SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  Form 10-K SB/A-1

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

                   For the Fiscal Year Ended December 31, 1996
                          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)


303 IBM Tower
701 West Georgia Street
Vancouver, B.C. CANADA                                         V7Y 1E7
--------------------------------------------------------------------------------
(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 [ ]

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.[ ]
<PAGE>
Issuer's   revenues  during  the  fiscal  year  ended  December  31,  1996:  CDN
$29,283,950 (converts at current exchange rates to U.S. $21,375,146).

Aggregate market value of voting stock held by  non-affiliates of the Registrant
as at March 31, 1997: U.S. $11,734,611

Number of shares  outstanding  of issuer's  Common  Stock as of March 31,  1997:
2,898,948.

          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                2,898,948(a)


(a)Calculated  as of March 31, 1997, and includes  76,723 shares issued pursuant
to certain transactions, primarily option/warrant exercises from January 1, 1997
through  March 31, 1997, of which amount 55,555 shares were issued as restricted
shares to the Company's primary lender.
<PAGE>

ITEM 1            DESCRIPTION OF BUSINESS

a.       General

         The Company operates a chain of 18 full-service  dining restaurants and
pubs,  14 of which are  located in Canada  and four of which are  located in the
United States.  Prior to the initial public offering of the Company's securities
in June of 1993,  the  Company  operated  12  restaurants  under  the name  "The
Elephant & Castle Pub &  Restaurant"  all  located in major  shopping  malls and
office  complexes  from  Victoria,  B.C. to Ottawa,  Ontario.  At that time, the
Company's  only U.S.  based  restaurant,  also  operated  under the  "Elephant &
Castle"   name,   was  located  in  a  large   suburban  mall  near  the  United
States/Canadian border in Bellis Fair, Washington.

         The  Company  remains  in the early  stages of a  previously  announced
business plan which contemplates a major  expansion/refocusing of its restaurant
operations.  The Company  intends to shift most of its  restaurants to (i) major
hotel or other urban high traffic  locations;  (ii) many of which will be in the
United States;  and (iii) adding  alternative  menu formats,  not limited to the
Elephant & Castle English-pubs concept.

         Of the 18 restaurants  currently operated by the Company,  four are now
based in the United States  (including the E&C at Bellis Fair,  Washington)  and
two more are under construction in the United States;  four, two in the U.S. and
two in Canada, are within the four walls of major hotel operations,  and both of
the units under construction are planned hotel restaurant operations; and two of
the units have introduced  alternative menu concepts,  Rosie's (a New York style
Deli) at Rosedale Hotel in Vancouver, British Columbia and the Alamo (a red meat
steakhouse) at the Mall of America, Bloomington, Minnesota.

         In addition,  the Company has been  selected as the  prospective  joint
venture partner for the development of Rainforest Cafe  restaurants in Canada by
Rainforest Cafe, Inc. (NASDAQ: RAIN). See below.

         1996 Results

         In 1996, the Company opened three new restaurants,  two of which are in
the  United  States  (San  Diego  [July  2,  1996]  and  the  Mall  of  America,
Bloomington,  Minnesota  [acquired  October  8, 1996] and one of which is in the
entertainment  district of downtown Toronto,  Canada [opened October 21, 1996]).
The San  Diego  Elephant  & Castle  Restaurant/Pub  is  located  at the 600 room
Holiday  Inn  hotel on the Bay.  The Mall of  America  restaurant  was  acquired
through  an  exchange  of  securities,  and  is  primarily  a red  meat  (steak)
restaurant operated under the "Alamo" trade name. The Toronto restaurant is also
a traditional  English-style  Elephant & Castle dining  restaurant and pub. Both
the Toronto and acquired  Minneapolis  locations  have exceeded  budgeted  sales
projections.  While  the San  Diego  facility  has not yet met  initial  revenue
expectations,  management  believes  that the  shortfall  to date is partially a
consequence of start-up  conditions,  including  renovation  construction at the
hotel. There is no assurance that results will be better in future periods.
   
         In 1996, the Company's sales  increased  13.7% to CDN $29,283,950  from
CDN $25,764,339 for the comparable  period in 1995. During the fiscal year ended
December 31, 1996, the Company  incurred a net loss of CDN $1,173,918 (CDN $.044
per share) compared to a net loss of CDN $1,578,167 for the corresponding period
in 1995 (CDN $.063 per share).  The 1995 net loss included a one time reserve of
CDN  $900,000  (CDN $.36 per  share) for  closing  costs and  anticipated  legal
disputes in the closure of three facilities (see "Litigation").
    
<PAGE>
         1996 results of operations  reflected  continued losses from operations
from  unsatisfactory   results  at  the  Company's  Canadian  mall  restaurants,
(revenues declined 0.5% at the twelve Canadian  operations  operated  throughout
1995 and 1996); 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.
   
