Michigan came into the game ranked 5th with a 10–1 record. Their only loss was to Michigan State. Michigan tied for the Big Ten title with Michigan State and earned the Rose Bowl berth because the Spartans were on probation.
USC came into the game ranked second in the Coaches' Poll and third in the AP Poll with an 11–1 record. USC defeated then #1 ranked Alabama, 24–14, in Birmingham early in the season, but subsequently suffered their lone defeat to Arizona State, 20–7, in Tempe. USC defeated UCLA, 17–10, to win the Pac-10 Conference, and then closed out the regular season by defeating defending national champion, Notre Dame, 27–25.
From the Michigan three-yard line during the second quarter, in a dive over the middle towards the goal-line, Charles White fumbled the ball before he entered the end-zone. The officials for this game were made up of a Pac-10/Big Ten crew. Upon White's fumble, a Pac-10 official immediately and correctly marked the ball around the one-yard line and signaled that there had been a change of possession. Then a Big Ten official came running in raising his hands signaling that White had scored a touchdown. This touchdown has become known as White's "Phantom Touchdown" as he was awarded the score after first fumbling, then entering the end-zone without the ball. This has been confirmed by White himself. The same Pac-10 official who awarded White this touchdown previously had ruled that USC quarterback Paul McDonald threw an incomplete pass in the final minute of Southern Cal's November 25, 1978 game against Notre Dame, when replays showed McDonald had fumbled and the Irish had recovered. Notre Dame led at the time, 25-24, but the Trojans drove downfield after that controversial call and kicked a field goal with 0:02 left to win, 27-25.