new geographic markets in which it
has no operating experience and in which Mexican and Tex-Mex food restaurants
are less prevalent than in Texas.  Consumer tastes vary from region to region
in the United States, and there can be no assurance that customers located in
the regions of the United States into which the Company intends to expand will
be as receptive to Mexican and Tex-Mex food or the Casa Ole concept as those
customers in its existing markets.  There can be no assurance as to the success
of the Company's efforts to expand into other geographic regions or that the
cost of such efforts will not have a material adverse effect on the Company's
results of operations or financial condition.

         SMALL RESTAURANT BASE AND GEOGRAPHIC CONCENTRATION.  The results
achieved to date by the Company's relatively small restaurant base may not be
indicative of the results of a larger number of restaurants in a more
geographically dispersed area.  Because of the Company's relatively small
restaurant base, an unsuccessful new restaurant could have a more significant
effect on the Company's results of operations than would be the case in a
company owning more restaurants.  Additionally, given the Company's present
geographic concentration (all Company-owned units are currently in Texas),
results of operations may be adversely affected by economic or other conditions
in the region and adverse publicity relating to the Company's restaurants could
have a more pronounced adverse effect on the Company's overall sales than might
be the case if the Company's restaurants were more broadly dispersed.

         CONTROL OF THE COMPANY BY MANAGEMENT.  Approximately 36.2% of the
Common Stock and rights to acquire Common Stock of the Company are beneficially
owned or held by Larry N. Forehand, Michael D. Domec, Louis P. Neeb and  John
C.  Textor.

         SHARES ELIGIBLE FOR FUTURE SALE AND STOCK PRICE.  Sales of substantial
amounts of shares in the public market could adversely affect the market price
of the Common Stock.  The Company currently has 3,597,705 shares of Common
Stock outstanding. The Company has granted limited registration rights to
holders of warrants granted by the Company and Larry N. Forehand to Louis P.
Neeb, Tex-Mex Partners, L.C., Patrick A. Morris and Stacy M. Riffe to register
the 880,766 underlying shares of Common Stock covered by such warrants in
connection with registrations otherwise undertaken by the Company.  In any
event, the market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors.

         COMPETITION.  The restaurant industry is intensely competitive.  The
Company competes against other family dining concepts, as well as quick service
and casual dining concepts, for customers, employees, franchisees and market
partners.  See "Item 1.  Business--Competition."





                                       15
<PAGE>   16
         YEAR 2000.  The Company is in the process of evaluating computer
processing alternatives.  Currently, most accounting processes are handled on
an outsourcing basis with entities that are expected to have Year 2000 issues.
The Company is evaluating whether these processes will continue to be
outsourced or internalized.  A final decision is expected during fiscal 1998
and management does not believe that the ultimate decision will have a
significant adverse impact on the financial results or operations of the
Company.

ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable for the Company for this annual report.

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1 of this report.


ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

         None

                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.


ITEM 11.         EXECUTIVE COMPENSATION

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.


ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.


ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.

                                    PART IV

ITEM 14.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                 8-K

         (a) Documents filed as part of Report.

             1.  Financial Statements:

                 The Financial Statements are listed in the index to
             Consolidated Financial Statements on page F-1 of this Report.

             2.  Exhibits:

               ++3.1   Articles of Incorporation of the Company.

               ++3.2   Bylaws of the Company.

               ++4.1   Specimen of Certificate of Common Stock of the Company.

               ++4.2   Articles of Incorporation of the Company (see 3.1
                       above).





                                       16
<PAGE>   17
               ++4.3   Bylaws of the Company (see 3.2 above).

              ++10.1   Employment Agreement by and between the Company and
                       Louis P. Neeb dated February 28, 1996.

              ++10.2   Employment Agreement by and between the Company and
                       Patrick A. Morris dated February 28, 1996.

              ++10.3   Employment Agreement by and between the Company and
                       Stacy M. Riffe dated February 28, 1996.

              ++10.4   Indemnity Agreement by and between the Company and Louis
                       P. Neeb dated as of April 10, 1996.

              ++10.5   Indemnity Agreement by and between the Company and Larry
                       N. Forehand dated as of April 10, 1996.

              ++10.6   Indemnity Agreement by and between the Company and John
                       C. Textor dated as of April 10, 1996.

              ++10.7   Indemnity Agreement by and between the Company and
                       Patrick A. Morris dated as of April 10, 1996.

              ++10.8   Indemnity Agreement by and between the Company and
                       Michael D. Domec dated as of April 10, 1996.

              ++10.9   Indemnity Agreement by and between the Company and Stacy
                       M. Riffe dated as of April 10, 1996.

              ++10.10  Indemnity Agreement by and between the Company and J.J.
                       Fitzsimmons dated as of April 10, 1996.

              ++10.11  Indemnity Agreement by and between the Company and
                       Richard E. Rivera dated as of April 10, 1996.

              ++10.12  Corrected Warrant Agreement by and between the Company
                       and Louis P. Neeb dated as of February 26, 1996.

              ++10.13  Corrected Warrant Agreement by and between the Company
                       and Tex-Mex Partners, L.C.  dated as of February 26,
                       1996.

              ++10.14  Form of the Company's Multi-Unit Development Agreement.

              ++10.15  Form of the Company's Franchise Agreement.

             +++10.16  1996 Long Term Incentive Plan.

             +++10.17  Stock Option Plan for Non-Employee Directors.

              ++10.18  Lease Agreement, dated July 15, 1977, between Weingarten
                       Realty, Inc. and Fiesta Restaurants, Inc., for property
                       located at 1020 Federal Road, Houston, Texas (Casa Ole
                       No. 4).

              ++10.19  Lease Agreement, dated July 12, 1978, between W & W
                       Investments, a Texas partnership, and Fiesta
                       Restaurants, Inc., for property located at 2727 John Ben
                       Shepperd Pkwy, Odessa, Texas (Casa Ole No.  8).

              ++10.20  Lease Agreement, dated August 11, 1986, between
                       Hartford-Lubbock Limited Partnership, a Texas limited
                       partnership, and Casa Ole No. 10, Inc., for property
                       located at 4413 South Loop 289, Lubbock, Texas (Casa Ole
                       No. 10).

              ++10.21  Lease Agreement, dated July 29, 1983, between Phil R.
                       Kensinger, Trustee, and Quality Mexican Restaurants,
                       Inc., for property located at 12203 Murphy Rd.,
                       Stafford, Texas (Casa Ole No. 13).

              ++10.22  Lease Agreement, dated July 17, 1987, between Leroy
                       Melcher and Fiesta Restaurants, Inc., for property
                       located at 3121 Palmer Hwy, Texas City, Texas (Casa Ole
                       No. 14).