         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 added
U.S.  $1,000,000 (CDN $1,370,000) in equity 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,  the Company  completed an  additional  U.S.  $2,000,000  (CDN
$2,740,000)  financing  with GEIPPP II. The proceeds of the 1997  financing  are
intended to be used to pay for  construction of new restaurants to be located at
the Club  Quarters  hotel in the heart of the  Boston,  Massachusetts  financial
district,   and  the   Cavanaugh  Inn  in  the  Seattle,   Washington   downtown
entertainment district.
    
         In addition, the Company has announced that it has been selected as the
Canadian   partner  of  Rainforest   Cafe,  Inc.,  a  fast  growing  U.S.  based
international  operator of rainforest themed restaurants,  which are a factor in
the  "eatertainment"  restaurant  sector,  and also  engage in the sale of theme
related   merchandise.   The  Company's   prospective  venture  into  rainforest
restaurants is consistent with its previously  announced plans and objectives of
driving up revenues per restaurant location,  while driving down occupancy costs
per dollar of revenue realized.

         Occupancy  costs  declined  from  15.8%  in  1995  to  15.0%  in  1996.
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 in the near term.
   
         The closing of the GEIPPP II financings and the potential  availability
of up to U.S.$4,000,000 (CDN $5,480,000) of additional  financing by the sale of
similar  notes in the future  significantly  enhances the  Company's  ability to
achieve the refocusing which is, and remains,  the basis of its future expansion
plans.  However,  additional  capital  will be  required,  particularly  for the
Canadian Rainforest restaurants venture.
    
         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
1996.  Although all of the Company's  restaurants  provide full liquor  service,
alcoholic beverages are primarily served to complement meals. Sales of alcoholic
beverages  accounted  for  approximately  38% of  restaurant  sales during 1996,
slightly less that prior periods.
<PAGE>
         The Company's  restaurants  average  approximately 5,500 square feet in
size, with a typical seating  capacity of 225. The restaurants are open 7 days a
week for lunch,  dinner and  late-night  dining.  Due to their location at major
downtown  and  suburban  malls  and  office  complexes,  the  Elephant  & Castle
restaurants  cater to a  consistently  high  traffic  flow of both  shoppers and
office workers.  Approximately  more than 40,000  customers a week are currently
serviced at the Elephant & Castle chain.  Repeat clientele make up a significant
portion of the Company's restaurant's patrons.

         Hotel Restaurants.  The Company has agreements with Holiday Inn 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  start-up  difficulties  which  have  decreased  revenues  and
increased costs both in absolute  amounts and as a percentage of revenues.  Such
conditions  are  expected  to be  favorably  affected  in the current and future
periods. The Company plans to build additional hotel restaurant units at Holiday
Inns and other  similar  first-class  hotels over the next  several  years.  The
Company is currently  building  additional hotel units in Boston,  Massachusetts
and  Seattle,  Washington.  In the  opinion of  management,  the three  critical
ingredients for this 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)      Registrant control of the menu, kitchen and restaurant
                  amenities.

         In August of 1995,  the  Company  opened  its  first  alternative  menu
restaurant  - a New York style deli known as  Rosie's-on-Robson.  The  Company's
arrangements  with the  Chevalier  Group are similar to those at the Holiday Inn
locations.  The Company  provides all of the hotel's room services,  off-premise
catering, and branded specialty products.

         The  restaurant  is the  result of the  Company's  arrangement  with an
international  developer, the Chevalier Group of Hong Kong, to build a 200-seat,
5,000-square-foot   restaurant   in  the   developer's   $40,000,000   280  room
Rosedale-on-Robson all-suites hotel in Vancouver, B.C.

         The Company's  restaurant at Rosedale is  significantly  different from
the traditional Elephant & Castle format. Management operates "Rosie's" as a New
York-style  deli and bar.  "Rosie's"  enables  the  Registrant  to have a second
"branded"  concept  restaurant to provide to those hotel  operators in locations
and/or with space requirements which may be unsuitable for the Elephant & Castle
traditional menu and decor.

         The  Company's  limited  experience  with  "Rosie's"  to date  has been
favorable.  With "Rosie's", the Registrant was committed to starting from fresh,
creating  its  own  interior  design  and  menu,   under  the  direction  of  an
experienced,  well-regarded  staff,  including an award-winning chef, and design
consultants.
<PAGE>
         Future  Company  Growth.  Other than the  Canadian  Rainforest  venture
discussed below, 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.
   
