SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 1997
                           Commission File No. 1-12134
                              Cusip No. 286199-10-4

                          ELEPHANT & CASTLE GROUP INC.
                         (Name of Small Business Issuer)


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                   For the Fiscal Year Ended December 31, 1997
                          Commission File No. 33-60612

                          ELEPHANT & CASTLE GROUP INC.
                         (Name of Small Business Issuer)


Province of British Columbia                               Not Applicable
--------------------------------------------------------------------------------
(State or other jurisdiction                            (IRS Employer
 of incorporation)                                      Identification Number)



856 Homer Street
Vancouver, B.C. CANADA                                         V6B 2W5
--------------------------------------------------------------------------------
(Address of principal executive officers)                     (Zip Code)


Registrant's telephone number including area code:       (604) 684-6451

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 13 months (or for such  shorter  period that the  registrant  was
required to file such reports),  and (2) has been subject to filing requirements
for the past 90 days. YES [X] NO [ ]
<PAGE>
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 SB or any  amendment to
this Form 10-K SB.[ ]

Issuer's   revenues  during  the  fiscal  year  ended  December  31,  1997:  CDN
$34,230,000 (converts at applicable exchange rates to U.S. $24,986,000).

Aggregate market value of voting stock held by  non-affiliates of the Registrant
as at March 31, 1998: U.S. $8,574,000 (CDN $1,746,000).

Number of shares  outstanding of Issuer's  Common Stock as of December 31, 1997:
3,002,183.

Securities registered pursuant to Section 12(b) of the Act:

         None.

Securities registered pursuant to Section 12(g) of the Act:

                                    NASDAQ                   Number of
      Title of Each Class           Symbol               Shares Outstanding
      -------------------           ------               ------------------

Common Stock, $.01 par value        PUBSF                     3,072,316(a)

(a)Calculated  as of March 31, 1998, and includes  70,133 shares issued pursuant
to certain financing transactions in the first quarter of 1998.

Forward-Looking Statements

         This annual  report on Form 10-K  contains  forward-looking  statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995,
including  statements  made  with  respect  to the  results  of  operations  and
businesses  of  the  Company.   Words  such  as  "may,"   "should,"   "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended  to  identify   forward-looking   statements.   These   forward-looking
statements are based upon management's  current plans,  expectations,  estimates
and  assumptions  and are  subject to a number of risks and  uncertainties  that
could significantly affect current plans,  anticipated actions and the Company's
financial  condition  and results of  operations.  Factors that may cause actual
results  to differ  materially  from those  discussed  in  such-forward  looking
statements include, among other, the following  possibilities:  (i) fluctuations
in foreign currency  exchange rates; (ii) heightened  competition,  the entry of
new competitors;  (iii) the inability to carry out development plans or to do so
without  delays;  (iv) loss of key  executives;  and (v)  general  economic  and
business  conditions.  The Company  does not intend to update  these  cautionary
statements.
<PAGE>
ITEM 1            DESCRIPTION OF BUSINESS

a.       General

         The Company currently operates a chain of 20 full-service casual dining
restaurants  and pubs,  14 of which are  located  in Canada and six of which are
located in the United States.

         All but two of the  restaurants  are currently  operated under the name
"Elephant & Castle" an English pub  concept.  The Elephant & Castle units in the
United States include the two newest additions to the chain, located in Seattle,
Washington and Boston,  Massachusetts.  Both of such units were added during the
second half of 1997.

         The Company has been selected by Rainforest Cafe, Inc.  (NASDAQ:  RAIN)
as  joint  venture  partner  and  exclusive  licensee  for  the  development  of
Rainforest  restaurants  in Canada.  The  Company's  first  Canadian  Rainforest
restaurant  is  under  construction  and  scheduled  to  open in June of 1998 in
Vancouver,  B.C. The Company  expects to operate up to five Canadian  Rainforest
restaurants by the end of 1999. If that goal or a substantial  fraction  thereof
is  met,  the  Company's   continuing  revenues  from  the  Canadian  Rainforest
restaurants  will  constitute a  significant  part of the  Company's  continuing
revenues.  Martin O'Dowd,  formerly the President and Chief Executive Officer of
Rainforest  Cafe,  Inc.,  became the  President and Chief  Executive  Officer of
Elephant & Castle Group Inc. in March of 1998.

         In addition,  the Company  owns and operates an "Alamo  Grill" red meat
steakhouse  at the Mall of  America,  Bloomington,  Minnesota.  The  Company  is
committed  to the  expansion  of the Alamo Grill  steakhouse  restaurants,  as a
separate  concept,  with the first  new site to be  opened  in 1998 in  Franklin
Mills,   Pennsylvania  in  a  new  "twinning"   arrangement   (side-by-side   or
back-to-back)  with an Elephant & Castle pub  restaurant.  The Elephant & Castle
English  Pub  concepts  is being  franchised  for the first  time in the  United
States, and it is the Company's  intention in the future to similarly  franchise
Alamo Grill.

         Prior to the initial  public  offering of the  Company's  securities in
June of 1993,  the  Company  operated 12 pub  restaurants,  all located in major
shopping malls and office complexes from Victoria,  B.C. to Ottawa, Ontario, and
only one of which was located in the U.S., at Bellis Fair,  Washington  near the
Canadian border.

         The shift of focus to more U.S. based  locations is in accordance  with
the  Company's  previously  announced  intentions  with  respect  to  restaurant
locations.  In  addition,  the  Company  has  moved its pub  restaurants  from a
previous  concentration  in mall  locations  into  major  hotels  and other high
traffic  urban  locations.  The Company  proposes to continue to  diversify  its
portfolio  of  restaurant   offerings  in  the  casual  restaurant  segment,  to
stand-alone  urban,  hotel  based and at select mall  locations.  The Company is
seeking to move towards  being a multi-brand  business  operating a portfolio of
proven  restaurant  concepts.  The  diversity  of the  concepts  is  intended to
maximize the  Company's  appeal to the broadest  band of consumers in the casual
dining  segment.  The Company  hopes to manage  other U.S.  based  brands in the
Canadian market,  while positioning itself to expand Elephant & Castle and other
developed or acquired brands in U.S. market.
<PAGE>
         1997 Results of Operations

         During   1997,   the  Company   opened  three  new  Elephant  &  Castle
restaurants,  two of which are in the United  States,  Boston  (November  4) and
Seattle,  Washington (August 28). The third new location was opened in Edmonton,
Canada on November  20,  1997.  Two  restaurant  locations  were closed in 1997,
Vancouver  (February 28th) and Thunder Bay (August 31st). Both closings occurred
upon lease expirations.

         In 1997, the Company's sales  increased 16.9% to CDN $34,231,000  (U.S.
$24,986,000) from CDN $29,284,000  (U.S.  $21,375,000) for the comparable period
in 1996.  The sales  increase and other  factors have  permitted  the Company to
reduce costs per dollar of sales, including general and administrative  expenses
which were 7.2% in 1997, a reduction of 17%.

         During the fiscal year ended December 31, 1997, the Company  incurred a
net  loss  of  CDN  $1,416,000  (US$1,034,000)  compared  to a net  loss  of CDN
$1,174,000  (US$857,000) for the  corresponding  period in 1996. The 1997 figure
includes CDN $677,000 (US  $494,000) in  restaurant  closing  costs and a senior
executive retiring allowance.

         1997 results of operations  reflected  continued losses from operations
from  unsatisfactory   results  at  the  Company's  Canadian  mall  restaurants,
(revenues declined 4.5% at the twelve Canadian  operations  operated  throughout
1997);  less than budgeted  projected  operating margins at certain of the newer
restaurants;  significantly  higher  interest costs on capital  borrowed for the
Company's expansion efforts;  and higher than planned general and administrative
costs.

                  Occupancy  costs declined from 15.0% in 1996 to 14.2% in 1997.
Management  believes  that the  build-out  of the  additional  U.S.  hotel-based
restaurants will further lessen occupancy costs as a percentage of revenues, and
that  the  Canadian  rainforest  restaurant   opportunity,   together  with  the
contemplated  disposition of certain restaurant locations with  disproportionate
occupancy costs,  will enable the Company to reduce total costs, as a percentage
of sales significantly and to return to profitability.

         GEIPPP II Financing. In December of 1995, the Company completed a major
financing  with a prominent  U.S.  private  limited  partnership  money manager,
General Electric  Investment  Private Placement  Partners II ("GEIPPP II"). That
financing  initially  added U.S.  $1,000,000  (CDN  $1,370,000) in equity before
issue costs and U.S.  $3,000,000 (CDN  $4,110,000) in  subordinated  convertible
notes to the  Company's  long  term  debt  structure.  In  February  of 1997 and
November of 1997,  the Company  completed an  additional  U.S.  $4,000,000  (CDN
$5,480,000)  financing  with GEIPPP II. The proceeds of the 1997  financing were
used to pay for  construction  of new  restaurants  located at the Club Quarters
hotel in the Boston,  Massachusetts financial district, and the Cavanaugh Inn in
the Seattle, Washington downtown entertainment district.

         The closing of the GEIPPP II financings and the potential  availability
of up to U.S.$2,000,000 (CDN $2,740,000) of additional  financing by the sale of
similar notes in the future enhances the Company's ability to achieve its future
expansion  plans.  In 1997, the Company  separately  raised  $12,000,000  from a
French  bank  and  certain  affiliates  and  subsidiaries  thereof  through  the
placement  of a  $2,000,000  Convertible  Note.  In the  opinion of  management,
significant  additional capital will be required,  particularly for the Canadian
Rainforest restaurants venture.
<PAGE>
         Elephant  &  Castle  (Traditional  Format).  At the  Elephant  & Castle
restaurants,   the  Company  seeks  to  distinguish   itself  from   competitive
restaurants by its distinctive British style and Tudor decor, and by featuring a
wide variety of menu items including a large number of English-style dishes. The
Company's  restaurants  offer  a broad  menu  at  popular  prices.  The  menu is
regularly  updated to keep up with  current  trends in  customers'  tastes.  The
average check per customer, including beverage, was approximately CDN $14 during
1997, a number  which has more or less been stable  since 1992.  Although all of
the Company's  restaurants provide full liquor service,  alcoholic beverages are
primarily served to complement meals.

         Mall Restaurants.  The Company's mall restaurants average approximately
5,000 square feet, with a typical  seating  capacity of 220. The restaurants are
open 7 days a week for lunch,  dinner and late-night dining.  Average unit sales
are less than CDN $2  Million,  with a sales mix of  approximately  60% food and
approximately 40% alcoholic  beverages.  Due to their location at major downtown
and suburban malls and office complexes, the Elephant & Castle restaurants cater
to both shoppers and office workers.

         Hotel  Restaurants.  The Company has  agreements  for the  operation of
restaurants at Holiday Inn hotels in Winnipeg, Manitoba, (Canada), Philadelphia,
Pennsylvania and San Diego, California in the United States. The Winnipeg Crowne
Plaza Holiday Inn Elephant & Castle  restaurant  was opened on May 18, 1994. The
Philadelphia Holiday Inn unit was opened on February 28, 1995, and the San Diego
Holiday Inn was opened on July 1, 1996.  Both the Winnipeg and the  Philadelphia
Holiday Inn restaurants have produced revenues and profits and positive reaction
from  Holiday  Inn  management.  The San Diego  facility  has  incurred  certain
operational  difficulties  which decreased  revenues and increased costs both in
absolute amounts and as a percentage of revenues. However, results of operations
at the San Diego facility have been more favorably impacted since mid 1997.

         The Boston,  Massachusetts and Seattle,  Washington sites added in 1997
are in hotel  locations  other than  Holiday  Inn.  The  Company  plans to build
additional hotel  restaurant  units at first-class  hotels over the next several
years.

         In the opinion of management, the three key ingredients favoring select
hotel based units strategy are:

         (1)      the control of occupancy costs;

         (2)      the capacity to work  synergistically  with a hotel management
                  seeking to divorce itself from direct  involvement in food and
                  beverage operations; and

         (3)      the  Company's  ability  to  control  the  menu,  kitchen  and
                  restaurant amenities.

         The Canadian Rainforest Venture. As of May 1, 1997, the Company entered
into final  agreements  with  Rainforest  Cafe,  Inc.  ("RCI")  relating  to the
Canadian Rainforest Joint Venture.  The agreements provide for the establishment
of a jointly-owned Canadian corporation,  Canadian Rainforest Restaurants,  Inc.
("CRRI") in which the  Registrant and RCI each have a 50% interest in the Common
Stock,  but which  the  Registrant  will  effectively  control  as to day to day
operations  by the power to nominate  three of the five CRRI  directors and by a
management agreement.
<PAGE>
         The   Registrant   has   simultaneously   acquired  an  exclusive  Area
Development  Agreement for U.S.  $500,000  (CDN  $685,000),  U.S.  $250,000 (CDN
$343,000) paid in advance,  and U.S.  $50,000 (CDN $69,000) per annum thereafter
until the balance is paid. The Area  Development  Agreement has been assigned to
CRRI, the joint venture company.

         Each  restaurant  built within the  exclusive  territory of Canada will
also enter into a license  arrangement with RCI. The Rainforest  restaurants,  a
trademark and trade name protected  concept,  provide  patrons with a rainforest
environment,  which is both attractive and entertaining, and has been sought out
by mall  operators and others on favorable  terms as a destination  location.  A
section  of the  premises  of each  restaurant  is set  aside  for  the  sale of
rainforest  related  merchandise.  The Company has  slightly  modified the basic
physical structure of each Rainforest restaurant.

         In the United States,  Rainforest  Cafe, Inc. has quickly expanded from
its  first  unit at Mall of  America,  Bloomington,  Minnesota  to a total of 13
restaurants by the end of 1997. RCI has also signed Area Development  Agreements
for foreign expansion in Mexico, England, France, Hong Kong and other areas.

         The  Registrant  expects to invest from CDN $10-15 million in the joint
venture entity for the creation of least five Canadian Rainforest restaurants in
Canada  during the next  twelve to  eighteen  months.  Each such  restaurant  is
expected to  contribute  substantially  to the Company'  revenues and  operating
margins  starting in mid-1998.  The Company will receive a 1.5%  management  fee
from each  licensed  restaurant  in addition to  distributions  it receives as a
shareholder of CRRI. The Company requires substantial  operating capital for the
proposed build-out of the Rainforest restaurants.