              ++10.23  Lease Agreement, dated February 17, 1981, between Eldred
                       Doty, wife Joyce C. Doty and Fiesta Restaurants, Inc.,
                       for property located at 3121 Palmer Hwy, Texas City,
                       Texas (Casa Ole No. 14).

              ++10.24  Lease Agreement, dated May 16, 1983, between CBL
                       Management, Inc., a Tennessee corporation, and Fiesta
                       Restaurants, Inc., d/b/a Casa Ole, for property located
                       at Post Oak Mall #3026, College Station, Texas (Casa Ole
                       No. 22).

              ++10.25  Lease Agreement, dated June 5, 1985, between David Z.
                       Mafrige Interests and Fiesta Restaurants, Inc., for
                       property located at 12350 Gulf Freeway, Houston, Texas
                       (Casa Ole No. 28).

              ++10.26  Lease Agreement, dated March 13, 1985, between
                       Plantation Village Plaza Joint Venture and Fiesta
                       Restaurants, Inc., for property located at 415 This Way,
                       Lake Jackson, Texas (Casa Ole No. 29).





                                       17
<PAGE>   18
              ++10.27  Lease Agreement, dated August 6, 1985, between Dalsan
                       Properties--Waco II, Service Life and Casualty Insurance
                       Co. and Casa Ole No 34, Inc., for property located at
                       414 N. Valley Mills Dr., Waco, Texas (Casa Ole No. 34).

              ++10.28  Lease Agreement, dated May 6, 1976, between Federated
                       Store Realty, Inc., Prudential Insurance Company of
                       America and Fiesta Restaurants, Inc., for property
                       located at 263 Greenspoint Mall, Houston, Texas (Casa
                       Ole No. 35).

              ++10.29  Lease Agreement, dated May 30, 1989, between Temple Mall
                       Company, a Texas General Partnership, and Casa Ole
                       Franchise Services, Inc., for property located at 3049
                       S. 31st Street, Temple, Texas (Casa Ole No. 37).

              ++10.30  Lease Agreement, dated May 3, 1995, between CO
                       Properties No.  3, a Texas general partnership, and Casa
                       Ole Franchise Services, Inc., for property located at
                       1135 Edgebrook, Houston, Texas.

              ++10.31  Corrected Warrant Agreement by and between Larry N.
                       Forehand and Louis P. Neeb dated as of February 26,
                       1996.

              ++10.32  Corrected Warrant Agreement by and between Larry N.
                       Forehand and Tex-Mex Partners, L.C. dated as of February
                       26, 1996.

              ++10.33  Corrected Warrant Agreement by and between Larry N.
                       Forehand and Patrick A. Morris dated as of February 26,
                       1996.

              ++10.34  Corrected Warrant Agreement by and between Larry N.
                       Forehand and Stacy M. Riffe dated as of February 26,
                       1996.

              ++10.35  Indemnification letter agreement by Larry N. Forehand
                       dated April 10, 1996.

               +10.36  1996 Manager's Stock Option Plan (incorporated by
                       reference to Exhibit 99.2 of the Company's Form S-8
                       Registration Statement Under the Securities Act of 1933,
                       dated February 24, 1997, filed by the Company with the
                       Securities and Exchange Commission).

              **10.37  Lease Agreement, dated June 21, 1996, between Sam Jack
                       McGlasson and Casa Ole Restaurants, Inc., for property
                       located at 725 North Loop 340, Bellmead, Texas (Casa Ole
                       No. 51).

              **10.38  Amended Lease Agreement, dated November 7,1996, between
                       The Prudential Insurance Company of America, by and
                       through its Agent, Terranomics Retail Services, Inc. and
                       Casa Ole Restaurants, Inc., for property located at 263
                       Greenspoint Mall, Houston, Texas (Casa Ole No. 35).

              **10.39  Assignment of Lease and Consent to Assign, dated October
                       11, 1996, between Roy M. Smith and W.M.  Bevly d/b/a
                       Padre Staples Mall (landlord) and Pepe, Inc. d/b/a Casa
                       Ole Restaurant and Cantina (tenant/assignor) and Jack
                       Goodwin (guarantor) and Casa Ole No. 29, Inc., for
                       property located at 1184 Padre Staples Mall, Corpus
                       Christi, Texas (Casa Ole No. 36).

              **10.40  Option Contract and Agreement dated January 11, 1997,
                       between Casa Ole of Beaumont, Inc., a Texas corporation,
                       and Casa Ole Restaurants, Inc.

              **10.41  $750,000 Promissory Note, dated December 30, 1996,
                       between Casa Ole No. 29, Inc. and Rainbolt, Inc. for the
                       purchase of Victoria, Texas restaurant (Casa Ole No.
                       15).

                10.42  Credit Agreement Between Casa Ole Restaurants, Inc., as
                       the Borrower, and NationsBank of Texas, N.A., as the
                       Bank, for $10,000,000, dated July 10, 1996 (incorporated
                       by reference to Exhibit 10.1 of the Company's Form 10-Q
                       Quarterly Report Under the Securities Exchange Act of
                       1934, dated August 22, 1996, filed by the Company with
                       the Securities and Exchange Commission).

              **10.43  Amendment No. 1, dated January 13, 1997, to the Credit
                       Agreement Between Casa Ole Restaurants, Inc., as the
                       Borrower, and NationsBank of Texas, N.A., as the Bank,
                       for $10,000,000, dated July 10, 1996.

               *10.44  Employment Agreement by & between the Company and Curt
                       Glowacki dated May 15, 1997.

               *10.45  Employment Agreement by & between the Company and Andrew
                       J. Dennard dated May 20, 1997.

              ++21.1   List of subsidiaries of the Company (incorporated by
                       reference to Exhibit 22.1 of the Company's Form S-1
                       Registration Statement Under the Securities Act of 1933,
                       dated April 24,1996, filed by the Company with the
                       Securities and Exchange Commission).

               *23.1   Consent of KPMG Peat Marwick LLP.

               *24.1   Power of Attorney (included on the signature page to
                       this Form 10-K).

               *27.1   Financial Data Schedule.





                                       18
<PAGE>   19
--------------------

             *   Filed herewith.
             **  Incorporated by reference to corresponding Exhibit number of
                 the Company's Form 10K Annual Report Pursuant to Section 13 or
                 15(d) of the Securities Exchange Act of 1934, dated March 24,
                 1997, filed by the Company with the Securities and Exchange
                 Commission.
             ++  Incorporated by reference to corresponding Exhibit number of
                 the Company's Form S-1 Registration Statement Under the
                 Securities Act of 1933, dated April 24, 1996, filed by the
                 Company with the Securities and Exchange Commission.
             +   Management contract or compensatory plan or arrangement.