The Canadian Rainforest Venture

         The  Company  expects  to  have  final  and  binding   agreements  with
Rainforest Cafe, Inc. ("RCI") at or about the date of filing of these materials.
The  draft  agreements  which  are  in  existence   currently  provide  for  the
establishment  of a  jointly-owned  Canadian  corporation,  Canadian  Rainforest
Restaurants,   Inc.   ("CRRI")  in  which  the  Registrant  and  RCI  will  have
approximately  an equal  interest,  but which the  Registrant  will  effectively
control day to day  operations  by the power to nominate  three of the five CRRI
directors and by a management  agreement.  The  Registrant  will  simultaneously
acquire,  an exclusive  Area  Development  Agreement,  for U.S.  $500,000,  (CDN
$685,000) U.S.  $250,000 (CDN $342,000) paid in advance,  and U.S.  $50,000 (CDN
$68,500) per annum  thereafter  until the balance is paid. The Area  Development
Agreement  will then be  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
tradename  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.  In the United States, RCI has quickly expanded from its first unit
at Mall of America,  Bloomington,  Minnesota  to a total of six  restaurants  to
date,  with eight more  proposed to be opened in the United  States during 1997,
and the first two  foreign  licensed  units as well.  RCI has also  signed  Area
Development  Agreements for foreign expansion in Mexico,  England,  France, Hong
Kong and  other  areas.  The  Registrant  expects  to  invest  in  excess of CDN
$12,000,000  in the joint venture entity for the creation of least five Canadian
Rainforest  restaurants in Canada during the next forty-eight  months. Each such
restaurant is expected to contribute  substantially to the Company' revenues and
operating  margins  starting in late 1997 or 1998. The Company will receive a 2%
management  fee from each licensed  restaurant in addition to  distributions  it
receives as a shareholder of CRRI.
    
         Other Facilities.

         Alamo.

         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 146,057 shares to the
shareholders of Alamo's parent company and assumed  U.S.$536,000  (CDN $734,320)
in 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 Company has no intention to use the Alamo name
in its  hotel  properties  and no  intention  of  creating  a chain  of Alamo or
Alamo-type  restaurants  at malls or free  standing  locations.  The single unit
Alamo has been successfully and profitably operated by the Company since October
of 1992,  and the Company  will likely  consider  using the Alamo food format at
other facilities in the near future.
<PAGE>
         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.

         Special  Events.   With  its  expertise  in  large-scale  food  service
operation,  the Company seeks to  participate  in one-of-a-  kind and continuing
special  events.  Elephant  & Castle  has  served  as the food  provider  at two
pavilions  at  Vancouver's  EXPO  86 and  again  at the  Commonwealth  Games  in
Victoria, BC. For the past three years, E&C has operated beer concessions at the
Molson Indy Vancouver.

         E&C  Express.  As an adjunct to its hotel  operations  in Winnipeg  and
Philadelphia,  the Company  created a coffee bar/fast  food/convenience  package
called the E&C Express.  The concept makes a limited menu of foods and beverages
available to hotel guests, as well as a variety of miscellaneous  items that are
required by hotel  guests and the public.  The E&C  Express  also makes  branded
retail  items  available  to  customers  and will be offered in all future hotel
contracts.

         Franchising/Licensing.  Management  of the  company  believes  that the
Company's  "brand"  identification  is a  valuable  asset.  The  licensing  of a
restaurant/pub  under the Elephant & Castle brand label at the new international
terminal at Vancouver  International  Airport is a demonstration  of that value.
Future    activities    may   include   an    expansion    of   the    Company's
licensing/franchising activities.

         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 303  I.B.M.  Tower,  701 West  Georgia
Street,. P.O. Box 10240,  Vancouver,  B.C., Canada V7Y 1E7, (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.
<PAGE>
         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),   and  Elephant  &  Castle,  Inc.,  a  Texas
corporation  ("E&C  Texas") (two  restaurants)  and  Elephant & Castle,  Inc., a
Washington State 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  has a tax loss  carryforward  of
approximately   U.S.   $1,000,000  (CDN  $1,370,000)  from  the  failed  Houston
restaurant.  The 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.

         Under the terms of the Reorganization Agreement, whereby E&C Canada and
E&C Texas became  wholly-owned  subsidiaries  of the Company,  each  shareholder
received, in consideration for the shares of the subsidiaries,  Common Shares of
the Company.  The  determination  of the number of Common  Shares issued to each
shareholder  was made  without any  independent  valuation  or  appraisal of the
business, assets or operations of the restaurant subsidiaries,  and by agreement
among the founding  shareholders.  The percentage of the total equity attributed
to each of the predecessor  subsidiaries  was based upon the parties'  estimated
value of each such  equity.  For  Canadian  Income  Tax Act  purposes,  a deemed
valuation  of CDN $3.77 per Common  Share was  attributed  to the Common  Shares
issued to the founding shareholders. Such valuation may be subject to review and
upward adjustment by the Canadian Revenue authorities.