         Each Rainforest Restaurant will present an equatorial rainforest motif,
a diverse  interesting menu and high quality food which is intended to appeal to
a broad customer base.

         The five restaurants  planned to date (one in greater Vancouver,  three
in Toronto and one in Montreal) will range from 17,000 to 20,000 square feet and
seat from 260 to 340 people.  Due to the size and scope of these facilities,  it
is necessary  that they be  positioned in very high traffic areas to attract the
necessary  clientele.  The  anticipated  sales mix from the Canadian  Rainforest
Restaurants is 25% retail items, and 75% food and beverage.

         The  principal  competition  will  be the  established  "eatertainment"
restaurants such as Hard Rock Cafe and Planet Hollywood.

         Alamo  Grill.  In  October of 1996,  the  Company  acquired  all of the
capital stock of Alamo Grill,  Inc.  ("Alamo"),  a one unit restaurant  business
located at the Mall of  America,  Bloomington,  Minnesota.  The  Company  issued
147,059  shares to the  shareholders  of  Alamo's  parent  company  and  assumed
U.S.$536,000  (CDN$734,000)  of  such  entity's  debt  in  connection  with  the
transaction.  The  acquisition  provides the Company  with a "red meat"  concept
restaurant  for the  expansion of its  hotel-based  properties.  The single unit
Alamo has been  successfully  and  profitably  operated by the Company since the
acquisition.  The new  "Alamo  Grill  Restaurants"  (which  may use such name or
variants  thereof)  will be casual  steakhouse  restaurants  with a  distinctive
southwestern  design and theme.  They are intended to be located in high traffic
suburban malls and large box retail  outlets.  The target market is blue to grey
collar family shoppers.  The menu will be positioned to deliver an average spend
of U.S.  $14-16  Dollars for food at dinner.  Each  restaurant  is planned to be
<PAGE>
6,500 square feet with a 240-seat capacity.  The Company is currently  proposing
to use the Alamo food format at other facilities.  In a concept which remains in
the development stage, the Company will dual-brand a twin restaurant opportunity
in Franklin Mills,  Pennsylvania.  The E & C/Alamo will be approximately  12,000
square  feet and share a common  kitchen.  The  efficiencies  of the  dual-brand
concept  intended  to  be  realized  include  facility  and  construction   cost
limitations,  while presenting two distinct brand images to the public. See also
Franchising/Licensing.

         Other  Formats.  In August of 1995, the Company opened a New York style
deli known as  Rosie's-on-Robson.  The Company  provides all of the hotel's room
service,  off-premise  catering,  and branded specialty products.  The Company's
restaurant at Rosedale is significantly  different from the traditional Elephant
& Castle format.  The Company's  experience  with "Rosie's" to date has not been
favorable.  The Company currently does not intend to further develop the Rosie's
brand or concept.

         Future Company Growth. In addition to the Canadian  Rainforest  venture
discussed elsewhere, the Company's strategy for future growth of its hotel-based
and urban  traffic  center  locations is as follows:  Select  locations  will be
identified in certain  high-density  markets.  The Company has in mind a limited
number of geo graphic pockets for potential growth for all corporate brands. The
intention  is to  cluster  restaurants  in prime  locations  within  the  chosen
geographic  regions.  Key  points  for  consideration  include  a high  level of
occupancy at a prospective  hotel; a hotel which is part of a chain large enough
to join in combined marketing  activities;  potential unique traffic generators;
and the need for revenues in all seasons.


Other Activities

         Franchising/Licensing.  Management  of the  company  believes  that the
Company's  "brand"  identification  is a valuable  asset.  The Elephant & Castle
brand  label  is  licensed  at  the  new  international  terminal  at  Vancouver
International  Airport.  Future  activities  may  include  an  expansion  of the
Company's  licensing/franchising  activities.  Elephant & Castle  International,
Inc. has been authorized to commence franchise  activities in the United States,
and has begun franchise activities for the Elephant & Castle units.

         Elephant on Campus.  In September  1995,  the Company  opened its first
on-campus  restaurant,  the  "Elephant  on  Campus",  at  the  British  Columbia
Institute of  Technology.  The campus  restaurant,  located in the student union
building,  required an  investment  of CDN  $500,000  and has an indoor  seating
capacity of  approximately  250, plus an outdoor  patio.  The restaurant has the
same  British-style/Tudor  decor,  and the menu features the same items as other
E&C restaurants.

         Airports.  Late in 1995, the Company licensed Cara Operations  ("Cara")
to operate an Elephant & Castle restaurant-pub at the new international terminal
at Vancouver  International  Airport.  Cara, which is highly successful and well
positioned  in airline and airport food  services in Canada,  elected to use the
E&C brand as part of the Vancouver  International  Airport  terminal "mix".  The
Company  intends  to  pursue  similar  business  with  Cara and  other  terminal
operators in the future.
<PAGE>
         Additional Information

         1. Form and Year of Organization.  The Company was  incorporated  under
the laws of the Province of British  Columbia,  Canada, on December 14, 1992, as
part  of a  reorganization  of  sister  subsidiaries.  The  Company's  principal
executive offices are located at Suite 500, 856 Homer Street, Vancouver, BC, V6B
2W5 (604)  684-6451,  fax (604)  684-8595.  As used  herein,  unless the context
specifies otherwise,  "Elephant & Castle" or the "Company" refers to the holding
company and its restaurant subsidiaries.

         2. Reorganization. The Company was formed in 1992 as a holding company.
The Company  owns The Elephant and Castle  Canada Inc.,  an Ontario  corporation
("E&C Canada") (14  restaurants);  Elephant & Castle,  Inc., a Texas corporation
("E&C Texas") (two restaurants); and Elephant & Castle, Inc., a Washington State
corporation.  In  addition,  the  Company  owns Alamo  Grill,  Inc.,  an Indiana
Corporation and Elephant & Castle International, inc., a Texas corporation.

         E&C Canada was  previously  amalgamated  in May 1990 to act as the sole
operator of the business  conducted by the 12  restaurants  under the trade name
"Elephant & Castle". E&C Texas was incorporated in Texas in 1983 for the purpose
of  creating  an  Elephant & Castle  restaurant  at an upscale  mall in Houston,
Texas. The mall development was not successful, and the restaurant was closed in
1985. The Company had a tax loss carryforward of approximately  U.S.  $1,000,000
(CDN $1,370,000) from the failed Houston restaurant. A portion of the benefit of
such tax loss carryforward has been utilized. The remaining benefits, if any, to
be derived from the United States tax loss  carryforward  are not believed to be
material in relation to the business of the Company as a whole.


b.       Financial Information about Industry Segments.

         During each of the last three years, the Company has been substantially
engaged in a single line of business -- the  ownership and operation of Elephant
& Castle restaurants.


c.       Narrative Description of the Business.

                  i.  Principal  Products or  Services  and their  Markets.  See
Description of the Business - General.

                  ii.  Distribution  Methods.  The Company focuses on the casual
dining  segment.  The Company has not set out to establish  its  restaurants  as
"destination  locations".  Instead,  it relies  primarily  on its  high-traffic,
convenient downtown and suburban mall, and most recently,  high-occupancy hotel,
locations  consumer  satisfaction  and word of mouth to  attract  new and repeat
customers.   The  Company  has  engaged  in  indirect  marketing  through  heavy
involvement  of its  principals  in local and national  charities  and community
functions, particularly Variety Club International.

                  Management  believes that newer Elephant & Castle  restaurants
have benefitted from the name recognition and reputation for quality development
for which the family of  restaurants  has become  known in Canada.  The  Company
employs  some  print  and  direct-mail   advertising  and  conducts  many  local
promotions geared to the neighborhoods and markets the restaurant serves.  These
low-cost  activities can include  everything from ski-party  packages to mystery
theater activities,  entertainment,  sports nights,  comedy nights and functions
related to special holidays.  During fiscal 1997, the Company's expenditures for
advertising and promotional activities were approximately 3% of its revenues.
<PAGE>
                  iii. Status of New Developments.  The Company is constantly in
the process of examining and  undertaking  various new development and expansion
opportunities.

         Relationship with Hotel Operators

         The Registrant's relationship with hotel operators, such as Holiday Inn
is predicated on (i) shared investment in significant  physical  improvements to
the facility at the onset of the occupancy;  (ii) costs of occupancy measured by
a percentage of the unit's revenues;  (iii) adequate time to recruit and train a
restaurant staff of Registrant's selection;  and (iv) reliance upon Registrant's
control  of  the  physical  environment  and  menu  selections.  The  Registrant
currently  operates  hotel  restaurants  at the  Club  Quarters  Hotel  (Boston,
Massachusetts)  and  Cavanaughs   (Seattle,   Washington).   The  Registrant  is
discussing additional prospective restaurant sites at major hotel locations.

                  iv.  Competitors  and  Competitive  Business  Conditions.  The
restaurant and food service industry is highly competitive and fragmented. There
are an  uncountable  number of restaurants  and other food and beverage  service
operations that complete directly and indirectly with the Company.  In addition,
many restaurant chains have significantly greater financial resources and higher
sales  volumes  than the Company.  Restaurant  revenues are affected by changing
consumer  tastes  and   discretionary   spending   priorities,   local  economic
conditions,  demographic  trends,  traffic  patterns,  the  ability of  business
customers to deduct  restaurant  expenses,  and the type, number and location of
competing  restaurants.  In addition,  factors such as inflation  and  increased
food, liquor,  labor and other employee  compensation costs can adversely affect
profitability.  The Company believes that its ability to compete effectively and
successfully  will  depend  on,  among  other  things,  management's  ability to
continue to offer  quality food for  moderate  prices,  management's  ability to
control  labor costs,  and  ultimately  on the  executive  determinations  as to
extensions of the brand (i.e.,  selection of sites for new locations and related
strategies).

                  v. Suppliers.  Food products and related  restaurant  supplies
are purchased  both through home office  purchasing  programs and already at the
restaurant  level from  specified  food  producers,  independent  wholesale food
distributors  and  manufacturers.  This  process  enables  the Company to ensure
quality companies.  Management believes all essential food and beverage products
are available from multiple sources in all of the locations it serves,  and that
it is not  dependent  on any one of a limited  number of  suppliers.  Management
expects to be able to achieve a  declination  in the costs of food  products and
related suppliers based upon new purchasing  policies currently being adopted, a
change  in key  personnel  responsible  for  the  implementation  of  purchasing
process, and maximization of rebates and allowances, which were not consistently
received by the Company in earlier periods.

                  vi.  Dependence on Customers.  Elephant & Castle  appeals to a
diverse customer base,  including  business and  professional  people who occupy
offices in the vicinity of the  restaurants,  shoppers from the malls,  downtown
tourists,  and others.  The Company's  locations and broad menu attract  traffic
from lunch through mid-afternoon, dinner and into the evening hours. Most all of
the Company's restaurants are open seven days and evenings, each week. All items
on the menu are available for take-out,  although take-out customers account for
less than 2% of total restaurant sales.
<PAGE>
                  vii.  Trademarks;  Licenses.  The Company has registered  "The
Elephant & Castle Pub & Restaurant"  with the Canadian  Trade marks Office,  and
has  registered  "Elephant  Mug" with the United  States  Patent  and  Trademark
Office.  The  Company  regards  its  "Elephant  &  Castle"  and  "Elephant  Mug"
trademarks as having sub stantial value and as being an important  factor in the
marketing of its  restaurants.  The Company is not aware of any infringing  uses
that could  materially  affect its business or any prior claim to the trademarks
in its business.  The Company acquired "The Elephant & Castle"  trademark in the
United  States.  The  Company  agreed to pay  approximately  U.S.  $50,000  (CDN
$69,000),  plus a one-time fee of U.S.  $5,000 (CDN $7,000) per location for the
first ten locations for the mark.

                  viii.  Governmental  Licenses  and  Approvals.  The Company is
subject to various rules,  regulations and laws affecting its business.  Each of
the Company's restaurants is subject to licensing and regulations by a number of
governmental  authorities,  including  alcoholic  beverage  control  and health,
safety and fire  agencies in the state,  province or  municipality  in which the
restaurant  is  located.  Difficulties  in  obtaining  or  failure to obtain the
required  licenses or approvals  could prevent or delay the development of a new
restaurant in a new location.  Management  believes the Company is in compliance
in all material  respects with all relevant  regulations.  The Company has never
experienced  abnormal  difficulties or delays in obtaining the required licenses
or approvals required to open a new restaurant.

                  Various  Canadian federal and provincial labor laws govern the
Company's  relationship  with its  employees,  including such matters as minimum
wage requirements, overtime and other working conditions. Significant additional
government-imposed  increases  in minimum  wage,  paid  leaves of  absences  and
mandated   health   benefits,   or  increased  tax  reporting  and  tax  payment
requirements  for  employees  who  receive  gratuities,  may impose  significant
burdens on the  Company.  The  Company's  restaurants  in the United  States are
subject to similar requirements.

                  Alcoholic  beverage  control  regulations  require each of the
Company's  restaurants to apply to a state authority and, in certain  locations,
county and  municipal  authorities,  for a license and permit to sell  alcoholic
beverages in the premises.  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 daily operations of the Company's
restaurants.  The Company has not encountered any material  problems  related to
alcoholic  beverage  licensing to date.  The failure to receive or retain,  or a
delay in obtaining a liquor  license in a particular  location  could  adversely
affect the Company's ability to obtain such a license elsewhere.

                  ix. Effect of Existing and Probable Governmental Regu lations.
The Company is subject to "dram-shop"  statutes in California,  Pennsylvania and
Washington  and may become  subject to similar  proposed  legislation in Canada.
"Dram-shop" statutes generally provide a person injured by an intoxicated person
the right to recover  damages  from an  establishment  which  wrongfully  served
alcoholic  beverages  to such a person.  The Company  carries  liquor  liability
coverage which it believes to be consistent  with the coverage  carried by other
entities  in the  restaurant  industry.  Even  though the  Company is covered by
insurance,  a judgment against the Company under a "dram-shop" statute in excess
of the Company's  liability coverage could have a material adverse effect on the
Company. The Company has never been the subject of a "dram-shop" claim.
<PAGE>
                  x. Research and  Development.  The Company places  significant
emphasis on the design and interior decor of its restaurant.  In-house design is
supervised by Vice President George Pitman, one of the founding  shareholders of
the Company.  The Company's  design  requires higher capital costs and furniture
and  fixtures  investment  to  open a new  restaurant  than  is  typical  in the
industry. Landlord contributions defray a part or a substantial part of interior
design and decor at a typical  new  restaurant.  The Company  believes  that its
design  and decor  features  enhance  the  dining  experience.  Each  restaurant
typically features large, airy dining areas. Two of the restaurants offer atrium
seating,  and several offer patio seating,  which adds substantially to seasonal
capacity,   revenues  and  profits.  Table  layouts  are  flexible,   permitting
re-arrangement of seating to accommodate large groups and effective  utilization
of maximum seating capacity.