         (b) Reports on Form 8-K

                On December 11, 1997, the Company  filed Form 8-K Current
             Report with the Securities and Exchange Commission regarding the
             Company's adopted new year end convention.





                                       19
<PAGE>   20
                           CASA OLE RESTAURANTS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                             <C>
Report of Independent Auditors  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-2

Consolidated Balance Sheets as of December 27, 1996 and December 28, 1997 . . . . . . . . . . . . . . . . .     F-3

Consolidated Statements of Income for each of the years in the three fiscal-year
  period ended December 28, 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-4

Consolidated Statements of Stockholders' Equity for each of the years in
  the three fiscal-year period ended December 28, 1997  . . . . . . . . . . . . . . . . . . . . . . . . . .     F-5

Consolidated Statements of Cash Flows for each of the years in the three
  fiscal-year period ended December 28, 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-6

Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     F-7
</TABLE>





                                      F-1
<PAGE>   21
                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors
Casa Ole Restaurants, Inc.:


         We have audited the accompanying consolidated balance sheets of Casa
Ole Restaurants, Inc. (the Company) as of December 27, 1996 and December 28,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three fiscal-year period ended
December 28, 1997.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Casa
Ole Restaurants, Inc. as of December 27, 1996 and December 28, 1997, and the
results of their operations and their cash flows for each of the years in the
three fiscal-year period ended December 28, 1997, in conformity with generally
accepted accounting principles.


                                             KPMG Peat Marwick LLP


Houston, Texas
February 13, 1998





                                      F-2
<PAGE>   22
                           CASA OLE RESTAURANTS, INC.

                          CONSOLIDATED BALANCE SHEETS

                    DECEMBER 27, 1996 AND DECEMBER 28, 1997



<TABLE>
<CAPTION>
                                                                                      1996              1997
                                                                                  ------------      ------------
<S>                                                                               <C>               <C>
ASSETS

Current assets:
  Cash and cash equivalents .................................................     $  6,419,305      $    986,024
  Marketable securities (approximates fair value) ...........................        1,007,255              --
  Royalties receivable ......................................................          110,254           111,964
  Receivables from affiliates ...............................................           14,000            13,000
  Other receivables .........................................................          195,287           338,599
  Inventory .................................................................          197,475           423,237
  Taxes receivable ..........................................................               --           102,409
  Prepaid expenses ..........................................................          260,459           546,287
                                                                                  ------------      ------------
         Total current assets ...............................................        8,204,035         2,521,520
                                                                                  ------------      ------------

Property, plant and equipment ...............................................        7,326,761        21,748,741
  Less accumulated depreciation .............................................        3,470,953         4,450,221
                                                                                  ------------      ------------
         Net property, plant and equipment ..................................        3,855,808        17,298,520
Deferred tax assets .........................................................             --             156,164
Other assets ................................................................           85,930         6,531,934
                                                                                  ------------      ------------

                                                                                  $ 12,145,773      $ 26,508,138
                                                                                  ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current installments of long-term debt ......................................     $     34,469      $  1,150,000
Accounts payable ............................................................          532,039         1,097,238
Income taxes payable ........................................................          352,375                --
Accrued sales and liquor taxes ..............................................          132,407           348,397
Accrued payroll and taxes ...................................................          266,597         1,121,011
Accrued expenses ............................................................           29,420           828,356
                                                                                  ------------      ------------

        Total current liabilities ...........................................        1,347,307         4,545,002
                                                                                  ------------      ------------

Long-term debt ..............................................................               --        10,106,871
Deferred income taxes .......................................................           35,577                --
Other liabilities ...........................................................           42,500           121,075

Stockholders' equity:
  Preferred stock, $.01 par value,
    1,000,000 shares authorized .............................................               --                --
  Capital stock, $0.01 par value, 20,000,000 shares
    authorized, 4,732,705 shares issued .....................................           47,327            47,327
  Additional paid-in capital ................................................       20,685,610        20,685,610
  Retained earnings .........................................................        1,337,452         2,352,253
Treasury stock, cost of 1,135,000 shares ....................................      (11,350,000)      (11,350,000)
                                                                                  ------------      ------------
         Total stockholders' equity .........................................       10,720,389        11,735,190
                                                                                  ------------      ------------

                                                                                  $ 12,145,773      $ 26,508,138
                                                                                  ============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>   23
                           CASA OLE RESTAURANTS, INC.

                       CONSOLIDATED STATEMENTS OF INCOME

                 FOR THE FISCAL YEARS ENDED DECEMBER 29, 1995,
                    DECEMBER 27, 1996 AND DECEMBER 28, 1997


<TABLE>
<CAPTION>
                                                                    1995              1996              1997
                                                                ------------      ------------      ------------
<S>                                                             <C>               <C>               <C>
Revenues:
  Restaurant sales ........................................     $ 16,690,682      $ 17,573,911      $ 34,301,029
  Franchise fees and royalties ............................          929,880           997,524         1,036,626
  Other ...................................................           68,986            90,474           132,284
                                                                ------------      ------------      ------------
                                                                  17,689,548        18,661,909        35,469,939
Costs and expenses (see note 7 for
  related party costs):
  Cost of sales ...........................................        4,198,412         4,405,330         8,892,889
  Restaurant operating expenses ...........................        9,790,998         9,608,834        19,431,014
  General and administrative ..............................        1,986,958         2,081,161         3,632,404
  Depreciation and amortization ...........................          266,389           208,132         1,244,703
  Restaurant closure costs ................................               --                --           433,173
                                                                ------------      ------------      ------------
                                                                  16,242,757        16,303,457        33,634,183
                                                                ------------      ------------      ------------

         Operating income .................................        1,446,791         2,358,452         1,835,756
                                                                ------------      ------------      ------------

Other income (expense):
  Interest income .........................................           14,846           271,057           141,723
  Interest expense ........................................          (38,531)          (17,402)         (451,868)
  Other, net ..............................................           56,352           114,232           139,588
                                                                ------------      ------------      ------------
                                                                      32,667           367,887          (170,557)
                                                                ------------      ------------      ------------
Income before income tax expense ..........................        1,479,458         2,726,339         1,665,199
Income tax expense ........................................           75,000           858,153           650,398
                                                                ------------      ------------      ------------

         Net income .......................................     $  1,404,458      $  1,868,186      $  1,014,801
                                                                ============      ============      ============