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. Jeffrey Barnett, Chairman and President
of the  Company,  is also Past  President  of the Greater  Vancouver  Restaurant
Association  and an  Honorary  Life Member of the  British  Columbia  Restaurant
Association.
<PAGE>
         Management  believes  that  newer  Elephant & Castle  restaurants  have
benefitted from the name recognition and reputa tion 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 1996, the Company's expenditures for advertising
and promotional activities were approximately 3% of its revenues.

                  iii. Status of New Developments.  The Company is constantly in
the process of  examining  and  undertaking  various new  development  expansion
opportunities, including:

         o        E&C  Express.  The Company  has added a  satellite  food court
                  facility under the name "E&C Express" at the Winnipeg  Holiday
                  Inn.  The  Company  added  an "E&C  Express"  facility  at the
                  Philadelphia  Holiday Inn location during 1995 and is actively
                  seeking other E&C Express locations.

         o        Renovations.   The  Company  has  modified   certain  existing
                  locations by the addition of patios and similar improve ments,
                  which add seating or serving capacity.  Similar renovations to
                  additional  locations  are  regularly  under  review,  and are
                  currently being contemplated.

         o        New Restaurant  Locations.  The Company continuously  examines
                  the   possibility   of  building  or  acquiring  one  or  more
                  additional restaurants. Such new restaurants typically require
                  a  substantial   investment  in  leasehold   improvements  and
                  restaurant  furniture  and  fixtures.  No  location  has  been
                  selected for an additional  newly-built  restaurant as of this
                  date.

         Relationship with Hotel Operators

         The Registrant's  relationship with hotel  operations,  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.
Application  of these  lessons have made the Regis  trant's  experience at hotel
sites reasonably  successful to date. The Registrant has been offered additional
hotel sites and is currently  completing hotel  restaurants at the Club Quarters
Hotel  (Boston,   Massachusetts)  and  Cavanaughs  (Seattle,   Washington).  The
Registrant  has no  assurance  of future  Holiday  Inn  sites but is  discussing
additional  prospective  restaurants  with  Holiday  Inn  management,  and  with
franchisees among other hotel operators.
<PAGE>
         Gaming Devices

         The Company has been licensed to operate video lottery  machines at its
three  restaurants  in Alberta,  where such gaming  devices have  recently  been
legalized.  The machines feature such games as poker,  blackjack and keno. There
is no gaming risk to the operator,  which is paid a commission  (15%) and bonus,
depending on volume.  The Company believes that the gaming devices have slightly
improved  cash flow at the Alberta  operations,  without any change in the fixed
costs of operation,  beyond the minimal investment  required for installation of
the machines.  Video  lottery  machines  have been  installed in two  additional
locations in 1994:  Saskatchewan and Manitoba,  on similar terms and conditions,
and its Bellis Fair restaurant  pull-tab gaming devices,  which are legal in the
State of  Washington,  and has realized a positive cash flow from them thus far.
Gaming  devices  are  not  expected  to be a  material  part  of  the  Company's
operations at any time in the foreseeable future.

         Extending the "Brand"

         The  Company  has  licensed  the  Elephant & Castle  concept to a major
U.S.-based  food  service  operator.  The  licensed  outlet opera tion under the
Elephant  &  Castle  name  commenced   business  in  May,  1992  in  Vancouver's
60,000-seat British Columbia Place Stadium.

         The Company  received an initial CDN $5,000 licensing fee and continues
to receive  royalties  of 5% of food sales.  To date,  such  revenues  have been
minimal from the one 500-square-foot outlet maintained by the licensee at the B.
C. Place. However, the Com pany is willing to apply the licensed-outlet  concept
to other major sports stadiums and campuses.

                  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.  The Company's  management  negotiates  directly
with  suppliers  for food and beverage  products to assure  uniform  quality and
freshness of food products in its restaurants and to secure competitive  prices.
Food products and related restaurant  supplies are purchased from specified food
producers,  independent  wholesale food  distributors  and  manufacturers.  This
process  enables the Company to take  advantage of volume  discounts  and ensure
consistent quality. 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.
<PAGE>
                  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.

                  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
$68,500), plus a one-time fee of $5,000 (CDN $6,850) per location 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.
<PAGE>
                  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.

                  x. Research and  Development.  The Company places  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.
For example,  the total  investment in the Company's newly built  restaurants at
the  Holiday Inn sites in  Winnipeg  and  Philadelphia  were  approximately  CDN
$950,000 and CDN $2,100,000 respectively,  including landlord contributions. 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  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, 1996, 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 favorable 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
Holiday Inn unit are unionized.  The Company has never  experienced an organized
work stoppage, strike or labor dispute.
<PAGE>
                  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 signficant 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  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 campus restaurants discussed separately below,
the  Company  currently  operates  twelve  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
Thunder Bay, Ont.          Intercity                  Sep. 1982                    5,947           225
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


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

         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.
<PAGE>
         The  Company's  facilities  at the  Holiday  Inns  and  other  non-mall
locations are occupied on the following basis:
<TABLE>
<CAPTION>

Holiday Inn                Opening Date     Square Ft.     Indoor Seating
-----------                ------------     ----------     --------------
<S>                        <C>                <C>                <C>
Winnipeg                   May 1994           4,300              180
Philadelphia               February 1995      7,900              310
San Diego                  July 1996          7,500              300