                  The Company also believes that the location of a restaurant is
critical to its success. In general, significant time and resources are spent in
determining  whether a prospective  site is acceptable.  Traditional  Elephant &
Castle restaurants were located at high-profile sites at malls/office  complexes
within larger  metropolitan  areas.  In selecting  future sites,  the Registrant
intends to analyze  demographic  information for each  prospective  site,  hotel
occupancy,  hotel  uses,  and  factors  such as  visibility,  traffic  patterns,
accessibility, proximity of shopping areas, offices, parks, tourist attractions,
and competitive restaurants.

                  xi. Costs and Effects of Compliance with  Environmental  Laws.
The  Company  is not aware of, and does not  anticipate  any  significant  costs
related to compliance with environmental laws.

                  xii. Number of Total Employees and Full-Time Employees.  As of
December 31, 1997, the Company employed approximately 900 persons on a full-time
and part-time  basis.  21 of such persons serve in  administrative  or executive
capacities,  54 serve as restaurant  management  personnel and the remainder are
hourly workers in the Company's restaurant operations. The Company believes that
its working  conditions and  compensation  packages are  competitive  with those
offered by its competitors.  Management  considers the Company's  relations with
its employees to be good, and its rate of employee turnover,  particularly among
management employees,  to be low in relation to industry standards.  The Company
has an  agreement  with the union which  represented  the former  workers at the
predecessor  restaurant  located at the Holiday Inn unit in  Philadelphia  which
requires the Registrant to seek new hires first from among the pool of available
union hiring hall personnel.  The Company's  service  personnel at the San Diego
Elephant & Castle  unit and  Rosie's on Robson are  unionized.  The  Company has
never experienced an organized work stoppage, strike or labor dispute.

                  The Company has sought to attract  and retain  high-  quality,
knowledgeable  restaurant  management and staff.  In units which the Company has
had in operation five or more years,  the Company has regularly  retained a work
force  with  a  significant  number  and  percentage  of  its  employees  having
continuous  service with the Company.  Currently,  at such units the Company has
259 employees of which 25.5% are five year veterans.  In  supervisory  positions
within the Company's restaurant business, the percentage is even higher (67.7%).
Each  restaurant  is  managed  by one  general  manager,  and  from one to three
assistant  managers  depending on volume.  Each  restaurant also has one kitchen
manager  and one to  three  assistant  kitchen  managers.  On  average,  general
managers have about five years'  experience  with the Company.  The Company also
<PAGE>
employs  regional  managers  and may be required to add  additional  supervisory
people as the chain  expands.  As the Company adds new  restaurants,  its future
success  may depend in part on its  ability  to  continue  to attract  and train
capable  additional  managers.  The Company also anticipates that the opening of
additional  restaurants  including  at hotel  sites in the  United  States  will
require a  commensurate  increase in  employees.  The Company  does not expect a
proportionate increase in the number of corporate or administrative personnel.

                  Restaurant  managers,  many of whom have moved up through  the
ranks,  are  required  to  complete a  training  program  during  which they are
instructed in areas including food quality and  preparations,  customer service,
alcohol service, liquor liability avoidance and employee relations.  The Company
believes its training  programs for managers and other  employees are comparable
to the  training  provided for  managers  and other  employees at  substantially
larger restaurant chains.  Restaurant managers are also provided with operations
manuals  relating  to food and  beverage  standards  and other  expectations  of
restaurant  operations.  Management  has made a conscious  commitment to provide
customer  service of the highest  standards.  In addition to evaluations made by
the customers,  the Company uses a "designated customer" quality control program
to  independently  monitor  service and operations.  "Designated  customers" are
independent  people who test the  standards  of food,  beverage  and  service as
customers of the restaurant  without the knowledge of management or staff.  Done
on a periodic  basis,  their  findings  are  reported to  corporate  management.
Efficient,  attentive and friendly service is integral to the Company's  overall
concept.  Any new employee at all functional levels is closely  supervised after
his  or  her  on-the-job   training.   Management  regularly  solicits  employee
suggestions  concerning  operations,  and endeavors to be responsive to employee
concerns.

                  The Company believes its commitment to employee morale is also
critical to its long-term success.  The Company has compiled an excellent record
of employee  retention  at all levels of  management.  The  average  tenure of a
restaurant  general  manager in the Elephant & Castle chain is seven years.  The
Company  considers the quality of its employee  interaction with customers to be
an important element of its business strategy.
<PAGE>
ITEM 2            PROPERTIES

PROPERTIES

         Other than the hotel and urban restaurants  discussed separately below,
the  Company  currently  operates  eleven  mall based  restaurants.  All of such
facilities are leased  properties.  The following  table provides  opening date,
square footage and indoor seating  capacity  information with respect to each of
the mall based restaurants currently in operation:
<TABLE>
<CAPTION>
                                                                                                 Indoor
City                       Mall                      Opening Date               Square Feet      Seating(a)
----                       ----                      ------------               -----------      ----------
<S>                        <C>                        <C>                          <C>             <C>     
Regina, Sask.              Cornwall Center            Aug. 1981                    5,375           220
Ottawa, Ont.               Rideau Center              Mar. 1983                    7,119           280
London, Ont.               Galleria                   Sep. 1983                    6,000           240
West Edm., Alb.            West Edmonton              Jul. 1988                    6,500           245
Edmonton, Alb.             Eaton Center               Sep. 1988                    5,939           225
Victoria, B.C.             Eaton Center               Jun. 1989                    5,640           225
Bellingham, WA             Bellis Fair                May  1990                    5,200           220
Saskatoon, Sask.           Midtown Plaza              Oct. 1990                    5,815           225
Calgary, Alb.              Eaton Center               Dec. 1990                    5,851           225
Surrey, B.C.               Guildford Town             May  1992                    4,835           200
Bloomington, MN            Mall of America            Oct. 1996                    6,750           280
</TABLE>


(a)Outdoor/patio seating is available at a number of the locations,  but only on
   a limited seasonal basis.


         All of the  restaurants  are located on leased sites.  The Company owns
the furnishings,  fixtures and equipment in each of its mall based  restaurants.
Existing  restaurant  leases have  expirations  ranging  from 1997  through 2017
(including  existing  renewal  options).  The Company  does not  anticipate  any
difficulties  renewing its existing leases as they expire. Mall leases typically
provide  for fixed  rent plus  payment  of  certain  escalations  and  operating
expenses, against a percentage at restaurant sales.

         The Company's hotel restaurant  leases are more typically  focused on a
percentage of restaurant  sales against only a minimum base rental.  Thus, while
the Company's aggregate annual minimum rent continues to increase, such rent per
facility and per square foot controlled by the Company is declining.

         The  Company's  facilities at Hotels and other  non-mall  locations are
occupied on the following basis:
<PAGE>

Hotel Locations              Opening Date     Square Ft.     Indoor Seating
---------------              ------------     ----------     --------------

Winnipeg                     May 1994           4,300              180
Philadelphia                 February 1995      7,900              310
San Diego                    July 1996          7,500              300
Seattle                      August, 1997       7,600              230
Boston                       November, 1997     9,500              200


Other Locations

"Rosie's"
 (Vancouver)                 August, 1995       5,500              200
BCIT
 (Burnaby,B.C.)              September, 1995    4,500              300
Toronto
 Entertainment
 District                    October, 1996      9,200              330
Edmonton                     November, 1997     5,600              180


         The following table sets forth,  for all  restaurants by location,  the
earliest expiration date of the leases and the minimum annual rent:


                                            Earliest
Location                               Expiration Date       Minimum Annual Rent
--------                               ---------------       -------------------

Regina Cornwall Center                        1998          CDN    $ 50,000
London Galleria                               1998                   78,000
BCIT, Burnaby, B.C.                           2000                  140,000
Edmonton Eaton Center                         2001                  109,000
Minneapolis, Mall of America                  2002                  259,000
West Edmonton Mall                            2003                  130,000
Ottawa Rideau Center                          2003                  165,000
Victoria Eaton Center                         2004                  141,000
Winnipeg, Holiday Inn                         2004                   60,000
Saskatoon Midtown Plaza                       2005                  150,000
Bellingham Bellis Fair                        2005                  106,000
Rosie's, Rosedale                             2005                   60,000
Philadelphia, Holiday Inn                     2005                  137,000
Calgary Eaton Center                          2005                   94,000
San Diego, Holiday Inn                        2006                   82,000
Surrey, Guilford                              2007                  156,000
Boston, Club Quarters                         2007                   82,000
Toronto (King Street)                         2011                   92,000
Edmonton, White Ave                           2012                   77,000
Seattle, Cavanaughs                           2012                   77,000


         Total:                                             CDN  $2,245,000
                                                                 ==========

         The Company has been able to decrease  the  aggregate  per unit minimum
annual rental over the last several years in part due to selective locations and
appropriate lease provisions.
<PAGE>
ITEM 3            LEGAL PROCEEDINGS

         From  time to time  lawsuits  are  filed  against  the  Company  in the
ordinary  course of business.  Except as set forth  below,  the Company is not a
party to any  litigation  which  would  have a  material  adverse  effect on the
Company or its business and is not aware of any such threatened litigation.

         In  1989  and  1990,  the  Canadian   subsidiary  received  Notices  of
Reassessment from Revenue Canada and the Ministry of Revenue, Ontario, regarding
a  construction  allowance  received  in 1984 from the  landlord  for its former
Sarnia  location.  The reassessment has been under appeal since 1989. The amount
of tax  reassessed  was CDN $209,000.  Including  interest  accrued to date, the
total amount in dispute as of December 31, 1997 was approximately CDN $ 739,000.

Shilo Litigation

         In late 1992, the Company obtained the right to operate all of the food
and beverage services at the Shilo Hotel & Resort complex in Yuma,  Arizona.  In
addition, on July 1, 1993, the Company added the food and beverage operations at
a second  Shilo  Hotel in  Pomona,  California.  The style and menu at the Shilo
Hotels  was  significantly  different  from  that  followed  at the  traditional
Elephant & Castle restaurants,  or any others which have followed. The Company's
experience  at the Shilo Hotels and with the  management  thereof was  negative,
resulting in termination and closing of those restaurants during 1995.

         The Registrant was a party to two ten (10) year lease  agreements  with
Shilo  Hotels  ("Shilo")  relating to  facilities  located at Yuma,  Arizona and
Pomona, California respectively.  After a breakdown in the business relationship
between the parties, on August 22, 1995, Shilo asserted legal claims against the
Company, and commenced a litigation, still pending, in the Superior Court, State
of  Arizona,  County of Yuma,  in which the Company is  represented  by A. James
Clark,  Esq., Clark & Carter,  Yuma,  Arizona and other counsel.  In the action,
Shilo seeks unspecified  general and special damages for alleged breaches of the
lease  agreements  at  Yuma  and  Pomona.  In the  opinion  of  management,  the
Registrant has potential  valid defenses and mitigation of damage claims against
Shilo, as well as properly stated counterclaims. Motions for Summary Judgment by
Shilo on the two leases have been denied.

The Company expects to prevail on the Pomona lease,  and  anticipates  that if a
trial as to damages,  if any, is required on the Yuma lease,  it will be able to
successfully defend its interests and position.
 
ITEM 4            SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was  submitted  during the fourth  quarter of the fiscal year
covered by this report to a vote of security  holders,  through the solicitation
of proxies or otherwise.
<PAGE>
                                     PART II


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

         The Company's Common Stock is, and has been since June 29, 1993, traded
on NASDAQ - small cap market (PUBSF) and the Pacific Exchange (PUBS).

         The  range of high and low  sales  prices  for the  Common  Stock  from
January 1, 1996, to date has been:

                                   High            Low
                                   ----            ---

First Quarter of 1997:            $  9.00          $5.75
Second Quarter of 1997:           $ 10.25          7 7/8
Third Quarter of 1997:            $ 11.25          9 5/8
Fourth Quarter of 1997:           $ 10.50          $6.75

First Quarter of 1996:            $ 7.125          $4.03125
Second Quarter of 1996:           $ 7.625          $5.25
Third Quarter of 1996:            $ 8.00           $5.5625
Fourth Quarter of 1996:           $ 8.50           $5.875

         The approximate  number of record holders of the Company's common stock
is 625.
<PAGE>
ITEM 6            MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

Twelve Months ended December 31, 1997 vs. December 31, 1996

Net Income

         For the year ended  December 31, 1997,  the  Company's net loss was CDN
$1,416,000  (US  $1,034,000)  compared  to a net  loss  of  CDN  $1,174,000  (US
$857,000) for the  corresponding  period in 1996.  The 1997 figure  includes CDN
$677,000  (US  $494,000)  in  restaurant  closing  costs and a senior  executive
retiring  allowance.  There were no such items in 1996.  Income from  restaurant
operations  increased  to CDN  $2,213,000  (US  $1,615,000)  in  1997  from  CDN
$1,587,000  (US  $1,158,000)  in 1996.  Overall,  loss per share in 1997 was CDN
($0.48)  compared to CDN ($0.44) in 1996.  See  reconciliation  for  differences
between Canadian and United States Generally Accepted Accounting Principles (CDN
GAAP and US GAAP).

Income from Restaurant Operations

         Income from  restaurant  operations,  at CDN $2,213,000 (US $1,615,000)
was up 39.4% over 1996 and, as a percentage of sales,  increased to 6.5% in 1997
from  5.4% in 1996.  There  are two  principal  reasons  for  this  improvement.
Firstly,  the opening of higher  volume  stores and closing of two lower  volume
locations enhances overall operating margins.  Secondly,  food and beverage cost
percentages  showed  improvement  throughout  the year.  The Company is actively
reviewing its purchasing procedures and believes additional  improvements can be
achieved in this area.