Pro forma income statement data:
  Net income as reported ..................................     $  1,404,458      $  1,868,186      $  1,014,801
  Pro forma adjustments:
    Compensation and related party
      expense arrangements ................................          820,000           161,700                --
    Provision for income taxes ............................         (775,799)         (210,422)               --
                                                                ------------      ------------      ------------

  Pro forma net income ....................................     $  1,448,659      $  1,819,464      $  1,014,801
                                                                ============      ============      ============

Basic income per share ....................................     $        .52      $        .54      $        .28
                                                                ============      ============      ============

Diluted income per share ..................................     $        .52      $        .53      $        .28
                                                               =============      ============      ============

Weighted average number of shares (diluted) ...............        2,793,116         3,403,906         3,601,902
                                                                ============      ============      ============
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>   24
                           CASA OLE RESTAURANTS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                           FOR THE FISCAL YEARS ENDED
                      DECEMBER 29, 1995, DECEMBER 27, 1996
                             AND DECEMBER 28, 1997



<TABLE>
<CAPTION>
                                                               ADDITIONAL        RETAINED                               TOTAL
                                              CAPITAL           PAID-IN          EARNINGS           TREASURY        STOCKHOLDERS'
                                               STOCK            CAPITAL          (DEFICIT)           STOCK              EQUITY
                                            ------------      ------------      ------------      ------------      ------------
<S>                                         <C>               <C>               <C>               <C>               <C>
Balances at December 30, 1994 .........          141,660         1,610,934            61,024          (200,000)        1,613,618
  Net income ..........................               --                --         1,404,458                --         1,404,458
  Capital contribution ................               --           458,988                --                --           458,988
  Distributions paid ..................               --                --        (1,542,824)               --        (1,542,824)
                                            ------------      ------------      ------------      ------------      ------------

Balances at December 29, 1995 .........          141,660         2,069,922           (77,342)         (200,000)        1,934,240
  Net income ..........................               --                --         1,868,186                --         1,868,186
  Issuance of common stock ............           20,000        21,980,000                --                --        22,000,000
  Offering costs and adjustments ......         (114,333)       (1,916,250)         (453,392)          200,000        (2,283,975)
  Warrants issued .....................               --            35,977                --                --            35,977
  Treasury stock purchased ............               --                --                --       (11,350,000)      (11,350,000)
  Distributions paid ..................               --        (1,484,039)               --                --        (1,484,039)
                                            ------------      ------------      ------------      ------------      ------------

Balances at December 27, 1996 .........     $     47,327      $ 20,685,610      $  1,337,452      $(11,350,000)     $ 10,720,389
  Net income ..........................               --                --         1,014,801                --         1,014,801
                                            ------------      ------------      ------------      ------------      ------------


Balances at December 28, 1997 .........     $     47,327      $ 20,685,610      $  2,352,253      $(11,350,000)     $ 11,735,190
                                            ============      ============      ============      ============      ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>   25


                           CASA OLE RESTAURANTS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE FISCAL YEARS ENDED DECEMBER 29, 1995,
                    DECEMBER 27, 1996 AND DECEMBER 28, 1997

<TABLE>
<CAPTION>
                                                                                    1995              1996              1997
                                                                                ------------      ------------      ------------
<S>                                                                             <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................     $  1,404,458      $  1,868,186      $  1,014,801
Adjustments to reconcile net income to net
      cash provided by operating activities:
  Depreciation and amortization ...........................................          266,389           208,132         1,244,703
  Restaurant closure costs ................................................               --                --           433,173
  (Gain) loss on sale of fixed assets .....................................              (54)           28,068                --
  Reserve for bad debts and note receivable write-offs ....................               --                --           112,500
  Deferred income taxes ...................................................               --            35,577            62,755
Changes in assets and liabilities, net of effects of acquisitions:
  Royalties receivable ....................................................          (42,142)           15,729           (31,710)
  Receivable from affiliates ..............................................           42,351            18,701             1,000
  Other receivables .......................................................          (21,284)         (161,733)           11,689
  Taxes receivable ........................................................               --                --          (102,409)
  Inventory ...............................................................          (10,587)          (37,033)          (33,169)
  Prepaids and other current assets .......................................          (23,848)         (176,122)         (240,579)
  Other assets ............................................................           35,150           (95,022)         (204,831)
  Accounts payable ........................................................          (39,430)          264,083            (8,064)
  Accrued expenses and other liabilities ..................................           54,601           370,113           302,369
  Deferred franchise fees and other long-term liabilities .................               --            42,500            21,235
                                                                                ------------      ------------      ------------
         Total adjustments ................................................          261,146           512,993         1,568,662
                                                                                ------------      ------------      ------------
         Net cash provided by operating activities ........................        1,665,604         2,381,179         2,583,463
                                                                                ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of acquisition, net of
         cash acquired ....................................................               --                --       (11,613,741)
Collection (issuance) of notes receivable .................................          (38,964)           38,964          (115,000)
Purchase of property, plant and equipment .................................         (103,749)       (2,764,152)       (8,338,660)
Sale (purchase) of marketable securities ..................................               --        (1,007,255)        1,007,255
Proceeds from sale of property, plant
    and equipment .........................................................            9,500             6,100           530,000
                                                                                ------------      ------------      ------------
         Net cash used in investing activities ............................         (133,213)       (3,726,343)      (18,530,146)
                                                                                ------------      ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution ......................................................          193,627                --                --
Payment of distributions ..................................................       (1,542,824)       (1,484,039)               --
Proceeds from minority partners' contributions ............................               --                --            41,000
Net borrowings under line of credit agreement .............................               --                --         4,990,204
Proceeds from issuance of long-term debt ..................................               --                --         6,000,000
Payments of notes payable .................................................         (127,106)         (157,079)         (517,802)
Proceeds from issuance of common stock ....................................               --        19,752,002                --
Purchase of treasury stock ................................................               --       (11,350,000)               --
                                                                                ------------      ------------      ------------
         Net cash provided by (used in)  financing activities .............       (1,476,303)        6,760,884        10,513,402
                                                                                ------------      ------------      ------------
         Increase (decrease) in cash and cash equivalents .................           56,088         5,415,720        (5,433,281)
Cash and cash equivalents at beginning of year ............................          947,497         1,003,585         6,419,305
                                                                                ------------      ------------      ------------
Cash and cash equivalents at end of year ..................................     $  1,003,585      $  6,419,305      $    986,024
                                                                                ============      ============      ============
</TABLE>


                                      F-6
<PAGE>   26
                           CASA OLE RESTAURANTS, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)