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
</TABLE>
         The following table sets forth,  for all  restaurants by location,  the
earliest expiration date of the leases and the minimum annual rent:
<TABLE>
<CAPTION>
                                             Earliest
Location                                 Expiration Date          Minimum Annual Rent
--------                                 ---------------          -------------------
<S>                                   <C>                             <C>
Vancouver Pacific Center              1997 (Exp.2/97) CDN             $    15,068
Thunder Bay Intercity                 1997                                 80,000
London Galleria                       1997                                107,888
Regina Cornwall Center                1998                                 75,000
Ottawa Rideau Center                  1998                                165,000
BCIT, Burnaby, B.C.                   2000                                140,000
Edmonton Eaton Center                 2001                                108,816
Minneapolis, Mall of America          2002                                258,892
West Edmonton Mall                    2003                                130,000
 
<CAPTION>
                                             Earliest
Location                                 Expiration Date          Minimum Annual Rent
--------                                 ---------------          -------------------
<S>                                   <C>                          <C>     
Victoria Eaton Center                 2004                                141,000
Winnipeg, Holiday Inn                 2004                                 60,000
Saskatoon Midtown Plaza               2005                                150,120
Bellingham Bellis Fair                2005                                106,186
Rosie's, Rosedale                     2005                                 60,000
Philadelphia, Holiday Inn             2005                                132,434
Calgary Eaton Center                  2005                                 93,616
San Diego, Holiday Inn                2006                                 82,200
Surrey, Guilford                      2007                                149,195
Toronto Entertainment                 2011                                 92,000

         Total:                                                    CDN $2,147,414
                                                                       ==========
</TABLE>
<PAGE>
Sarnia Location

         In 1988,  the Company  sold an existing  restaurant  located in Sarnia,
Ontario  to the  general  manager  of that  facility,  who had been a  long-time
employee.  The  general  manager  agreed  to pay the  Company  $600,000  for the
restaurant and delivered notes to the Company for such amount. The Company owned
and continued to maintain  key-man  insurance on the life of the general manager
in the amount of  $600,000.  During  1989,  the general  manager  became ill and
subsequently  defaulted  on the  balance of the notes  then owed to the  Company
($570,000).  In 1990,  the general  manager  died and the Company  received  the
$600,000 proceeds from the life insurance policy.

         Since the general  manager's death, The Elephant and Castle Canada Inc.
has  operated  the Sarnia  location  for the benefit of the estate of the former
general  manager  without  remuneration,  but with all of its costs of operation
being reimbursed.  The lease on the Sarnia location expires in 1998. The Company
is a guarantor of the lease.  The Registrant does not intent to renew the Sarnia
lease.


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, 1996 was approximately CDN $ 697,000.

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.  A Motion for Summary Judgment
by Shilo on the Yuma  lease  was  denied in 1996,  and a  similar  Motion on the
Pomona lease has been deferred.
<PAGE>
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 COMMON STOCK AND RELATED MATTERS

         The Company's Common Stock is, and has been since June 29, 1993, traded
on NASDAQ - small cap  market.  The symbol  for the  Company's  Common  Stock is
PUBSF.  There was no public market for the Company's  Common Stock prior to June
29, 1993.

         The  range of high and low  sales  prices  for the  Common  Stock  from
January 1, 1995, to date has been:
<TABLE>
<CAPTION>

                                High Sales      Low Sales
                                  Price           Price
                                  -----           -----
<S>                               <C>            <C>
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

First Quarter of 1995:            $9.375         $7.875
Second Quarter of 1995:           $9.50          $8.50
Third Quarter of 1995:            $10.25         $8.625
Fourth Quarter of 1995:           $11.25         $5.00
</TABLE>

   
         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, 1996 vs. December 31, 1995

Net Income

For the year ended  December 31, 1996, the Company's net loss was CDN $1,173,918
compared to net loss of CDN $1,578,167 for the corresponding period in 1995. The
1995 figure  included a loss of CDN $900,000 for closing  costs and  anticipated
legal disputes  related to the closure of three locations  during the year. Loss
per share was CDN ($0.44),  compared to CDN ($0.63),  (CDN ($0.27) excluding the
reserve).

Sales

Sales  increased  13.7% during the twelve months ended  December 31, 1996 to CDN
$29,283,950 from CDN $25,764,339 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
Minneapolis,  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, Arizona and Pomona, California.

For the twelve Canadian  operations open throughout both periods,  sales for the
twelve months ended December 31, 1996 totaled CDN $17,128,822 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 $980,025 (CDN  $1,342,034) and were up
7.1% compared to the corresponding period for 1995.

For the Philadelphia Holiday Inn location, 1996 sales totaled US $2,897,937 (CDN
$3,970,174)  which  significantly  exceeded  expectations.   The  new  Vancouver
locations sales for 1996 were CDN $2,830,411,  which also significantly exceeded
expectations.  The new Burnaby location's sales were somewhat under expectations
as the hours of operation were scaled back from initial plans. The new San Diego
location's sales annualize at US $2,100,000 (CDN $2,817,000),  which is slightly
less than initial  expectations.  The acquired Minneapolis location continues to
experience sales increases over comparable months under the previous  ownership,
and is meeting  revenue  expectations.  The new  Toronto  location's  sales have
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 costs
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.
<PAGE>
         Labour and Benefit Costs

Labour and benefit costs decreased slightly from 33.0% of sales in 1995 to 32.8%
for the  current  period.  The  Company  continues  to review  staff  scheduling
procedures  with the goal of controlling  future labour 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% for the current period.  There are two largely
offsetting  components  to  this  change  in  percentage.   Firstly,  the  lease
arrangements  at the new  locations  have  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 is an overall  increase in other net  operating  expenses.  The
Company's  newest  facilities  and hotel  restaurant  arrangements  are 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 current
period from 4.8% last year. The increase is  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  $401,423 in 1996,  compared to CDN
$344,289 in 1995.