Sales

         Sales  increased  16.9%  during  the 1997 year to CDN  $34,231,000  (US
$24,986,000)  from CDN $29,284,000 (US  $21,375,000) in 1996. The Company opened
three new locations during 1997, in Seattle (August 28th), Boston (November 4th)
and Edmonton  (November  20th);  and closed two locations,  Vancouver  (February
28th) and Thunder Bay (August 31st), both of which were lease  expirations.  The
Company  also  opened  three  locations  in  1996,  in  San  Diego  (July  2nd),
Bloomington  (acquired on October 8th,  1996) and Toronto  (October  21st).  The
result of opening  higher volume  stores and closing lower volume  locations has
seen the average  weekly sales volume per unit in 1997 increase by 7.2% over the
1996 figure.

         For the twelve  Canadian  locations open  throughout  both years,  1997
sales totaled CDN  $17,597,000  (US  $12,844,000)  and were down 4.5% from 1996.
Four locations  suffered decreases ranging from 9.6% to 21.5% and were the cause
of the overall decrease.  Specific action plans for each of these four locations
are in place or in the planning stage.

         For the two U.S.  locations open throughout both years, sales decreased
3.1% from 1996.  Sales are expected to decrease at one of these locations for at
least  the  first  half of 1998  due to  decreased  traffic  counts  at its mall
location.

         Of the locations  opened in 1997,  sales at the Seattle location are in
line with expectations,  Boston is exceeding expectations, and although Edmonton
is not yet meeting expectations, sales are increasing each month compared to the
previous month.
<PAGE>
Costs and Expenses

         Food and Beverage Costs

         Overall,  food and beverage costs, as a percentage of sales,  decreased
to 29.1% for the twelve months ended December 31, 1997 compared to 30.2% for the
corresponding period in 1996. The Company has implemented a number of purchasing
programs  that are  expected  to  decrease  the food  and  beverage  percentage,
commencing with the second quarter of 1998.

         Labour and Benefits Costs

         Labour and benefits  costs  increased  slightly  from 32.8% of sales in
1996 to 33.0% for the 1997 period.  This rate has been stable for the last three
years.

         Occupancy and Other Costs

         Occupancy and other  operating costs decreased as a percentage of sales
from  26.2% in 1996 to  25.7%  in 1997.  This is  primarily  the  result  of the
Company's  strategy of focusing new developments in high traffic urban locations
and moving away from its traditional suburban mall locations.  This is resulting
in lower occupancy percentages at the newer locations and is driving the overall
rate down.

         Depreciation and Amortization

         Depreciation and amortization costs increased to 5.7% of sales for 1997
compared to 5.3% in 1996.  Higher  development  costs and  shorter  amortization
periods at new  locations,  compared to older  suburban  mall  locations are the
cause of the increase in the percentage.

         General and Administrative Costs

         General and  administrative  expenses  decreased  from 8.3% of sales in
1996 to 7.2% in 1997. The Company  originally  targeted a rate of 7.0% for 1997.
Three new executives  were hired in 1997,  causing the overall rate to increase.
Hiring  these  executives  was a  necessary  step  in  the  development  of  the
infrastructure   needed  to  allow  the   Company   to  expand   and  return  to
profitability.  Mr. Martin  O'Dowd,  former  President of Rainforest  Cafe Inc.,
joined  the  Company  in August as  President  of the U.S.  operations  with the
mandate to expand the Company's U.S.  presence and to oversee the development of
Rainforest Cafes in Canada. In March of 1998, Mr. O'Dowd was appointed President
and Chief Executive Officer of the Company.  Mr. Colin Stacey,  former President
of Keg  Restaurants,  also  joined the  Company in  August,  as Chief  Operating
Officer responsible for Canadian operations.  Mr. Richard Bryant, formerly Chief
Financial Officer of Keg Restaurants,  joined the Company in November,  as Chief
Financial Officer. While the costs of these executives,  plus other additions to
corporate  management will cause general and  administrative  costs to rise over
the near term, the Company believes its long term general and expense percentage
will be brought  down to under 7.0% as new  stores are added  without  incurring
proportionate additional costs.
<PAGE>
         Retiring Allowances and Other Costs

         In December, 1997 one of the founders of the Company, Mr. Peter Barnett
retired from his position as Executive  Vice  President.  Under the terms of his
employment contract Mr. Barnett was paid a retiring allowance on his retirement.
Other costs arose from  settlement of two labour matters with former  employees.
There were no such items in 1996.

         Restaurant Closing Costs

         During 1997 the Company  closed two mall locations on the expiration of
their  respective   leases.  The  costs  associated  with  these  closings  were
approximately CDN $200,000 (US $146,000). The Company also incurred costs of CDN
$130,000 (US $95,000)  related to a lease  guarantee on a former  property.  The
Company did not close any locations during 1996.

         Interest on Long Term Debt  

         During 1997 the Company  completed  two US $2,000,000  (CDN  $2,740,000
each,  for  a  total  of  CDN  $5,480,000)  convertible  subordinated  debenture
financings with General Electric  Investment Private Placement  Partners,  II, a
U.S. based limited  partnership with which it had previously  arranged a similar
US $3,000,000 (CDN  $4,110,000)  financing.  As a result,  interest on long term
debt in 1997 was  substantially  higher than 1996,  and will be higher  again in
1998.

         The Company also completed a US $2,000,000 (CDN $2,740,000) convertible
debenture  financing with  subsidiaries  and affiliates of a French bank.  Under
Canadian  GAAP this  financing  was an  equity  financing  without  a  liability
component.  Under  U.S.  GAAP,  this  financing  would be treated as a long term
liability [See Note 18 to the Financial Statements].

(Loss) before Taxes

         The Company incurred a loss before income taxes of CDN ($1,416,000) (US
$1,034,000)  in 1997  compared to a loss of CDN  ($1,174,000)  (US  $857,000) in
1996.  The  1997  figure  includes  a total of CDN  $677,000  (US  $494,000)  in
restaurant  closing costs,  retiring  allowances and other costs.  There were no
such  costs in 1996.  The 1997 loss  before  these  items was CDN  $739,000  (US
$540,000),  representing  an  improvement  of  approximately  CDN  $435,000  (US
$318,000) on a comparable  basis over 1996. This is attributable to the positive
impact of the new  locations  opened over the past two year,  plus some  general
improvements  in food and beverage  cost  percentages,  offset in part by higher
interest costs related to increased levels of long term debt.

         Management  believes the additions it has made to executive  management
during 1997 has  positioned the Company to  successfully  roll-out its expansion
plans,  including the  development of Rainforest  Cafe in Canada.  Management is
targeting a return to profitability by 1999.

Income Taxes

         The Company  incurred losses in each of 1997 and 1996 and therefore has
no tax liability. The Company also has loss carry-forwards which will reduce its
effective tax rate in future years.
<PAGE>
Differences  Between  Canadian and United States Generally  Accepted  Accounting
Principles (Canadian and U.S. GAAP)

         The Company  prepares  its  financial  statements  in  accordance  with
Canadian GAAP. (The reader is referred to Note 18 of the Consolidated  Financial
Statements for the year ended December 31, 1997 for additional explanation.) The
financial  statements,  if  prepared  in  accordance  with U.S.  GAAP would have
differed as follows:

         Net loss for the year ended December 31, 1997 would be increased by CDN
$186,000  (US  $136,000)  comprised  of  amortization  expense  or CDN  $110,000
(US$80,000)resulting  from  exclusion of the first option period in  calculating
the  amortization  of  certain  leasehold  improvements.   The  impact  of  this
adjustment  would be to  increase  the net loss per share from CDN  ($0.48)  (US
$(0.35)) under Canadian GAAP to CDN ($0.54) (US($0.39)) under US GAAP.

         Net loss for the year ended December 31, 1996 would have been increased
by CDN $116,000 (US $85,000)  comprised of amortization  expense  resulting from
the  exclusion of the first option period in  calculating  the  amortization  of
certain  leasehold  improvements.  On a per share  basis,  net loss  would  have
increased  from CDN ($0.44) (US $0.32)  under  Canadian  GAAP to CDN ($0.48) (US
$0.35) under US GAAP.

         Shareholders'  Equity at  December  31, 1997 under US GAAP would be CDN
$6,850,000 (US  $5,000,000)  compared to CDN  $10,209,000  (US $7,452,000  under
Canadian GAAP, due to the cumulative effect of reconciliation adjustments.

         Shareholders' Equity at December 31, 1997 under US GAAP would have been
CDN $7,177,000 (US $5,239,000)  compared to CDN $7,928,000 (US $5,787,000) under
Canadian GAAP.

Liquidity and Capital Resources

         The  Company's  cash  balances  at the end of the 1997  period were CDN
$4,097,000 ($US 2,990,000).  This compares to a cash balance of CDN $801,000 (US
$585,000) at the end of the 1996 period.

         Capital  expenditures  were CDN $5,306,000 (US $3,873,000) for the 1997
period,  primarily  for  construction  of the new  Seattle,  Boston and Edmonton
restaurants.

         Changes in non-cash  working  capital items resulted in a net source of
funds of CDN  $387,000  (US  $282,000)  for the year  ended  December  31,  1997
compared to a net use of funds of CDN $131,000 (US $96,000) in 1996.

         The Company  completed two US $2,000,000  (CDN  $2,740,000  each, for a
total of CDN  $5,480,000)  convertible  subordinated  debenture  financings with
General Electric Investment Private Placement  Partners,  II, a US Based limited
partnership  with which it had previously  arranged a similar US $3,000,000 (CDN
$4,110,000)  financing in 1995. The Company also completed a US $2,000,000  (CDN
$2,740,000)  with  subsidiaries  and  affiliates  of a French bank. A portion of
these  funds was used to pay for  construction  of the new  Seattle,  Boston and
Edmonton locations, and for the Company's share of the construction of the first
Rainforest Cafe in Canada, as discussed below.
<PAGE>
         During 1997 the Company  entered into a joint  venture  agreement  with
Rainforest Cafe Inc. to develop at least five Rainforest  restaurants in Canada.
The first restaurant is under  construction and is expected to open in mid-1998.
The  Company  estimates  its  capital  requirements  for the entire  development
program  will be CDN $10 to 15 million (US $7 to 11  million).  The Company will
need to arrange additional financing in order to meet these capital requirements
and anticipates it will be successful in raising the necessary funds.

         The  Company is also  planning  to build two or more new  Elephant  and
Castle  locations  during  1998 and will  need to  arrange  financing  for these
projects.  The  Company  believes  it  will  be  successful  in  doing  so,  and
anticipates  US  $2,000,000  (CDN  $2,740,000)  will be  provided by an existing
lender through a previously arranged agreement.

Twelve Months ended December 31, 1996 vs. December 31, 1995

Net Income

         For the year ended  December 31, 1996,  the  Company's net loss was CDN
$1,174,000  (US  $857,000)  compared  to  a  net  loss  of  CDN  $1,578,000  (US
$1,152,000)  for the  corresponding  period in 1995. The 1995 figure  included a
reserve of CDN $900,000 (US $657,000) for closing  costs and  anticipated  legal
disputes  related to the closure of three  locations  during the year.  Loss per
share was CDN ($0.44) (US ($0.32)),  compared to CDN ($0.63) (US $(0.46)) in the
prior  year.  Excluding  the  reserve,  the 1995  figures  were CDN  ($0.27) (US
($0.20)).  See reconciliation for differences between Canadian and United States
Generally Accepted Accounting Principles.

Sales

         Sales  increased 13.7% during the twelve months ended December 31, 1996
to CDN $29,284,000 (US  $21,375,000)  from CDN $25,764,000 (US  $18,806,000) for
the comparable  period in 1995.  The Company  opened three new locations  during
1996,  at the 600 room Holiday Inn on the Bay in San Diego,  California  (opened
July 2,  1996),  in the Mall of  America  in  Bloomington,  Minnesota  (acquired
October 8, 1996), and in the entertainment  district of downtown Toronto (opened
October  21,  1996).  During  1995,  the  Company  opened  three  new  locations
(Philadelphia,  PA,  Vancouver,  BC,  and  Burnaby,  BC) and also  closed  three
pre-existing  locations,  two of which were  non-branded  operations  located at
Shilo Inns in Yuma, AZ and Pomona, CA.

         For the twelve Canadian operations open throughout both periods,  sales
for the twelve  months  ended  December  31, 1996  totaled CDN  $17,129,000  (US
$12,503,000) and were down 0.5% compared to the corresponding period for 1995.

         For the one U.S. operation open throughout both periods,  sales for the
twelve months ended December 31, 1996 totaled US $980,000 (CDN  $1,342,000)  and
were up 7.1% compared to the corresponding period for 1995.

         For the  Philadelphia  Holiday  Inn  locations,  1996 sales  totaled US
$2,898,000 (CDN $3,970,000) which significantly exceeded  expectations.  The new
Vancouver  location's sales for 1996 were CDN $2,830,000 (US $2,066,000),  which
also significantly exceeded expectations.  The new Burnaby location's sales were
<PAGE>
somewhat  under  expectations  as the hours of  operation  were scaled back from
initial plans.  The new San Diego  location's  sales annualized at US $2,100,000
(CDN  $2,877,000),  which was  slightly  less  than  initial  expectations.  The
acquired  Bloomington  location  continued to experience  sales  increases  over
comparable months under the previous  ownership,  and met revenue  expectations.
The new Toronto location's sales also consistently  exceeded expectations during
the first three months of operation.

Costs and Expenses

         Food and Beverage Costs

         Overall,  food and beverage costs, as a percentage of sales,  increased
to 30.2% for the twelve months ended December 31, 1996 compared to 29.6% for the
corresponding  period in 1995.  The  majority of the  increase  was in food cost
percentages,  where continued reluctance in consumer spending placed pressure on
margins. The Company continues to review all purchasing procedures,  recipes and
menus in order to control overall food and beverage cost percentages.

         Labour and Benefit Costs

         Labour and benefit costs decreased slightly from 33.0% of sales in 1995
to 32.8% for the 1996 period.  The Company  continued to review staff scheduling
procedures with the goal of controlling future costs as a percentage of sales.