<TABLE>
<S>                                                                             <C>              <C>              <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
    Interest ..............................................................     $     28,134     $     24,051     $    327,933
    Income taxes ..........................................................           36,417          390,000        1,039,812
Non-cash financing activities:
    Liability assumption/capital contribution .............................          265,361               --               --
    Exchange of equipment for note balance ................................               --           53,897           32,500
    Note issued for purchase of restaurant ................................               --               --          750,000
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>   27
                           CASA OLE RESTAURANTS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 28, 1997


(1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)  Description of Business

         On February 16, 1996, Casa Ole Restaurants, Inc. was incorporated in
the state of Texas, and on April 24, 1996, its initial public offering of
2,000,000 shares of Common Stock became effective.  Casa Ole Restaurants, Inc.
is the holding company for Casa Ole Franchise Services, Inc. and sixteen
subsidiary restaurant operating corporations (collectively the "Company").
Casa Ole Franchise Services, Inc. was incorporated in 1977, and derives its
revenues from the collection of franchise fees under a series of protected
location franchise agreements and from the sale of restaurant accessories to
the franchisees of those protected location franchise agreements.  The
restaurants feature moderately priced Mexican and Tex-Mex food served in a
casual atmosphere.  The first Casa Ole restaurant was opened in 1973.

         On July 2, 1997, the Company purchased 100% of the outstanding stock
of Monterey's Acquisition Corp. ("MAC").  The Company purchased the shares of
common stock for $4.0 million, paid off outstanding debt and accrued interest
totaling $7.1 million and funded various other agreed upon items approximating
$500,000.  Approximately $6.0 million of goodwill was recorded as a result of
this purchase.  At the time of the acquisition, MAC owned and operated 26
restaurants in Texas and Oklahoma under the names "Monterey's Tex-Mex Cafe,"
"Monterey's Little Mexico" and "Tortuga Cantina."

         The table below presents unaudited pro forma income statement
information as if the Company had purchased MAC at the beginning of fiscal
1996.  Pro forma adjustments are to remove consulting fees that are
non-continuing, amortize the resulting goodwill over 40 years and remove the
pre-acquisition goodwill amortization, reflect net interest expense on the debt
resulting from the acquisition and record additional income tax at an effective
rate of 39% on the combined income of the Company and MAC.  The acquisition was
accounted for as a purchase.

<TABLE>
<CAPTION>
                                                            1996           1997
                                                        -----------     -----------
<S>                                                     <C>             <C>
Revenues ..........................................     $39,288,909     $45,951,299
Net income ........................................     $ 2,044,464     $ 1,257,838
Diluted income per share ..........................     $      0.60     $      0.34
</TABLE>


         The pro forma information does not purport to be indicative of results
of operations which would have occurred had the acquisition been consummated on
the date indicated or future results of operations.

         (b)  Principles of Consolidation

         The consolidated financial statements include the accounts of Casa Ole
Restaurants, Inc. and its wholly-owned subsidiaries, after elimination of all
significant inter-company transactions.  For years prior to fiscal 1996, the
financial statements are combined and include the operations of four
restaurants that were closed prior to the public offering and do not constitute
the ongoing operations of the Company.

         The reorganization of the Company in preparation for the initial
public offering was accounted for as a contribution to Casa Ole Restaurants,
Inc. at historical cost.  The financial statements presented herein reflect the
assets, liabilities and operations of the entities presented at their
historical values consistent with the requirements of Staff Accounting Bulletin
Number 48.

         (c)  Fiscal Year

         The Company maintains its accounting records on a 52/53 week fiscal
year ending on the Sunday nearest December 31st.

         (d)  Cash Equivalents

         For purposes of the statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.

         (e)  Inventory

         Inventory, which is comprised of food and beverages, is stated at the
lower of cost or market.  Cost is determined using the first-in, first-out
method.  Miscellaneous restaurant supplies are included in inventory and valued
on a specific identification basis.





                                      F-8
<PAGE>   28
                           CASA OLE RESTAURANTS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         (f)  Pre-opening Costs

         Costs, primarily the hiring and training of employees, associated with
the opening of a new restaurant are deferred and amortized over a one-year
period commencing with the opening of each respective restaurant.

         (g)  Property, Plant and Equipment

         Property, plant and equipment are stated at cost.  Depreciation on
buildings and improvements is calculated on the straight-line method over the
estimated useful lives of the assets.  Leasehold improvements are amortized
straight-line over the shorter of the lease term plus options or estimated
useful life of the assets, and depreciation on equipment is calculated on the
straight-line method over the estimated useful lives of the assets.

<TABLE>
<S>                                                                  <C>
Buildings and improvements . . . . . . . . . . . . . . . . . . .     15-39 years
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3-5 years
Equipment  . . . . . . . . . . . . . . . . . . . . . . . . . . .       2-7 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . . .      3-39 years
</TABLE>

         Significant expenditures that add materially to the utility or useful
lives of property, plant and equipment are capitalized.  All other maintenance
and repair costs are charged to current operations.  The cost and related
accumulated depreciation of assets replaced, retired or otherwise disposed of
are eliminated from the property accounts and any gain or loss is reflected as
other income and expense.  Recoverability of assets to be held is measurable by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset.  If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount the carrying value
exceeds the fair value of the asset.  The Company recorded an impairment
provision at December 28, 1997, in the amount of $433,173 relating to the
impairment of assets at restaurants that will be closed.

         (h)  Other Assets

         At December 28, 1997, other assets included $6.5 million of goodwill,
primarily resulting from the MAC acquisition.  Goodwill is being amortized over
40 years, and accumulated amortization as of December 28, 1997 was $102,213.
The Company assesses the recoverability of intangible assets by determining
whether amortization of the asset balance over its remaining life can be
recovered through undiscounted operating cash flows of the acquired operation.
The Company believes that no impairment of goodwill exists.

         (i)  Income Taxes

         Prior to the Company's reorganization, substantially all the companies
had elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code.  Accordingly, no provision for federal income taxes has been
provided for these entities prior to the reorganization, as the shareholders of
these entities have included the income on their personal income tax returns.
Federal income taxes for the companies that were C corporations are provided
based on the asset and liability method of accounting pursuant to Statement of
Financial Accounting Standards (SFAS) No.  109, Accounting for Income Taxes.
State income taxes have been provided for all entities.

         The S corporation elections terminated on the effective date of the
Company's reorganization, April 24, 1996.  Accordingly, a pro forma provision
for federal and state income taxes, using a 37% effective tax rate, is
presented as if the Company was taxed as a C corporation.  Subsequent to the
reorganization, federal income taxes are provided based on the asset and
liability method of accounting pursuant to SFAS No. 109.