         General and Administrative

General and administrative expenses decreased from 8.9% of sales in 1995 to 8.3%
in the current  period.  The 1995 figure  included a one-time  write-off  of CDN
$141,722.  Excluding  the  one-time  write-off,  the general and  administrative
expense  percentage  remained  constant.  The Company  believes  its general and
administrative  expense  percentage  can be brought down to under 7.0% through a
combinations  of expense  reductions  and adding  new stores  without  incurring
proportionate general and administrative  expenses.  With this in mind, all such
costs are under review and being reduced or eliminated wherever practical.

         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  $84,691 to CDN  $334,356.  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 debt will be
significantly higher in 1997.

(Loss) before Taxes

The Company  incurred a loss before income taxes,  of CDN  ($1,173,918)  for the
1996  period  compared  to a loss of CDN  ($681,955)  for the  1995  period.  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.
<PAGE>
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  $801,032.
This compares to a cash balance of CDN $5,031,078 at the end of the 1995 period.

Capital  expenditures  were CDN  $3,291,740  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  Minneapolis,  Minnesota  in 1996 for US
$536,000 cash (CDN  $734,320) and US $1,000,000  (CDN  $1,370,000)  stock.  This
gives the Company a third "brand" to offer for potential expansion locations.

Changes in non-cash  working capital items resulted in a net use of funds of CDN
$181,783 on the twelve  months ended  December 31, 1996  compared to a source of
funds of CDN $808,769 in the comparable  period for 1995. The principal  usage s
in  1996  were  in  deposits  and  prepaid  expenses,   inventory  and  accounts
receivable, offset by an increase in accounts payable.

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  financing
agreement  signed in 1995,  and there are up to US $4,000,000  (CDN  $5,480,000)
additional notes available, subject to certain conditions.

The  Company  plans  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
will be in a new Club Quarters hotel currently  under  construction in the heart
of Boston's  financial  district.  The Seattle  location will be in the recently
opened Cavanaugh's Inn in Seattle's  downtown  entertainment  section.  Both are
expected to open in summer, 1997.

The Company has signed a Letter of Intent with  Rainforest  Cafe, Inc. to form a
joint venture to develop Rainforest restaurants in Canada. The Company estimates
its potential capital requirements for the project will be between CDN $10 to 15
million. The Company will need to arrange additional financing in order to meets
these capital  requirements and anticipates it will be successful in raising the
necessary funds.


Twelve Months Ended December 31, 1995 vs. December 31, 1994

Net Income

For the year ended  December 31, 1995, the Company's net loss was CDN $1,581,955
compared to net income of CDN $213,166 for the corresponding period in 1994. The
1995  figure  included  a  loss  of CDN  $900,000  for  the  closing  costs  and
anticipated  legal disputes related to the closure of three locations during the
year. Loss per share was CDN ($0.63),  compared to income per share of CDN $0.09
per share in 1994.
<PAGE>
Sales

Sales  increased  1.4% during the twelve  months ended  December 31, 1995 to CDN
$25,764,339 from CDN $25,414,275 for the comparable  period in 1994. The Company
opened three new  locations  during 1995,  at the 445 room Holiday Inn Select in
Philadelphia,  Pennsylvania (opened February 28, 1995), at the 275 room Rosedale
on Robson All Suite Hotel in Vancouver,  B.C. (opened August 8, 1995) and on the
campus of the  18,000  student  British  Columbia  Institute  of  Technology  in
Burnaby,  B.C.  (opened  September  23,  1995).  The Company  also closed  three
locations  during  1995,  the 240 seat  Elephant  & Castle in  Toronto,  Ontario
(closed July 1, 1995) and two  non-branded  operations  located at Shilo Inns in
Yuma,  Arizona (closed March 29, 1995) and Pomona,  California  (closed June 20,
1995).  During 1994, the Company opened one new  pub/restaurant  in the 400 room
Crowne Plaza Downtown in Winnipeg, Manitoba (opened May 18, 1994). There were no
closings in 1994.

For the eleven Canadian  operations open throughout both periods,  sales for the
twelve months ended December 31, 1995 totaled CDN  $17,214,303  and were up 1.2%
compared to the corresponding period for 1994, reflecting continued cautiousness
on the part of the Canadian customers as related to the economy.