         Occupancy and Other Operating Costs

         Occupancy  and  other  operating  expenses  increased  marginally  as a
percentage of sales from 26.1% in 1995 to 26.2% in 1996.  There were two largely
offsetting  components  to  this  change  in  percentage.   Firstly,  the  lease
arrangements at the new locations  resulted in an overall  decrease in occupancy
costs as a percentage of sales from 15.8% in 1995 to 15.0% in 1996.

         Offsetting  this  was  an  overall  increase  in  other  net  operating
expenses. The Company's newest facilities and hotel restaurant arrangements were
aimed at driving down  occupancy  and other  operating  costs as a percentage of
sales.

         Depreciation and Amortization

         Depreciation and amortization  costs increased to 5.3% of sales for the
1996 period from 4.8% in 1995. The increase was  attributable to depreciation on
the  new  locations  plus  the  amortization  of  pre-opening  costs  at the new
locations.  Amortization of pre-opening  costs was CDN $401,000 (US $293,009) in
1996, compared to CDN $344,000 (US $251,000) in 1995.

         General and Administrative

         General and  administrative  expenses  decreased  from 8.9% of sales in
1995 to 8.3% in 1996.  The 1995  figure  included  a one-time  write-off  of CDN
$142,000  (US  $103,000).  Excluding  the  one-time  write-off,  the general and
administrative  expense percentage  remained constant.  The Company believed its
general and administrative  expense percentage can be brought down to under 7.0%
through a  combination  of expense  reductions  and  adding  new stores  without
incurring proportionate general and administrative  expenses. With this in mind,
all such costs were being reviewed and reduced or eliminated wherever practical.
<PAGE>
         Interest on Long Term Debt

         In December,  1995 the Company  completed a financing with a major U.S.
based pension money  manager,  General  Electric  Investment  Private  Placement
Partners,  II,  which  added US  $3,000,000  (CDN  $4,110,000)  in  subordinated
convertible notes to the Company's long term debt. As a result, interest on long
term debt increased from CDN $85,000 (US $62,000) to CDN $334,000 (US $244,000).
In  February,  1997 the Company  completed  an  additional  US  $2,000,000  (CDN
$2,740,000)  financing  with the same  pension  money  manager and, as a result,
interest on long term would be significantly higher in 1997.

(Loss) before Taxes

         The Company incurred a loss before income taxes of CDN ($1,174,000) (US
($857,000))  for the 1996  period  compared  to a loss of CDN  ($1,578,000)  (US
($1,152,000))  for the 1995 period. As described above, the 1995 figure included
a reserve  of CDN  $900,000  (US  $657,000)  for  restaurant  closing  costs and
anticipated  legal settlements  arising out of such closings.  There was no such
provision in 1996.  Excluding the reserve,  the 1995 loss was CDN ($678,000) (US
($495,000)).  As discussed  above,  increased  food,  beverage and  depreciation
costs,  plus  interest  on long  term debt  related  to the US  $3,000,000  (CDN
$4,110,000)  subordinated  convertible  notes incurred in December,  1995, had a
negative  impact  on  earnings.  Management  believes  that  the  build  out  of
additional  hotel-based  restaurants  and other  properties with fixed occupancy
costs  together  with  the  disposition  of  older  mall  based  properties,  if
successfully  consummated,  will  enable  the  Company  to  reduce  costs,  as a
percentage of sales, and return to profitability.

Income Taxes

         The Company  incurred losses in each of 1996 and 1995 and therefore has
no tax liability. The Company also has loss carry-forwards which will reduce its
effective tax rate in future years.

Liquidity and Capital Resources

         The  Company's  cash  balances  at the end of the 1996  period were CDN
$801,000 (US  $585,000).  This compared to a cash balance of CDN  $5,031,000 (US
$3,672,000) at the end of the 1995 period.

         Capital  expenditures  were CDN $3,292,000 (US $2,403,000) for the 1996
period,  primarily for construction of the new San Diego and Toronto  locations.
The Company also acquired Alamo Grill,  Inc., a profitable  steak-house  concept
restaurant  operating in the Mall of America in  Bloomington,  Minnesota in 1996
for US $536,000 (CDN $734,000) cash and US $1,000,000  (CDN  $1,370,000)  stock.
This gave the Company an  additional  "brand" to offer for  potential  expansion
locations.

         Changes in  non-cash  working  capital  items  resulted in a net use of
funds of CDN $131,000 (US $96,000) for the twelve months ended December 31, 1996
compared to a source of funds of CDN  $809,000 (US  $598,000) in the  comparable
period for 1995.  The  principal  usages in 1996 were in  deposits  and  prepaid
expenses,  inventory and accounts receivable,  offset by an increase in accounts
payable.
<PAGE>
         In February,  1997 the Company  completed a financing with a major U.S.
based pension money  manager,  GEIPPP II for US $2,000,000  (CDN  $2,740,000) in
convertible  subordinated  notes.  This was the second  tranche  of a  financing
agreement  signed in 1995, and there were up to US $4,000,000  (CDN  $5,480,000)
additional notes available, subject to certain conditions.

         The Company  planned to use the US $2,000,000  (CDN  $2,740,000) to pay
for  construction  of new  locations in Boston,  MA and Seattle,  WA. The Boston
location  is in a new Club  Quarters  hotel in the heart of  Boston's  financial
district.  The Seattle location is in the Cavanaugh's Inn in Seattle's  downtown
entertainment section. Both subsequently opened in 1997.

         The Company had signed a Letter of Intent with Rainforest Cafe, Inc. to
form a joint venture to develop Rainforest restaurants in Canada.  Subsequently,
joint venture and area development agreements were signed. The Company estimates
its potential capital requirements for the project will be between CDN $10 to 15
million  (US $7 to 11  million).  The  Company  will need to arrange  additional
financing in order to meet these capital requirements and anticipates it will be
successful in raising the necessary funds.

Differences  between  Canadian and United States Generally  Accepted  Accounting
Principles (Canadian GAAP and U.S. GAAP)

         The Company  prepares  its  financial  statements  in  accordance  with
Canadian GAAP. (the reader is referred to Note 17 of the Consolidated  Financial
Statements for additional explanation.) The financial statements, if prepared in
accordance with U.S. GAAP would differ as follows:

         Net loss for the year ended December 31, 1996 would have been increased
by CDN $116,000 (US $85,000)  comprised of amortization  expense  resulting from
exclusion of the first option period in calculating the  amortization of certain
leasehold  improvements.  The  impact  of this  adjustment  would  have  been to
increase  the net loss per common  share from CDN  ($0.44)  (US  ($0.32))  under
Canadian GAAP to CDN ($0.48) (US ($0.35)) under US GAAP.

                  Net loss for the year ended  December 31, 1995 would have been
increased by CDN $2,558,000 (US $1,890,000) comprised of:

         A one-time interest expense of CDN $2,436,000 (US $1,800,000) resulting
         from the  beneficial  conversion  feature of  convertible  subordinated
         debentures at the time of issue.

         Amortization  expense  of CDN  $122,000  (US  $90,000)  resulting  from
         exclusion of the first option period in calculating the amortization of
         certain leasehold improvement costs.

         The impact of these  adjustments  would have been to  increase  the net
         loss per common share from CDN ($0.63) (US ($0.47)) under Canadian GAAP
         to CDN ($1.65) (US ($1.22)) under U.S.
         GAAP.

         Shareholders'  Equity at December 31, 19966 under U.S.  GAAP would have
been CDN $7,177,000 (US  $5,239,000)  compared to CDN $7,929,000 (US $5,787,000)
under Canadian GAAP, due to the cumulative effect of reconciliation adjustments.

         Shareholders'  Equity at December  31, 1995 under U.S.  GAAP would have
been CDN $6,683,000 (US $4,878,000),  compared to CDN $7,318,000 (US $5,342,000)
under Canadian GAAP.
<PAGE>
ITEM 7            FINANCIAL STATEMENTS

         The Company's  consolidated  financial statements and the report of the
independent  accountants  thereon  appear  beginning  at page F- 2. See index to
consolidated Financial Statements on page F-1.



 



ITEM 8            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE

         None.  Not applicable.



<PAGE>
ELEPHANT & CASTLE GROUP INC.


Consolidated Financial Statements
December 31, 1997
(Canadian Dollars)






         INDEX                                                             

         Auditors' Report to the Shareholders                              

         Consolidated Financial Statements

         Consolidated Balance Sheets                                       

         Consolidated Statements of Income                                 

         Consolidated Statements of Shareholders' Equity                   

         Consolidated Statements of Cash Flows                             

         Notes to Consolidated Financial Statements                        




<PAGE>
Pannell Kerr Forster






AUDITORS' REPORT TO THE SHAREHOLDERS


We have audited the consolidated  balance sheets of Elephant & Castle Group Inc.
as at December  31,  1997 and 1996 and the  consolidated  statements  of income,
shareholders'  equity and cash flows for the years ended December 31, 1997, 1996
and 1995.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
in Canada which do not differ in any material  respects from auditing  standards
generally  accepted in the United States.  Those standards  require that we plan
and  perform  an audit to obtain  reasonable  assurance  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.

In our opinion,  these consolidated  financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1997
and 1996 and the  results  of its  operations  and its cash  flows for the years
ended December 31, 1997,  1996 and 1995 in accordance  with  generally  accepted
accounting  principles  in Canada  applied  on a  consistent  basis.  Accounting
principles  generally accepted in Canada differ in certain significant  respects
from  accounting  principles  generally  accepted  in the United  States and are
discussed in Note 18 to the consolidated financial statements.




/s/Pannell Kerr Forster
-----------------------
"Pannell Kerr Forster"

Chartered Accountants

Vancouver, Canada
March 31, 1998


                                                [GRAPHIC-LOGO FOR PKF WORLDWIDE]
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
December 31
(Canadian Dollars)
                                                                       1997           1996
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Assets (note 8)
Current
  Cash and term deposits                                          $ 4,096,808     $   801,032
  Accounts receivable                                                 671,513         662,569
  Inventory                                                           683,441         649,933
  Deposits and prepaid expenses                                       592,247         396,426
                                                                  -----------     -----------
                                                                    6,044,009       2,509,960
Fixed (notes 4 and 7)                                              14,690,468      10,915,251
Goodwill (note 3)                                                   2,120,256       2,187,775
Other (note 5)                                                      1,765,850       1,154,084
                                                                  -----------     -----------

                                                                  $24,620,583     $16,767,070
                                                                  ===========     ===========
Liabilities

Current
  Accounts payable and accrued liabilities (note 6)               $ 4,133,004     $ 3,480,888
  Current portion of obligation under capital leases (note 7)               0          18,184
  Current portion of long-term debt (note 8)                          443,641         541,763
                                                                  -----------     -----------
                                                                    4,576,645       4,040,835
Obligation Under Capital Leases (note 7)                                    0           3,227
Long-Term Debt (note 8)                                             9,834,731       4,794,910
                                                                  -----------     -----------
                                                                   14,411,376       8,838,972
                                                                  -----------     -----------
Shareholders' Equity

Capital Stock (note 9)
  Authorized    10,000,000     Common shares without par value
  Issued        3,002,183      (1996 - 2,822,225) Common shares    11,228,023       9,875,943
Other Paid-In Capital (note 9(a))                                   2,421,493               0
Deficit                                                            (3,440,309)     (1,947,845)
                                                                  -----------     -----------
                                                                   10,209,207       7,928,098
                                                                  -----------     -----------

                                                                  $24,620,583    $ 16,767,070
                                                                  ===========     ===========
Contingencies and Commitments (notes 11 and 12)
</TABLE>
Approved on behalf of the Board:

"J.M. Barnett"                                    "M.J. O'Dowd"
 .......................Director   ......................................Director
J.M. Barnett                                       M.J. O'Dowd

See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Income
Years Ended December 31
(Canadian Dollars)


                                                       1997              1996              1995
                                                  ------------      ------------      ------------
<S>                                               <C>               <C>               <C>
Sales                                             $ 34,230,727      $ 29,283,950      $ 25,764,339
                                                  ------------      ------------      ------------

Restaurant Expenses
  Food and beverage                                  9,945,695         8,852,677         7,622,183
  Operating
      Labour                                        11,304,714         9,611,587         8,511,442
      Occupancy and other                            8,801,914         7,679,699         6,716,129
  Depreciation and amortization                      1,965,313         1,553,054         1,223,934
                                                  ------------      ------------      ------------

                                                    32,017,636        27,697,017        24,073,688
                                                  ------------      ------------      ------------

Income from Restaurant Operations                    2,213,091         1,586,933         1,690,651
                                                  ------------      ------------      ------------

General and Administrative Expenses                  2,448,510         2,426,495         2,284,127
Restaurant Closing Costs (note 13)                     330,000                 0           900,000
Retiring Allowance and Other Costs (note 14)           347,250                 0                 0
Interest on Long-Term Debt                             503,715           334,356            84,691
                                                  ------------      ------------      ------------

                                                     3,629,475         2,760,851         3,268,818
                                                  ------------      ------------      ------------

Loss Before Income Tax                              (1,416,384)       (1,173,918)       (1,578,167)
Income Tax (note 15)                                         0                 0                 0

Net Loss For Year                                 $ (1,416,384      $ (1,173,918      $ (1,578,167)
                                                  ============      ============      ============ 

Net Loss Per Common Share                         $      (0.48)     $      (0.44)     $      (0.63)
                                                  ============      ============      ============ 

Weighted Average Number of Shares Outstanding        2,946,950         2,682,533         2,502,759
                                                  ============      ============      ============ 
</TABLE>

See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Shareholders' Equity
Years Ended December 31
(Canadian Dollars)


                                                                          Other           Retained            Total
                                              Common Shares               Paid-In         Earnings        Shareholders'
                                         Number          Amount           Capital         (Deficit)          Equity
                                       ---------     ------------     ------------      ------------      ------------
<S>                                    <C>           <C>              <C>               <C>               <C>     
Balance, December 31, 1994             2,493,500     $  6,772,665     $          0      $    804,240      $  7,576,905
    Issue of shares, net                 111,111        1,319,400                0                 0         1,319,400
    Net loss                                   0                0                0        (1,578,167)       (1,578,167)
                                       ---------     ------------     ------------      ------------      ------------