         (j)  Pro Forma Data

         The pro forma income statement data reflects adjustments to
compensation and related party expense arrangements and reflects an adjustment
to the provision for income taxes as discussed above.

         (k)  Franchise Fees

         Franchise fee revenue from an individual franchise sale is recognized
when all services relating to the sale have been performed and the restaurant
has commenced operation.  Initial franchise fees relating to area franchise
sales are recognized ratably in proportion to services that are required to be
performed pursuant to the area franchise or development agreements and
proportionately as the restaurants within the area are opened.





                                      F-9
<PAGE>   29
                           CASA OLE RESTAURANTS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)



         (l)  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 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.

(2)  PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment at December 27, 1996 and December 28,
1997 were as follows:

<TABLE>
<CAPTION>
                                                                                  1996            1997
                                                                              -----------     -----------
         <S>                                                                  <C>             <C>
         Land ...........................................................     $   882,297     $ 4,303,341
         Buildings and improvements .....................................       1,997,677       5,034,043
         Vehicles .......................................................          25,850          31,178
         Equipment and smallwares .......................................       3,511,847       8,081,413
         Leasehold improvements .........................................         848,220       3,886,569
         Construction in progress .......................................          60,870         412,197
                                                                              -----------     -----------
                  Total .................................................     $ 7,326,761     $21,748,741
                                                                              ===========     ===========
</TABLE>

(3)  LONG-TERM DEBT

         Long-term debt consists of the following at December 27, 1996 and
December 28, 1997:

<TABLE>
<CAPTION>
                                                                                            1996              1997
                                                                                        ------------      ------------
<S>                                                                                     <C>               <C>
         NationsBank,  Advised Guidance Loan Commitment ...........................     $         --      $  5,666,666

         NationsBank,  Revolving Line of Credit ...................................               --         4,990,205
         Note payable to individual, principal and interest due monthly
           in the amount of $3,975, interest at 9.0%, due through October 1997 ....           34,469                --
         Note payable to individual, interest at 6%, principal of $150,000 due each
            January 2nd  through 2001 .............................................               --           600,000
                                                                                        ------------      ------------

                 Total long-term debt .............................................           34,469        11,256,871
         Less current installments ................................................          (34,469)       (1,150,000)
                                                                                        ------------      ------------
                 Long-term debt, excluding current installments ...................     $         --      $ 10,106,871
                                                                                        ============      ============
</TABLE>


         In July 1996, the Company entered into a $10 million unsecured credit
agreement with NationsBank of Texas, N.A.  To facilitate the acquisition of MAC
on July 2, 1997,  the credit agreement was amended, expanding the facility to
$13 million. Terms of the amended facility, including applicable interest
rates, are similar to those in the original facility.  The facility is divided
into a $7 million Revolving Line of Credit (the "Revolver) and a $6 million
Advised Guidance Loan Commitment (the "Guidance Loan").  The Revolver is to be
used for general corporate purposes, including the construction or acquisition
of new restaurants, and can be drawn on, with interest only payments, through
May 31, 1999, at which time the balance will be placed in a four-year term
note.  The Guidance Loan was used, in part, for the acquisition of MAC and is
payable over six years from the date of funding.  The interest rate on both
components of the agreement is either the prime rate or LIBOR plus a stipulated
percentage ( 8.1% at December 28, 1997).  The Company is subject to a non-use
fee of 0.25% on the unused portion of the Revolver from the date of the
agreement.  At the time of funding of the Guidance Loan, there was a one time
fee of 0.25%.  The terms of the agreement require the Company to meet certain
financial covenants.  The carrying amounts of long-term debt approximate fair
value as the effective rates for these instruments are comparable to market
rates at the balance sheet date.

         Maturities on long-term debt are as follows:

<TABLE>
        <S>                                                     <C>
        1998 . . . . . . . . . . . . . . . . . . . . . . .      $ 1,150,000
        1999 . . . . . . . . . . . . . . . . . . . . . . .        1,878,000
        2000 . . . . . . . . . . . . . . . . . . . . . . .        2,398,000
        2001 . . . . . . . . . . . . . . . . . . . . . . .        2,398,000
        2002 . . . . . . . . . . . . . . . . . . . . . . .        2,248,000
        Thereafter . . . . . . . . . . . . . . . . . . . .        1,184,871
                                                                -----------
                                                                $11,256,871
                                                                ===========
</TABLE>





                                      F-10
<PAGE>   30



(4)  INCOME TAXES

         The provision for income tax expense is summarized as follows for
fiscal years 1995, 1996 and 1997:

<TABLE>
<CAPTION>
                                                                      1995         1996         1997
                                                                    --------     --------     --------
<S>                                                                 <C>          <C>          <C>
                 Current:
                     Federal ..................................     $     --     $659,303     $526,092
                     State and local ..........................       75,000      163,273       61,551
                 Deferred .....................................           --       35,577       62,755
                                                                    --------     --------     --------
                                                                    $ 75,000     $858,153     $650,398
                                                                    ========     ========     ========
</TABLE>

         The actual income tax expense differs from expected income tax expense
by applying the U.S. federal corporate tax rate to income before income tax
expense as follows:

<TABLE>
<CAPTION>
                                                                   1995           1996           1997
                                                                ---------      ---------      ---------
<S>                                                             <C>            <C>            <C>
           Expected tax expense ...........................     $ 503,016      $ 927,000      $ 566,168
           State tax expense, net .........................        49,500        107,773         40,624
           Non-deductible amortization ....................            --             --         26,884
           Subchapter S corporation status ................      (477,516)      (205,156)            --
           Other ..........................................            --         28,536         16,722
                                                                ---------      ---------      ---------
                                                                $  75,000      $ 858,153      $ 650,398
                                                                =========      =========      =========
</TABLE>

         The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 27, 1996 and
December 28, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                             1996           1997
                                                                          ---------      ---------
<S>                                                                       <C>            <C>
          Deferred tax assets:
          Depreciation differences .................................      $      --      $ 339,147
           Asset impairments ........................................            --        166,772
           Net operating loss carry forward .........................            --        157,758
           Accrued expenses .........................................            --        140,835
           Other ....................................................            --         17,563
                                                                          ---------      ---------
                                                                          $      --      $ 822,075
                                                                          =========      =========
         Deferred tax liabilities: ..................................
         Depreciation differences ...................................     $ (35,577)     $      --

           Pre-opening costs ........................................            --        (70,692)
           Prepaid expenses .........................................            --        (31,262)
           Other ....................................................            --        (31,647)
                                                                          ---------      ---------
                                                                          $ (35,577)     $(133,601)
                                                                          =========      =========

           Net deferred taxes .......................................       (35,577)       688,474
           Valuation allowance ......................................            --       (532,311)
                                                                          ---------      ---------
                                                                          $ (35,577)     $ 156,164
                                                                          =========      =========
</TABLE>


         The valuation allowance was established during fiscal 1997 as a result
of the MAC acquisition by the Company.  To the extent that future tax benefits
are realized that are currently allowed for, goodwill associated with the MAC
acquisition will be correspondingly reduced.  MAC has a net operating loss
carry forward of approximately $400,000 that will expire in 2009.