For the one U.S.  operation open throughout  both periods,  sales for the twelve
months ended  December 31, 1995 totaled US $914,693  (CDN  $1,253,619)  and were
down 6.1% compared to the  corresponding  period for 1994.  This location relies
heavily on cross-border shopping by Canadians and the sales decline reflects the
relative low value of the Canadian  dollar  versus the U.S.  dollar and also the
continued cautiousness on the part of Canadian consumers.

For the new Winnipeg  Holiday Inn Location,  1995 sales  totaled CDN  $2,423,542
which far exceeds the average sales of CDN $1,342,500 for mall-based  locations,
and continue to grow.  The new  Philadelphia  location's  sales  annualize at US
$2,400,000  (CDN  $3,288,000),  which  is in  line  with  expectations.  The new
Rosedale location's sales were CDN $961,728 for less than five month's activity,
and  continue to meet  expectations.  The Burnaby  location  operates on limited
hours to reflect student demands, and sales are in line with expectations.

Costs and Expenses

         Food and Beverage Costs

Overall, food and beverage costs, as a percentage of sales, increased marginally
to 29.6% for the twelve months ended December 31, 1995 compared to 29.4% for the
corresponding period in 1994. The reluctance in consumer spending added pressure
to  margins  during  1995.  The  Company  continues  to  review  all  purchasing
procedures,  recipes  and  menus in order to  bring  down the  overall  food and
beverage cost percentage.

         Labour and Benefit Expenses

Labour  costs  increased  from  31.6% of sales in 1994 to 33.0% for the  current
period.  The increase in the percentage was attributable to increases in minimum
wages (up to CDN $7.00 per hour) in most Canadian locations, plus the difficulty
in reducing labour relative to sales decreases at locations already operating at
minimal staff levels. The Company is reviewing staff scheduling  procedures with
the goal to bring 1996 labour percentages to below those of 1994.
<PAGE>
         Occupancy and Other Operating Expenses

Occupancy  and other  expenses  decreased as a percentage of sales from 28.9% in
1994 to 26.1% for the current period. This decrease is primarily attributable to
two factors.  Firstly,  the lease  arrangements  and higher than  average  sales
volumes  (compared  to  other  operations)  at the  new  locations  allow  these
locations to operate at lower than average expense  percentages.  Secondly,  the
continued  expansion  of  video  lottery  terminals  at  several  locations  has
generated  income that is  recorded  for  presentation  purposes as an offset to
other  expenses.  1995 is the second  consecutive  year the  Occupancy and Other
Operating  Expenses  percentage has dropped,  reflecting the positive results of
the Company's switch in focus away from mall-based locations.

         Depreciation and Amortization

Depreciation and  amortization  costs increased to 4.8% of sales for the current
period from 2.7% last year. The increase is  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  $344,289 in 1995,  compared to CDN
$70,928 in 1994.

         General and Administrative

General and administrative expenses increased from 6.4% of sales in 1994 to 8.9%
in 1995.  The  increase  is  attributable  to  numerous  factors  including  the
write-off of CDN $141,722 in expenses  related to development of a restaurant in
San  Francisco  which was  terminated  in  February,  1996;  increases in legal,
travel,  meeting and promotional costs; plus a major increase in occupancy costs
for the Company's head office. All such costs are under review, with the goal to
bring  the  General  and  Administrative  expense  percentage  back to  industry
standards.  With this in mind, the Company anticipates  relocating its corporate
headquarters in 1996 to a location with lower occupancy costs.

         Interest on Long Term Debt

During the 1994 period, the Company had virtually no long term debt and had cash
reserves  invested  in  interest  bearing  accounts.  During  1995,  the Company
incurred  CDN  $1,100,000  in long  term  debt in  order  to  construct  its new
locations, and in December, 1995 completed a financing with a U.S. based limited
GEIPPP II. GEIPPP II acquired US $3,000,000 in subordinated convertible notes to
the Company's long term debt in December of 1995. As a result,  interest on long
term debt  increased  from CDN $66,516 in 1994 to CDN 84,691 in 1995 and will be
significantly  higher  in 1996.  Cash  balances  not  immediately  required  are
invested in premium grade money market instruments.

(Loss) Income Before Taxes

The  Company  incurred  a loss from  operations,  before  income  taxes,  of CDN
($681,955)  for the 1995 period  compared to income of CDN $213,166 for the 1994
period.  As discussed  above,  increased food,  beverage and labour costs,  plus
amortization  of  pre-opening  costs for new  operations  (up CDN $273,361  over
1994),  combined  with  decreased  same store  sales,  had a negative  impact on
earnings.  Management  is reviewing  all areas of operations to reverse the cost
increases and the sales decreases.
<PAGE>
Income Taxes

The Company  incurred a loss in 1995 and  therefore  has no tax  liability.  The
Company's  effective tax rate for 1994 was also zero,  due to the  deductibility
for tax  purposes  of a portion  of the costs  associated  with its 1993  public
offering.  The Company's  effective tax rate will continue to be reduced for the
next two years for this reason.  The impact of this reduction as a percentage of
sales is dependent upon earnings and cannot be predicted in advance.