Balance, December 31, 1995             2,604,611        8,092,065                0          (773,927)        7,318,138
    Issue of shares
      For interest (note 8)               70,555          413,878                0                 0           413,878
      For acquisition of
        subsidiary (note 3)              147,059        1,370,000                0                 0         1,370,000
    Net loss                                   0                0                0        (1,173,918)       (1,173,918)
                                       ---------     ------------     ------------      ------------      ------------

Balance, December 31, 1996             2,822,225        9,875,943                0        (1,947,845)        7,928,098
    Issue of other paid-in
      capital (note 9(a))                      0                0        2,548,502                 0         2,548,502
    Issue of shares
      For interest (note 8)               70,555          471,979                0                 0           471,979
      For services                         2,000           21,235                0                 0            21,235
      On exercise of options              17,833          128,893                0                 0           128,893
      On exercise of warrants             75,000          599,375                0                 0           599,375
      On conversion of
        other paid-in
        capital (note 9(a))               14,570          130,598         (127,009)           (3,589)                0
      Dividend on other paid-in
        capital                                0                0                0           (72,491)          (72,491)
    Net loss                                   0                0                0        (1,416,384)       (1,416,384)
                                       ---------     ------------     ------------      ------------      ------------

Balance, December 31, 1997             3,002,183     $ 11,228,023     $  2,421,493      $ (3,440,309      $ 10,209,207
                                       =========     ============     ============      ============      ============

</TABLE>

See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(Canadian Dollars)
                                                         1997             1996             1995
                                                     -----------      -----------      ----------- 
<S>                                                  <C>              <C>              <C>
Cash Provided By Operating Activities
  Net loss                                           $(1,416,384)     $(1,173,918)     $(1,578,167)
  Items not involving cash
       Depreciation and amortization                   1,965,313        1,553,054        1,223,934
       Deferred finance charges amortization              41,781          184,655                0
       Loss on disposal of fixed assets and
         other closing costs                             310,715            1,531          182,391
                                                     -----------      -----------      ----------- 
                                                         901,425          565,322         (171,842)
                                                     -----------      -----------      ----------- 
Changes in Non-Cash Working Capital
  Accounts receivable                                   (194,944)        (121,820)        (162,895)
  Inventory                                              (33,508)        (148,234)           6,317
  Deposits and prepaid expenses                         (248,768)        (251,850)         191,803
  Accounts payable and accrued liabilities               864,214          390,721          773,544
                                                     -----------      -----------      ----------- 
                                                         386,994         (131,183)         808,769
                                                     -----------      -----------      ----------- 
                                                       1,288,419          434,139          636,927
                                                     -----------      -----------      ----------- 
Investing Activities
  Acquisition of fixed assets                         (5,305,750)      (3,291,740)      (3,216,156)
  Goodwill, net of non-cash consideration                      0         (646,775)               0
  Acquisition of other assets                           (654,696)        (608,543)        (385,769)
  Cash surrender value of life insurance                       0           45,000           45,000
  Acquisition of trademark                               (13,700)          (6,850)          (6,850)
                                                     -----------      -----------      ----------- 
                                                      (5,974,146)      (4,508,908)      (3,563,775)
                                                     -----------      -----------      ----------- 
Financing Activities
  Deferred finance charges                              (215,555)         (34,246)        (200,788)
  Obligation under capital leases                        (21,411)         (73,870)         (39,553)
  Proceeds from long-term debt                         5,480,000                0        5,233,992
  Repayment of long-term debt                           (538,301)         (47,841)         (50,097)
  Issuance of shares for cash                            728,268                0        1,319,400
  Issuance of convertible debentures (note 9(a))       2,548,502                0                0
                                                     -----------      -----------      ----------- 
                                                       7,981,503         (155,957)       6,262,954
                                                     -----------      -----------      ----------- 

Increase (Decrease) in Cash                            3,295,776       (4,230,726)       3,336,106
Cash and Term Deposits, Beginning of Year                801,032        5,031,758        1,695,652
                                                     -----------      -----------      ----------- 

Cash and Term Deposits, End of Year                  $ 4,096,808      $   801,032      $ 5,031,758
                                                     ===========      ===========      ===========

</TABLE>
See notes to consolidated financial statements.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------


1.       BASIS OF PRESENTATION

         These  financial  statements  include the accounts of Elephant & Castle
         Group Inc. and its wholly-owned subsidiaries

         (a)      The   Elephant   and  Castle   Canada  Inc.   ("the   Canadian
                  subsidiary") which owns and operates English style restaurants
                  across Canada under the name "The Elephant & Castle Restaurant
                  and  Pub",  an  upscale  coffee  bar  under  the  name  "E & C
                  Express", and a New York style deli under the name "Rosie's";

         (b)      Elephant & Castle Inc. ("the U.S. subsidiary"  incorporated in
                  Texas) which owns and operates  English style  restaurants  in
                  Washington, Pennsylvania, Massachusetts and California;

         (c)      Alamo Grill, Inc. ("Alamo" incorporated in Indiana) which owns
                  and  operates a red meat steak  house at the Mall of  America,
                  Bloomington, Minnesota; and

         (d)      Elephant & Castle  International,  Inc. incorporated in Texas,
                  September  4,  1997  to   franchise   the  Elephant  &  Castle
                  British-style pub and restaurant concept.

         Canadian Rainforest Restaurants,  Inc. was incorporated during 1997 and
         is  jointly  owned  with  Rainforest  Cafe,  Inc.  for the  purpose  of
         undertaking  the  development of rainforest  theme  restaurants  within
         Canada.

         All significant inter-company balances and transactions are eliminated.

         These consolidated financial statements are prepared in accordance with
         Canadian generally accepted  accounting  principles and all figures are
         in  Canadian  dollars  unless  otherwise  stated.   Canadian  generally
         accepted   accounting   principles  differ  in  certain  respects  from
         accounting  principles  generally  accepted in the United  States.  The
         significant  differences  and the  approximate  related  effect  on the
         consolidated financial statements are set forth in Note 18.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)      Comparative figures

                  Certain of the comparative  figures have been  reclassified in
                  order to conform with the current year's presentation and as a
                  result  of  the  correction  of an  error  in  accounting  for
                  deferred income taxes as described in note 2(i).

         (b)      Inventory

                  Inventory  consists of food and  beverages  and is recorded at
                  the  lower of cost or  market.  Cost is  determined  using the
                  first-in, first-out method.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         (c)      Fixed assets

                  Fixed assets are recorded at cost and are depreciated annually
                  as follows

                           Furniture and fixtures   -  10% straight-line method
                           Computer software        -  20% straight-line method
                           Automobile               -  20% straight-line method

                  Improvements  to leased  premises and property  under  capital
                  leases are being  amortized on the  straight-line  method over
                  the term of the  lease  plus the  first  renewal  option.  For
                  locations   opened   subsequent  to  January  1,  1993,   such
                  improvements are being amortized on a straight-line basis over
                  the term of the lease.

                  China,   glassware  and  cutlery  are  not   depreciated   and
                  replacements are charged directly to operations.

         (d)      Goodwill

                  Goodwill is recorded at cost and amortization is calculated on
                  a straight-line basis over periods from 10 to 40 years.

         (e)      Pre-opening costs

                  Pre-opening  costs represent amounts for staff training costs,
                  payroll for trainees,  rents paid prior to opening, travel and
                  accommodation  of  trainers  and  supplies  consumed  prior to
                  opening which were all incurred to open new  locations.  These
                  costs are amortized on a straight-line basis over 12 months.

         (f)      Other assets

                  The  following  other  assets  are  recorded  at cost which is
                  amortized annually as follows

                       Trademark                        -  10 years
                       Restaurant development rights    -   5 years
                       Deferred finance costs           -  Term of the related
                                                           financial instruments

         (g)      Foreign currency translation

                  Amounts  recorded  in foreign  currency  are  translated  into
                  Canadian dollars as follows

                  (i)      Monetary  assets  and  liabilities  at  the  rate  of
                           exchange in effect at the balance sheet date;
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

                  (ii)     Non-monetary  assets and  liabilities at the exchange
                           rates  prevailing at the time of the  acquisition  of
                           the assets or assumption of the liabilities; and,

                  (iii)    Revenues and  expenses  (excluding  depreciation  and
                           amortization which are translated at the same rate as
                           the related  asset),  at the average rate of exchange
                           for the year.

         (h)      Earnings (loss) per share

                  Earnings  (loss)  per  share  computations  are  based  on the
                  weighted  average number of common shares  outstanding  during
                  the year.  There is no dilutive  effect on earnings (loss) per
                  share in 1997,  1996 or 1995  after the  assumed  exercise  of
                  stock options, warrants or convertible debentures.

         (i)      Deferred income taxes

                  In prior years the Company recorded deferred income taxes as a
                  result of  claiming  depreciation  for income tax  purposes in
                  excess of  depreciation  recorded for accounting  purposes but
                  did not  recognize  the income tax effect of losses  available
                  for  reduction of those tax  liabilities.  This error has been
                  corrected  on a  retroactive  basis;  accordingly  the amounts
                  previously  reported as deferred income tax liability has been
                  decreased by $231,000 at December 31, 1996 and 1995.  Retained
                  earnings at December 31, 1994 has been increased by $231,000.

3.       BUSINESS ACQUISITION

         Effective  October 9, 1996,  the  Company  acquired  all the issued and
         outstanding shares of Alamo Grill, Inc. ("Alamo") for $734,320 cash and
         147,059  shares.  The  acquisition  was  accounted  for by the purchase
         method. The following pro-forma condensed consolidated income statement
         for the year ended December 31, 1996 with comparative figures for 1995,
         which  are both  unaudited,  has been  prepared  giving  effect  to the
         acquisition of Alamo as if the  transaction  had taken place at January
         1, 1995. Actual figures for 1997 are included for comparative purposes.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

3.       BUSINESS ACQUISITION (Continued)
<TABLE>
<CAPTION>


                                                  1997              1996              1995
                                             ------------      ------------      ------------ 
<S>                                          <C>               <C>               <C>
Sales                                        $ 34,230,727      $ 31,851,208      $ 29,376,146
Restaurant expenses (including
depreciation and amortization of
$1,965,313 in 1997, $1,641,473 in
1996 and $1,328,611 in 1995)                   32,017,636        29,825,626        27,008,824
General, administrative expenses and
other costs (including interest on long-
term debt of $503,715 in 1997,
$462,346 in 1996 and $215,303 in 1995)          3,629,475         3,261,582         3,897,715
                                             ------------      ------------      ------------ 
                                          
Net loss                                     $ (1,416,384      $ (1,236,000      $ (1,530,393)
                                             ------------      ------------      ------------ 

Net loss per share                           $      (0.48)     $      (0.44)     $      (0.58)
                                             ------------      ------------      ------------ 

</TABLE>

4.       FIXED ASSETS
<TABLE>
<CAPTION>
                                                         1997
                                                     Accumulated
                                                     Depreciation
                                                         and
                                        Cost         Amortization         Net
                                     -----------     -----------     -----------
<S>                                  <C>             <C>             <C>
Leasehold improvements               $14,392,554     $ 3,601,575     $10,790,979
Furniture and fixtures                 6,933,503       3,501,226       3,432,227
China, glassware and cutlery             467,212               0         467,212
Computer software                         71,774          71,774               0
Automobile                                28,298          28,298               0
                                     -----------     -----------     -----------

                                     $21,893,341     $ 7,202,873     $14,690,418
                                     ===========     ===========     ===========
 
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

4.       FIXED ASSETS (Continued)
<TABLE>
<CAPTION>
                                                         1996
                                                     Accumulated
                                                     Depreciation
                                                         and
                                        Cost         Amortization         Net
                                     -----------     -----------     -----------
<S>                                  <C>             <C>             <C>
Leasehold improvements               $10,503,374     $ 3,299,657     $ 7,203,717
Furniture and fixtures                 6,583,933       3,289,211       3,294,722
China, glassware and cutlery             413,215               0         413,215
Computer software                         71,774          68,177           3,597
Automobile                                28,298          28,298               0
                                     -----------     -----------     -----------

                                     $17,600,594     $ 6,685,343     $10,915,251
                                     ===========     ===========     ===========
</TABLE>


5.       OTHER ASSETS
<TABLE>
<CAPTION>
                                                                    1997           1996
                                                                ----------     ----------
<S>                                                             <C>            <C>
Prepaid interest (additional consideration for below market
interest rate)
  interest rate)                                                $  565,674     $  214,779
Pre-opening costs                                                  361,343        342,832
Rainforest Restaurant developments rights                          342,500              0
Deferred finance costs                                             337,594        413,657
Trademark                                                          109,544        107,351
Other                                                               49,195         75,465
                                                                ----------     ----------
                                                                $1,765,850     $1,154,084
                                                                ==========     ==========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

6.       ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
                                                        1997             1996
                                                     ----------       ----------
<S>                                                  <C>              <C>

Trade payables                                       $1,588,525       $1,610,656
Occupancy costs                                         245,362          176,710
Accrued salaries, wages and related tax                 518,624          504,168
Sales taxes                                             264,255          274,227
Construction, closing costs and other                 1,516,238          915,127
                                                     ----------       ----------

                                                     $4,133,004       $3,480,888
                                                     ==========       ==========
</TABLE>


7.       OBLIGATION UNDER CAPITAL LEASES

         The  following is a schedule of future  minimum  lease  payments  under
         capital leases
<TABLE>
<CAPTION>
                                                            1997           1996
                                                          -------        -------
<S>                                                       <C>            <C>

1997                                                      $     0        $19,456
1998                                                            0          3,366
                                                          -------        -------

Total minimum lease payments                                    0         22,822
Less:  Amount representing interest and
         executory costs                                        0          1,411
                                                          -------        -------

                                                                0         21,411
Less:  Current portion                                          0         18,184
                                                          -------        -------

Obligation under capital leases                           $     0        $ 3,227
                                                          =======        =======
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