(5)  COMMON STOCK, OPTIONS AND WARRANTS

         In April 1996, the Company completed an initial public offering of
2,000,000 shares of Common Stock.  Immediately prior to the effectiveness of
the Registration Statement, there was an exchange of shares by the shareholders
of the prior corporations for proportional shares of the Company.  Immediately
following the effectiveness of the Registration Statement, the Company redeemed
shares held by Michael D. Domec for an aggregate $11.35 million.





                                      F-11
<PAGE>   31
                           CASA OLE RESTAURANTS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         (a) 1996 Long Term Incentive Plan

         The Board of Directors and shareholders of the Company have approved
the Casa Ole 1996 Long Term Incentive Plan (the "Incentive Plan").  The
Incentive Plan, as amended, authorizes the granting of up to 500,000 shares of
Common Stock in the form of incentive stock options and non-qualified stock
options to key executives and other key employees of the Company, including
officers of the Company and its subsidiaries.  The purpose of the Incentive
Plan is to attract and retain key employees, to motivate key employees to
achieve long-range goals and to further align the interests of key employees
with those of the other shareholders of the Company.  Options granted under the
Incentive Plan will vest and become exercisable at the rate of 10% on the first
anniversary of the date of grant, 15% on the second anniversary of the date of
grant, and 25% on each of the third through fifth anniversaries of the date of
grant.

         (b) Stock Option Plan for Non-Employee Directors

         The Company has adopted the Casa Ole Stock Option Plan for
Non-Employee Directors (the "Directors Plan") for its outside directors and has
reserved 100,000 shares of Common Stock for issuance thereunder.  The Directors
Plan provides that each initial outside director will automatically be granted
an option to purchase 10,000 shares of Common Stock at the time of becoming a
director.  These options will be exercisable in 20% increments at the initial
public offering price of $11.00 per share and will vest equally over the
five-year period from the date of grant.  Except with respect to the initial
outside directors options granted as described in the preceding sentences, each
outside director will automatically receive options to purchase 3,000 shares of
Common Stock annually immediately following his or her reelection to the Board
and after his or her first three years of service, exercisable at the fair
market value of the Common Stock at the close of business on the date
immediately preceding the date of grant (the initial outside directors will be
eligible for such grants once their initial options have fully vested).  Such
annual options will vest at the conclusion of the outside director's annual
term.  All stock options granted pursuant to the Directors Plan will be
nonqualified stock options and will remain exercisable until the earlier of ten
years from the date of grant or six months after the optionee ceases to be a
director of the Company.

         (c) 1996 Manager's Stock Option Plan

         The Company has adopted the 1996 Manager's Stock Option Plan (the
"Manager's Plan") specifically for its store-level managers.  The Manager's
Plan authorizes the granting of up to 200,000 shares of Common Stock in the
form of non-qualified stock options to store-level managers of the Company.
The purpose of the Manager's Plan is to attract, retain and motivate restaurant
managers to achieve long-range goals and to further align the interests of
those employees with those of the other shareholders of the Company.  Options
granted under the Manager's Plan will generally vest and become exercisable at
the rate of 10% on the first anniversary of the date of grant, 15% on the
second anniversary of the date of grant, and 25% on each of the third through
fifth anniversaries of the date of grant.

         (d) Warrants

         In conjunction with the initial public offering, the Company entered
into warrant agreements with Louis P. Neeb and Tex-Mex, a limited liability
company of which John C. Textor (a member of the Board of Directors) is a
principal, pursuant to which Mr. Neeb and Tex-Mex acquired warrants to
purchase shares of Common Stock at the initial public offering ($11.00 per
share) price less the amount paid for the warrant ($.10 per share) for an
aggregate amount of Common Stock equal to ten percent (10%) of the shares of
Common Stock of the Company outstanding upon consummation of the initial
public offering, such shares to be allocated 5%, or 179,885 shares, to Mr.
Neeb and 5%, or 179,885 shares, to Tex-Mex.  The Company's warrants to Mr.
Neeb become exercisable on the second anniversary of the initial public
offering, and the Company's warrants to Tex-Mex became exercisable on the
first anniversary of the initial public offering.

         (e) Option and Warrant Summary
<TABLE>
<CAPTION>
                                                                                 Weighted Average
                                                                       Shares     Exercise Price
                                                                     ----------------------------
<S>                                                                     <C>       <C>
         Balance at December 29, 1995 ..........................             --              --

           Granted .............................................        674,178      $    11.00
           Exercised ...........................................             --              --
           Canceled ............................................         (5,500)     $    11.00
                                                                     ----------      ----------

         Balance at December 27, 1996 ..........................        668,678      $    11.00

           Granted .............................................        416,500      $     7.98
           Exercised ...........................................             --              --
           Canceled ............................................       (246,908)     $    10.58
                                                                     ----------      ----------

         Balance at December 28, 1997 ..........................        838,270      $     9.66
</TABLE>





                                      F-12
<PAGE>   32
                           CASA OLE RESTAURANTS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         The options and warrants outstanding at December 28, 1997 had exercise
         prices ranging between $4.94 to $13.25 (717,270 of the
         options/warrants range from $8.63 to $11.00), and 192,935 were
         exercisable (at $11.00).


         (f)  SFAS No. 123.  "Accounting for Stock-Based Compensation"

         The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," and has accounted for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations.  Accordingly, no compensation cost has
been recognized for stock options or warrants.  Had compensation cost for the
Company's outstanding stock options and warrants been determined based on the
fair value at the grant date for awards consistent with the provisions of SFAS
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                           1996                  1997
                 <S>                                                                  <C>                     <C>
                 Net income - as reported . . . . . . . . . . . . . . . . . . .       $ 1,819,464             $ 1,014,801
                 Pro forma net income - pro forma for SFAS No. 123  . . . . . .       $ 1,309,931             $   475,007
                 Net income per share - as reported . . . . . . . . . . . . . .       $      0.54             $      0.28
                 Pro forma net income per share - pro forma for SFAS No. 123  .       $      0.39             $      0.13
</TABLE>

         The weighted average fair value of the options and warrants granted
during 1996 and 1997 is estimated at $3.69 and $3.61 per share, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: volatility of 25.0% for 1996 and 41.0% for 1997,
risk-free interest rate of 6.5%, an expected life of 5 years for options and 4
years for warrants and 0% dividend yield.