8.       LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                      1997                    1996
                                                                   -----------             -----------
<S>                                                                <C>                     <C>
General Electric Investment Private Placement Partners II, a
limited   partnership,   $7,000,000  U.S.  (CDN  $9,590,000)
convertible subordinated debentures, interest only at 4% per
annum to November  1996,  5% per annum to November  1997, 6%
per annum to November  1998,  7% per annum to November  1999
and 8% per annum thereafter,  repayable in equal semi-annual
instalments   of  one   eighth  of  the   principal   amount
outstanding  commencing  November 2001. In consideration for
the below market interest rates, the agreement  provides for
the issuance to the lender of 70,555  common  shares in each
of 1996 and 1997 and  15,000  common  shares in each of 1998
and 1999. The lender may exercise its  conversion  privilege
at any time on the basis of one  share  for each $8 U.S.  of
principal                                                          $ 9,590,000             $ 4,110,000

Toronto-Dominion  Bank term loans repayable over terms up to
3 years in monthly  instalments of $33,638  principal,  plus
interest  at prime  plus  0.75%,  due  March  1999 and 2000,
secured by a general  security  agreement with a first fixed
and  floating  charge  over  all the  Canadian  subsidiary's
assets, an assignment of the Canadian  subsidiary's accounts
receivable, inventory and certain leasehold improvements               621,245               1,123,992

Camdev Properties Inc. - repayable in monthly instalments of
$3,002  including  interest  at 13%,  due  August  1,  1999,
secured by a charge on certain leasehold improvements                   57,127                  80,681
                          
Viking Rideau Corporation - without interest, repayable in
monthly instalments of $1,000, due October, 1998,
secured by a charge on certain leasehold improvements                   10,000                  22,000
                                                                   -----------             -----------

                                

                                                                    10,278,372               5,336,673
Less:  Current portion                                                 443,641                 541,763
                                                                   -----------             -----------

                                                                   $ 9,834,731            $  4,794,910
                                                                   ===========            ============

</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

8.       LONG-TERM DEBT (Continued)

         Long-term debt principal  repayments due in each of the next five years
         and thereafter are approximately as follows:


               1998                        $   444,000        
               1999                            283,000        
               2000                                  0        
               2001                          1,199,000        
               2002                          2,398,000        
               Thereafter                    5,954,000        
                                           -----------
                                           $10,278,000        
                                           ===========        
                               
9.       CAPITAL STOCK

         (a)      In July 1997, the Company issued  $2,000,000 U.S.  ($2,740,000
                  CDN)  of  6%  convertible  subordinated  debentures.  The  net
                  proceeds  of  $1,860,000  U.S.   ($2,548,502  CDN)  have  been
                  recorded  as  "other  paid-in  capital".  The  debentures  are
                  automatically converted into common shares on July 31, 2000 if
                  they have not already been converted at that time. The Company
                  has filed a  registration  statement  with the  Securities and
                  Exchange  Commission  for  296,296  shares of common  stock in
                  respect to the shares to be issued upon  conversion  under the
                  conversion  formula. In December 1997, $100,000 U.S. principal
                  amount of the  debentures  plus accrued  interest to that date
                  was  converted by the holder into 14,570  common  shares.  The
                  Company may redeem the  debentures  at any time at 115% of the
                  principal amount being redeemed.

         (b) Stock option plans have been adopted as follows:

                 (i)       The 1993  Founders'  option  plan set  aside  100,000
                           common  shares.  Options on the entire 100,000 shares
                           have been granted at $6.60 U.S.  ($9.04 Cdn.).  These
                           options  become  exercisable  on the 5th  through 9th
                           anniversary date of granting.

                 (ii)      The  1993  employee  option  plan set  aside  100,000
                           common   shares.   Options   have  been  granted  for
                           approximately  90,000  shares.  All options expire on
                           the 5th anniversary date of the grant.  17,833 of the
                           options  have been  exercised  through  December  31,
                           1997.

                 (iii)     The  1997  employee  option  plan set  aside  400,000
                           common shares.  Options have been granted for 214,000
                           shares.  All  options  expire on the 5th  anniversary
                           date of the grant.
                           None have been exercised through December 31, 1997.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

9.       CAPITAL STOCK (Continued)

                 (iv)      The 1993  directors'  option  plan set  aside  20,000
                           common  shares.  All have been  granted and none have
                           been exercised through December 31, 1997.

                  There are 796,967 (including the 395,000 options in (c) below)
                  options  outstanding  at  December  31,  1997  exercisable  at
                  various prices detailed in note 18(e).

         (c)      During 1997, options for 395,000 common shares were granted to
                  four  key  executives  at the time of  their  commencement  of
                  employment with the Company. None have been exercised.

         (d)      During 1994,  63,500 shares were issued to a director at $4.75
                  U.S. per share. At December 31, 1997,  $300,000 U.S. ($411,000
                  Cdn.) of these  proceeds  were unpaid.  The amount  unpaid was
                  charged to shareholders' equity in the 1994 fiscal year.

         (e)      At December 31, 1997,  warrants to purchase common shares were
                  outstanding as follows:


                                          Exercise       
                    Expiry Date           Price                         Number
                    -----------           -----                         ------ 
                     
                    2000           $ 4.75 - $ 6.00 U.S.                 160,000
                    2001                    $ 6.80 U.S.                   6,125
                    2002                   $ 10.00 U.S.                  20,000
                    2002                    $ 8.00 U.S.                 600,000
                    2002                    $ 9.00 U.S.                 300,000
                                                                      ---------
                                                                               
                                                                      1,086,125
                                                                      =========
                     
                   
10.      FINANCIAL INSTRUMENTS

         (a)      Fair value

                  The  carrying  value  of  cash  and  term  deposits,  accounts
                  receivable,   accounts   payable   and   accrued   liabilities
                  approximate  their fair value because of the short maturity of
                  these financial instruments.

                  The carrying  value of term loans from  Toronto-Dominion  Bank
                  approximate  their fair value because interest is based on the
                  prime rate.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

10.      FINANCIAL INSTRUMENTS (Continued)

                  The carrying value of convertible subordinated debentures held
                  by General Electric  Investment  Private Placement Partners II
                  approximate  their fair value  because the  interest  payments
                  over the term of the debentures approximated market rates when
                  the agreements were finalized.

                  The carrying value of 6% convertible  subordinated  debentures
                  recorded  as "other  paid-in  capital"  has been  adjusted  to
                  reflect  market  rates  at  the  date  the   transaction   was
                  completed.

         (b)      Credit risk

                  The Company's financial assets that are exposed to credit risk
                  consist  primarily  of cash and  term  deposits  and  accounts
                  receivable.  Cash and term  deposits  are  placed  with  major
                  financial  institutions  rated in the two  highest  grades  by
                  nationally  recognized  rating  agencies.   Credit  risk  from
                  customer  exposure  is  nominal  due  to  the  nature  of  the
                  business.

         (c)      Interest rate risk

                  The Company is not exposed to  significant  interest rate risk
                  due to the short-term  maturity of its monetary current assets
                  and current  liabilities  and the  relatively  small amount of
                  long-term debt subject to interest rate changes.

         (d)      Translation risk

                  The Company  translates  the results of U.S.  operations  into
                  Canadian  currency  using  rates   approximating  the  average
                  exchange  rate for the year.  The exchange  rate may vary from
                  time to  time.  This  risk is  minimized  to the  extent  U.S.
                  capital  expansions  are  financed  through  borrowing in U.S.
                  dollars and all non-Canadian  source revenues and expenses are
                  in U.S. dollars.

11.      CONTINGENCIES

         (a)      The Company was a party to two ten year lease  agreements with
                  Shilo Hotels ("Shilo") relating to facilities located at Yuma,
                  Arizona  and  Pomona,  California  respectively.  The  Company
                  asserted  certain  claims against Shilo by reason of the lease
                  agreements.  Shilo,  in  turn,  asserted  claims  against  the
                  Company  and  commenced  litigation,  still  pending,  in  the
                  Superior  Court,  State of  Arizona,  County  of Yuma.  In the
                  action,  Shilo seeks general and special damages  amounting to
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
11.      CONTINGENCIES (Continued)

                  approximately  $2,560,000 U.S.  ($3,486,000  Cdn.) for alleged
                  breach  of  the  lease  agreements  at  Yuma  and  Pomona.  In
                  management's opinion, the Company has potential valid defenses
                  and  mitigation of damage  claims  against  Shilo,  as well as
                  potential counterclaims. A provision of $646,979 Cdn. has been
                  made for  potential  damages from this action along with legal
                  and closing  costs (note 13).  Should any  recovery or further
                  loss result from the  resolution  of this claim,  such loss or
                  recovery will be recognized in that period in which it becomes
                  both probable and estimable.

         (b)      In 1989 and 1990, the Canadian  subsidiary received Notices of
                  Reassessment  from Revenue Canada and the Ontario  Ministry of
                  Revenue  regarding a construction  allowance  received in 1984
                  from the landlord for its former Sarnia, Ontario location. The
                  reassessment  has been under appeal since 1989.  The amount of
                  tax  reassessed  was  $209,000.   Including  interest  accrued
                  retroactively   since  1984,  the  total  amount  disputed  at
                  December 31, 1997 approximates $739,000.

                  Legal counsel is of the opinion Revenue Canada's position will
                  not likely be upheld by the courts.

                  When the outcome of the appeal is resolved, the tax liability,
                  if any,  will be  recorded  as an  element  of the  income tax
                  expense for the year it is settled.

12.      COMMITMENTS

         (a)      The  subsidiaries  are committed to leases on their restaurant
                  locations  extending into the 2012 fiscal year. Minimum annual
                  rentals for the  restaurants  excluding  realty taxes,  common
                  area maintenance and other charges are as follows:


                         1998                                  $  2,233,187   
                         1999                                     2,186,159    
                         2000                                     2,264,999    
                         2001                                     2,226,784    
                         2002                                     1,995,936    
                         2003 to 2012 inclusive                   7,395,830    
                                                               ------------    
                                                                               
                                                                               
                                                               $ 18,302,895    
                                                               ============    
                         
                  Each of the  aforementioned  leases provide for the payment of
                  additional  rent based on  percentages of gross annual revenue
                  in  excess  of  minimum  rents,  or other  graduated  formulae
                  derived from gross revenue as defined in the particular  lease
                  agreements. The percentages range from 6% to 11%.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

12.      COMMITMENTS (Continued)

         (b)      The  Company  has agreed with  Rainforest  Cafe,  Inc. to make
                  equal  capital   contributions  for  the  development  of  the
                  Canadian Rainforest  restaurants.  It is anticipated a maximum
                  of $18 million will be required by the corporate joint venture
                  for the first three restaurants to be opened.

13.      RESTAURANT CLOSING COSTS
<TABLE>
<CAPTION>
                                                                     1997          1996         1995
                                                                  ---------     --------     --------
<S>                                                               <C>           <C>          <C>
Disposal of assets and demolition costs relating to
restaurant lease not renewed                                      $ 330,000     $      0     $253,021
Provision for potential damages, disposal of assets,
legal and other costs relating to restaurant leases in
dispute (note 11)                                                         0            0      646,979
                                                                  ---------     --------     --------

                                                                  $ 330,000     $      0     $900,000
                                                                  =========     ========     ========
</TABLE>
14.      RETIRING ALLOWANCE AND OTHER COSTS

                                                    1997
                                                ----------    

Senior executive retirement allowance           $  261,000
Other former employees costs                        86,250
                                                ----------
                                                $  347,250
                                                ==========

15.      INCOME TAX

         The Company has the  following  available  tax losses,  the benefits of
         which have not been recorded in these financial statements

         (i)      Non-capital  losses of  approximately  $3,132,000 which can be
                  applied  against future income for Canadian tax purposes up to
                  and including 2003.

         (ii)     Net  capital  losses of  approximately  $270,000  which can be
                  applied  against  future capital gains income for Canadian tax
                  purposes indefinitely.

         (iii)    Operating losses of approximately  $1,038,000 U.S. ($1,422,000
                  Cdn.)  which may be carried  forward to apply  against  future
                  years' income for United  States income tax purposes  expiring
                  in 1998, 1999, 2003, 2004 and 2005.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

16.      RELATED PARTY TRANSACTIONS

         (a)      Three  officers  of  the  Company  utilize   personal  service
                  corporations to receive the income from their  employment with
                  the Company.  Payments to these corporations as well as direct
                  payments  to  these   officers   totalled   $342,000  (1996  -
                  $381,000), (1995 - $343,000).

         (b)      A former director of the Company provides legal and consulting
                  services  to the  Company.  Fees for these  services  totalled
                  $80,000 (1996 - $90,000), (1995 - $61,000).

         (c)      Accounts  receivable include $18,000 (1996 - $56,000) due from
                  directors  of the  Company.  An  additional  $48,000  (1996  -
                  $48,000) of accounts  receivable is due from a Company that is
                  related to a director and which shared  office  premises  with
                  the Company.

17.      GEOGRAPHIC SEGMENTED DATA
<TABLE>
<CAPTION>
                                         1997               1996              1995
                                     ------------      ------------      ------------
<S>                                  <C>               <C>               <C>
Sales to unaffiliated customers
  Canada                             $ 21,226,516      $ 21,774,563      $ 19,776,365
  United States                        13,004,211         7,509,387         5,987,974
                                     ------------      ------------      ------------

                                     $ 34,230,727      $ 29,283,950      $ 25,764,339
                                     ============      ============      ============

Income from retaurant operations
  Canada                             $  1,436,596      $  1,419,085      $  1,973,168
  United States                           776,495           167,848          (282,517)
                                     ------------      ------------      ------------


                                        2,213,091         1,586,933         1,690,651
Other charges                           3,629,475         2,760,851         3,268,818
                                     ------------      ------------      ------------

Net loss for year                    $ (1,416,384)     $ (1,173,918)     $ (1,578,167)
                                     ============      ============      ============ 

Identifiable assets
  Canada                             $ 11,345,419      $  8,930,068      $ 12,948,148
  United States                        11,154,908         5,820,227         2,939,952
                                     ------------      ------------      ------------

                                     $ 22,500,327      $ 14,750,295      $ 15,888,100
                                     ============      ============      ============
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

18.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED  
         ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP)

         (a)      Recent accounting pronouncements

                  (i)      Earnings per share

                           In February 1997, the Financial  Accounting Standards
                           Board   ("FASB")   issued   Statement   of  Financial
                           Accounting  Standard ("SFAS") No. 128,  "Earnings per
                           Share".  The  statement  is effective  for  financial
                           statements  for periods  ending  after  December  15,
                           1997,  and changes the method in which  earnings  per
                           share will be determined.  The Company's  adoption of
                           FASB  128  for  U.S.  GAAP  purposes  results  in  no
                           difference in net income (loss) disclosure.

                  (ii)     Income tax

                           Under Canadian  GAAP, the future tax benefit  related
                           to the non-capital  loss carry forwards have not been
                           recorded in the accounts.  Under U.S. GAAP, companies
                           must  follow  the   requirements   of   Statement  of
                           Financial  Accounting  Standards  No.  109 (SFAS 109)
                           which required the use of the asset/liability  method
                           for measurement of tax liabilities,  wherein deferred
                           tax assets are  recognized  as well as  deferred  tax
                           liabilities.

                           The  Company   has   significant   non-capital   loss
                           carryforwards  (note 15).  SFAS 109 would require the
                           recognition  of a long-term  tax asset for the future
                           benefit   expected  from  the  application  of  these
                           carryforwards  to future  profitable  years. If it is
                           expected that the entire amount of  non-capital  loss
                           carryforwards will not be utilized,  then a valuation
                           allowance is applied to the asset to reasonably state
                           the  asset at its  expected  value.  Under  SFAS 109,
                           disclosure of the amount of the  valuation  allowance
                           is required.  As at December 31, 1997,  the valuation
                           allowance is equal to 100% of the deferred tax asset.
                           Changes  in the  value  of  the  deferred  asset  are
                           recognized each year as income tax expense.

                  (iii)    SFAS 130, "Reporting  Comprehensive  Income" and SFAS
                           131, "Disclosures About Segments of an Enterprise and
                           Related  Information" were also issued in 1997. These
                           standards,  which  will  become  effective  in  1998,
                           expand or modify disclosures and,  accordingly,  will
                           have  no  effect  on the  Corporation's  consolidated
                           financial  position,  results of  operations  or cash
                           flows.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

18.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED   
         ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)

         (b)     Reconciliation of earnings reported in accordance with Canadian
                 GAAP and U.S. GAAP
<TABLE>
<CAPTION>
                                                 1997             1996             1995
                                             -----------      -----------      ----------- 
<S>                                          <C>              <C>              <C>
Net loss - Canadian GAAP                     $(1,416,384      $(1,173,918      $(1,578,167)
Adjustments increasing net loss
   Cost of beneficial conversion feature
   of subordinated debenture (note 8
   and 18(b)(i))                                       0                0       (2,435,760)
   Amortization of improvement costs            (110,000)        (116,000)        (122,000)
   Dividend on paid-in capital that                    0
   would be treated as interest under
   U.S. GAAP (note 9(a))                         (76,080)               0
  Income tax effect of adjustments                     0                0                0
                                             -----------      -----------      ----------- 

Net loss U.S. GAAP                           $(1,602,464      $(1,289,918      $(4,135,927)
                                             ===========      ===========      =========== 

Net loss per common share

  Canadian GAAP                              $     (0.48)     $     (0.44)     $     (0.63)
                                             ===========      ===========      =========== 

  U.S. GAAP                                  $     (0.54)     $     (0.48)     $     (1.65)
                                             ===========      ===========      =========== 

Average number of shares outstanding           2,946,950        2,682,533        2,502,759
                                             ===========      ===========      =========== 
</TABLE>
                  (i)      The  beneficial  conversion  feature  of  convertible
                           subordinated   debentures  is  accounted  for  as  an
                           interest   expense  at  the  date  of  issue  of  the
                           security.  This policy conforms to the accounting for
                           these  transactions  announced  by the SEC  staff  in
                           March, 1997.

                           The fiscal 1995  differences  between  earnings under
                           Canadian and U.S.  GAAP have been  adjusted to comply
                           with  the  SEC  staff's   position   of   retroactive
                           application of this accounting practice. As a result,
                           fiscal 1995 U.S.  GAAP net loss per common  share has
                           been increased from ($0.68) to ($1.65).
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

18.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED 
         ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)

                           The  reconciliation of shareholders'  equity reported
                           in  accordance  with  Canadian GAAP and U.S. GAAP has
                           been  adjusted by  $2,435,760  Cdn.  to reflect  this
                           charge to income and increase in capital in 1995.

                  (ii)     Under   U.S.   GAAP,    amortization   of   leasehold
                           improvement  costs would be restricted to the term of
                           the lease.

                  (iii)    Under U.S.  GAAP,  interest  expense would be imputed
                           with respect to a  non-interest  bearing loan $10,000
                           (1996 - $22,000)  received in 1983 from a landlord to
                           assist  in  financing  leasehold  improvements.   The
                           effect  on  net  income  of  not  recording   imputed
                           interest and related income tax is negligible. If the
                           imputed  interest  had  been  recorded  when the loan
                           originated,  the  effect  on  the  balance  sheet  at
                           December  31, 1997 would have been to decrease  fixed
                           assets and  long-term  debt by  approximately  $1,000
                           (1996 - $2,500).

         (c)      Statements of Cash Flows

                  The  Statements of Cash Flows have been prepared in accordance
                  with Canadian GAAP.

                  Under Canadian GAAP,  Cash and  Equivalents is defined as cash
                  net of  short-term  borrowings.  Under U.S.  GAAP,  short-term
                  borrowings are considered a financing activity.

                  Under U.S. GAAP,  financing and investing  activities  that do
                  not result in cash flow would be excluded  from the  statement
                  and disclosed separately.  The following items included in the
                  Statements of Cash Flows would be disclosed  separately  under
                  U.S. GAAP
<TABLE>
<CAPTION>
                                                     1997             1996                1995
                                                 ------------     ------------        ----------
<S>                                              <C>              <C>                 <C>
Cash surrender value of life insurance           $     15,000     $     45,000        $   45,000
Acquisition of fixed assets                                 0                0           (20,000)
Obligation under capital leases                             0                0            18,000
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

18.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED 
         ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)

                  Under U.S. GAAP, the following supplemental disclosure of cash
                  flow information would be made
<TABLE>
<CAPTION>
                                                      1997             1996              1995
                                                 ------------     ------------        ----------
<S>                                              <C>              <C>                 <C>
Interest paid                                   $      387,507    $    151,580        $   78,570
Income tax paid                                              0               0            75,000
</TABLE>

         (d) Reconciliation of shareholders'  equity reported in accordance with
             Canadian GAAP and U.S. GAAP
<TABLE>
<CAPTION>
                                               1997           1996            1995
                                           -----------    -----------     ------------
<S>                                        <C>            <C>             <C>
Shareholders' equity, December 31,
  under Canadian GAAP                      $10,209,207 *  $ 7,928,098 *   $ 7,318,138 *
Cumulative adjustments increase
  net loss reported under
  Canadian GAAP to net loss
  under U.S. GAAP                           (3,373,057)    (3,186,977)     (3,070,977)
  Other paid-in capital under Canadian
    GAAP (note 9(a)) treated as debt
    obligation for U.S. GAAP                (2,421,493)             0               0
Beneficial conversion feature of
  convertible subordinated
  debentures (notes 8 and 18(b)(i))          2,435,760      2,435,760       2,435,760
                                           -----------    -----------     ------------
Shareholders' equity December 31,
  under U.S. GAAP                          $ 6,850,417    $ 7,176,881     $  6,682,921
                                           ===========    ===========     ============
</TABLE>
*   After giving retroactive effect to correction of deferred income taxes (note
    2(h)).
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------

18.      DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED 
         ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)

         (e)      Stock options

                  The  Company  has  granted  founders,  directors  and  certain
                  employees  stock options.  Stock option activity is summarized
                  as follows:
<TABLE>
<CAPTION>
                                                     Number            Exercise Price
                                                   of Shares      (U.S.$)         (Cdn.$)
                                                   ---------      -------         -------
<S>                                                 <C>            <C>             <C>
Balance outstanding, December 31, 1994               160,000       $ 6.19 *        $  8.48
1995 - Granted                                        18,000         4.75             6.51
1995 -  Cancelled                                    (4,200)         5.40             7.40

Balance outstanding, December 31, 1995               173,800         6.06 *           8.30
1996 - Granted                                        22,000         7.02             9.86

Balance outstanding, December 31, 1996               195,800         6.19 *           8.47
1997 - Granted                                       619,000         8.63            11.82
1997 - Exercised                                    (17,833)         5.28 *           7.23

Balance outstanding, December 31, 1997               796,967       $ 8.10 *          11.10

</TABLE>
* Weighted average exercise price.

                  In  1995  the  FASB  issued  SFAS  No.  123   "Accounting  for
                  Stock-Based  Compensation",  which contains a fair value-based
                  method for valuing stock-based  compensation that entities may
                  use. This measures  compensation  cost at the grant date based
                  on  the  fair  value  of  the  award.   Compensation  is  then
                  recognized  over the  service  period,  which is  usually  the
                  vesting period. For U.S. GAAP purposes management accounts for
                  options  under APB Opinion No. 25. As option  exercise  prices
                  approximated   market   price  on  the   dates  of  grants  no
                  compensation  expense has been recognized.  If the alternative
                  accounting-related provisions of SFAS No. 123 had been adopted
                  as of the beginning of 1995, the effect on 1997, 1996 and 1995
                  U.S. GAAP net loss per share would have been immaterial.
<PAGE>

                                    PART III


ITEM 9            DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required  by this  Item 10 will be  contained  in the
Company's  definitive  proxy  materials  to be  filed  with the  Securities  and
Exchange Commission.


ITEM 10           EXECUTIVE COMPENSATION

         The  information  required  by this  Item 11 will be  contained  in the
Company's  definitive  proxy  materials  to be  filed  with the  Securities  and
Exchange Commission.

ITEM 11           SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         The  information  required  by this  Item 12 will be  contained  in the
Company's  definitive  proxy  materials  to be  filed  with the  Securities  and
Exchange Commission.


ITEM 12           CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required  by this  Item 13 will be  contained  in the
Company's  definitive  proxy  materials  to be  filed  with the  Securities  and
Exchange Commission.


                                     PART IV

ITEM 13.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                  FORM 8-K

         (a)  See Index to Exhibits, attached.

         (b) The  Registrant  has not filed any  reports  on Form 8-K during the
last quarter of the period covered by this period.
<PAGE>

                                   SIGNATURES


         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.


(Registrant)  Elephant & Castle Group Inc.


By    /s/Jeffrey Barnett
      ------------------
      Jeffrey Barnett, Chairman of the Board of Directors

Date  April 14, 1998



By    /s/Martin O'Dowd
      -----------------
      Martin O'Dowd, President and Chief Executive Officer

Date  April 14, 1998



         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  Registrant and in the capacities and
on the dates indicated.


By    /s/Rick Bryant
      --------------
      Rick Bryant, Chief Financial Officer

Date  April 14, 1998



By    /s/Daniel DeBou
      ---------------
      Daniel DeBou, Chief Accounting Officer

Date  April 14, 1998


By    /s/George W. Pitman
      -------------------
      George W. Pitman, Director


Date

<PAGE>

By
      William McEwen, Director


Date


By
      David Wiederecht, Director


Date


By
      Anthony Mariani, Director


Date


By    /s/Colin Stacey
      ---------------
      Colin Stacey, Director

Date
<PAGE>
                                INDEX TO EXHIBITS



Exhibits


3.1      Certificate of Incorporation and                              *
         Certificate of Name Change of
         Registrant

3.2      Articles of Association of Registrant                         *

3.3      Certificate of Amalgamation, dated                            *
         May 1, 1990, The Elephant and Castle
         Canada Inc.

4.1      Form of certificate evidencing shares                         *
         of Common Stock

4.2      Form of Underwriter's Warrant Agreement                       *
         between Registrant and the Underwriter

10.1     Bank Loan Agreement, dated September 13,                      *
         1990, with Toronto Dominion Bank

10.2     Letter Agreement dated June 26, 1991,                         *
         regarding expansion of facilities at
         Edmonton Eaton Centre food court relocation

10.3     Retailer Application dated May 23, 1992,                      *
         and Specimen Agreement for Alberta Lotteries
         and Alberta Gaming Control

10.4     License Agreement dated July 9, 1992, with                    *
         Servomation Inc. relating to B.C. Place
         Stadium

10.5     Restaurant lease dated November 10, 1992,                     *
         with Shilo Management Corporation, relating
         to the Shilo Inn, Yuma, Arizona

10.6     Letter Agreement, with Shilo Management                       *
         Corporation relating to Shilo Hotel, Pomona,
         California

10.7     Restaurant Lease Agreement with Holiday Inns                  **
         of Canada, Ltd., relating to Holiday Inn Crowne
         Plaza at Winnipeg, Manitoba.

10.8     Restaurant Lease Agreement relating to Holiday
         Inn,  Philadelphia, Pennsylvania                              ***

10.9     Abstract of Restaurant Lease relating to Holiday
         Inn, San Diego Lease                                          ****

10.10    Lease Abstract of Restaurant Lease relating to
         Canadian Rainforest Restaurants, Inc. (Yorkdale)              X
<PAGE>

10.11    Lease Abstract of Restaurant Lease relating to
         Canadian Rainforest Restaurants, Inc.(Montreal)               X

10.12    Lease Abstract of Canadian Rainforest Restaurants,
         Inc.(Burnaby, B.C.)                                           X

10.13    Lease Abstract of Elephant & Castle Group, Inc.
         (Edmonton)                                                    X

21       List of Subsidiaries                                          ****

24.1     Irrevocable Consents and Power of Attorney on
         Form F-X                                                      *

99.1     Canadian Declaration as of May 11, 1990,                      *
         claiming the trade name "The Elephant and
         Castle"

99.2     Filing receipt dated February 5, 1993, for                    *
         U.S. service mark application "E&C"

99.3     Filing receipt dated February 5, 1993, for                    *
         U.S. service mark "Elephant Mug"

----------------------
X Filed herewith.

*        Incorporated  by reference  from the Exhibits  filed with the Company's
         Registration   Statement  on  Form  SB-2  (Registration  No.  33-60612)
         Modification  of the  numbering of the exhibits is in  accordance  with
         Item 601 of Registration S-B.

**       Filed with Registrant's 10-K SB for the Fiscal Year ended
         December 31, 1993.

***      Filed with Registrant's 10-K SB for the Fiscal Year Ended
         December 31, 1994.

****     Filed with Registrant's 10-KSB A-1 for Fiscal Year Ended
          December 31, 1996