         (g)  Income Per Share

         Statement of Financial Accounting Standards No. 128, "Earnings per
Share", specifies new measurement, presentation and disclosure requirements for
earnings per share and is required to be applied retroactively upon initial
adoption.  The Company has adopted SFAS No. 128 effective with the release of
December 28, 1997 earnings data, and accordingly, has restated herein all
previously reported income per share data.  Basic income per share is based on
the weighted average shares outstanding without any dilutive effects
considered.  Diluted income per share reflects dilution from all contingently
issuable shares, including options and warrants.  For 1995, there is no
difference between basic and diluted income per share.  For 1997, the effect of
dilutive stock options increase the weighted average shares outstanding by
approximately 4,000 shares which does not affect the determination of diluted
income per share. Approximately 800,000 options and warrants were considered
antidilutive for 1997.

         A reconciliation of income per share data for the fiscal year ended
December 27, 1996 is as follows: (numbers shown are in thousands, except for
per share amount.)

<TABLE>
<CAPTION>
                 1996                                                                                                    Per Share
                 ----                                                                       Income         Shares         Amounts
                                                                                          ----------     ----------     ----------
<S>                                                                                       <C>                 <C>       <C>
         Basic EPS
         Net Income (pro forma) .....................................................     $    1,819          3,338     $     0.54

         Effect of dilutive securities:
         Warrants ...................................................................             --             35             --
         Options ....................................................................             --             31             --
                                                                                          ----------     ----------     ----------
         Diluted EPS.................................................................     $    1,819          3,404     $     0.53
                                                                                          ----------     ----------     ----------
</TABLE>





                                      F-13
<PAGE>   33
                           CASA OLE RESTAURANTS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(6)  LEASES

         The Company leases restaurant operating space and equipment under
non-cancelable operating leases which expire at various dates through July
2017.

         The restaurant operating space base agreements typically provide for a
minimum lease rent plus common area maintenance, insurance, and real estate
taxes, plus additional percentage rent based upon revenues of the restaurant
(generally 2% to 7%) and may be renewed for periods ranging from five to
fifteen years.

         Future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year as of December 28,
1997 are:

<TABLE>
                 <S>                               <C>
                 1998 . . . . . . . . . . . . . .  $ 1,457,000
                 1999 . . . . . . . . . . . . . .    1,216,000
                 2000 . . . . . . . . . . . . . .    1,040,000
                 2001 . . . . . . . . . . . . . .      943,000
                 2002 . . . . . . . . . . . . . .      702,000
                 Thereafter . . . . . . . . . . .    3,109,000
                                                   -----------
                                                   $ 8,467,000
                                                   ===========
</TABLE>

         Rent expense for restaurant operating space and equipment amounted to
$1,170,269, $1,137,891, and $1,853,054 for the fiscal years 1995, 1996 and
1997, respectively.


(7) 401(k) PLAN

         MAC has a defined contribution 401(k) plan that covers substantially
all full-time employees meeting certain age and service requirements.
Participating employees may elect to defer a percentage of their qualifying
compensation as voluntary employee contributions.  MAC may contribute
additional amounts at the discretion of management.  MAC did not make any
contributions to the plan in 1997.  The Company plans to expand 401(k)
coverage to all its subsidiaries in fiscal 1998.

(8) RELATED PARTY TRANSACTIONS

         MDD Investments, Inc., a corporation formed in 1991 by a Company
shareholder, charged fees directly to certain Casa Ole restaurants owned by the
shareholder. Net amounts paid to MDD Investments, Inc. in fiscal 1995 and 1996
(prior to the offering) were $302,962 and $102,759, respectively.

         Bay Area Management, Inc., owned entirely by the brother of a Company
shareholder and director, provides accounting and administrative services on a
fee basis, to all of the Company-owned Casa Ole restaurants and some franchise
entities.  Amounts paid to Bay Area Management, Inc. by the Company in fiscal
1995, 1996 and 1997 were $117,683, $177,707 and $231,095, respectively.

The Company leases its executive offices from a company owned by two
shareholders of Casa Ole Restaurants, Inc.  Net lease expense related to these
facilities in fiscal 1995, 1996 and 1997 was $57,500, $50,375 and $57,755
respectively.

         The Company paid a success fee of $105,000 to an entity, that benefits
one of the Company's directors, related to the MAC acquisition.  Also in fiscal
1997, the Company paid $275,000 to another director for real estate that had
been recently acquired by that director for the same amount.





                                      F-14
<PAGE>   34

                                   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.



                                CASA OLE RESTAURANTS, INC.

                                By:/s/  Louis P. Neeb
                                ------------------------------------
                                Louis P. Neeb,
                                Chairman of the Board of Directors, President
                                and Chief Executive Officer



                               POWER OF ATTORNEY

         KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Louis P. Neeb, Curt Glowacki
and Andrew J. Dennard, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K under
the Securities Exchange Act of 1934, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

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


<TABLE>
<CAPTION>
         SIGNATURE                                TITLE                                             DATE
         ---------                                -----                                             ----
<S>                                        <C>                                                 <C>
/s/                                        Chairman of the Board of
--------------------------                 Directors, President and
Louis P. Neeb                              Chief Executive Officer
                                           (Principal Executive Officer)                       March 24, 1998



/s/                                        Founder and Vice Chairman of the
--------------------------                 Board of Directors                                  March  24, 1998
Larry N. Forehand


/s/                                        Executive Vice President and
--------------------------                 Chief Operating Officer                             March  24, 1998
Curt Glowacki


/s/                                        Vice President, Controller,
--------------------------                 and Treasurer
Andrew J. Dennard                          (Principal Accounting Officer)                      March  24, 1998



/s/                                        Director                                            March  24, 1998
--------------------------
John C. Textor


/s/                                        Director                                            March  24, 1998
--------------------------
Michael D. Domec


/s/                                        Director                                            March  24, 1998
--------------------------
J. J. Fitzsimmons


/s/                                        Director                                            March  24, 1998
--------------------------
Richard E. Rivera

/s/                                        Director                                            March  24, 1998
--------------------------
J. Stuart Sargent
</TABLE>