Provision for Closing Costs

During 1995, the Company  closed three  locations.  A one-time  provision of CDN
$900,000  was  taken  during  1995 to  provide  for the costs of  closing  these
locations,  and to provide for possible disputes arising from these closings. To
date, the costs of the closings total approximately CDN $375,000.  The remaining
CDN $525,000 is a provision against future costs and disputes.

    
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, 1996
(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 - Amended December 18, 1997
    

<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated  balance sheets of Elephant & Castle Group Inc.
as at December  31,  1996 and 1995 and the  consolidated  statements  of income,
shareholders'  equity and cash flows for the years ended December 31, 1996, 1995
and 1994.  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, 1996
and 1995 and the  results  of its  operations  and its cash  flows for the years
ended December 31, 1996,  1995 and 1994 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 17 to the consolidated financial statements.

Pannell Kerr Forster
Chartered Accountants

Vancouver, Canada
April 10, 1997


COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA-U.S. REPORTING CONFLICT

In the United States,  reporting  standards for auditors require the addition of
an explanatory  paragraph  following the opinion paragraph when the consolidated
financial  statements  are affected by  significant  uncertainties  such as that
referred to in the attached  balance sheets as at December 31, 1996 and 1995 and
as described in Note 10 of the consolidated financial statements.  Our report to
the  shareholders  dated April 10, 1997 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such uncertainties in the
auditors'  report  when  the  uncertainties  are  adequately  disclosed  in  the
consolidated financial statements.



Pannell Kerr Forster
Chartered Accountants

Vancouver, Canada
April 10, 1997
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Balance Sheets
December 31
(Canadian Dollars)
                                                                     1996           1995
                                                                 -----------    -----------
<S>                                                              <C>            <C>
Assets (note 8)
Current
  Cash and term deposits ....................................    $   801,032    $ 5,031,758
  Accounts receivable .......................................        662,569        540,749
  Inventory .................................................        649,933        501,699
  Deposits and prepaid expenses .............................        611,205        359,355
                                                                 -----------    -----------
                                                                   2,724,739      6,433,561
Fixed (notes 3 and 7) .......................................     10,915,251      8,798,738
Goodwill (note 5) ...........................................      2,016,775              0
Other (note 4) ..............................................      1,110,305        655,801
                                                                 -----------    -----------

                                                                 $16,767,070    $15,888,100
                                                                 ===========    ===========
Liabilities
Current
  Accounts payable and accrued liabilities (note 6) .........    $ 3,480,888    $ 3,090,167
  Current portion of obligation under capital leases (note 7)         18,184         71,382
  Current portion of long-term debt (note 8) ................        541,763        451,173
                                                                 -----------    -----------
                                                                   4,040,835      3,612,722
Obligation Under Capital Leases (note 7) ....................          3,227         23,899
Long-Term Debt (note 8) .....................................      4,794,910      4,933,341
Deferred Income Tax .........................................        231,000        231,000
                                                                 -----------    -----------
                                                                   9,069,972      8,800,962
                                                                 -----------    -----------
Shareholders' Equity
Capital Stock (note 9)
  Authorized
      10,000,000      Common shares without par value
  Issued
       2,822,225      (1995 - 2,604,611) Common shares.......      9,875,943      8,092,065
Deficit......................................................     (2,178,845)    (1,004,927)
                                                                 -----------    -----------
                                                                   7,697,098      7,087,138
                                                                 -----------    -----------

                                                                 $16,767,070    $15,888,100
                                                                 ===========    ===========
Contingencies and Commitments (notes 10 and 11)

Approved on behalf of the Board

Director                                                           Director
J.M. Barnett                                                       P. J. Barnett

See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Income
Years Ended December 31
(Canadian Dollars)
   
                                                         1996            1995            1994
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>         
Sales ............................................   $ 29,283,950    $ 25,764,339    $ 25,414,275
                                                     ------------    ------------    ------------

Restaurant Expenses
  Food and beverage ..............................      8,852,677       7,622,183       7,470,248
  Operating
         Labour ..................................      9,611,587       8,511,442       8,042,819
         Occupancy and other .....................      7,679,699       6,716,129       7,334,993
  Restaurant closing costs (note 12) .............              0         900,000               0
  Depreciation and amortization ..................      1,553,054       1,223,934         673,756
                                                     ------------    ------------    ------------

                                                       27,697,017      24,973,688      23,521,816
                                                     ------------    ------------    ------------

Income from Restaurant
  Operations .....................................      1,586,933         790,651       1,892,459
                                                     ------------    ------------    ------------

General and Administrative Expenses ..............      2,426,495       2,284,127       1,621,836
Interest on Long-Term Debt .......................        334,356          84,691          66,516
                                                     ------------    ------------    ------------

                                                        2,760,851       2,368,818       1,688,352
                                                     ------------    ------------    ------------

Income (Loss) Before Income Tax ..................     (1,173,918)     (1,578,167)        204,107
                                                     ------------    ------------    ------------

Income Tax (note 13)
  Current ........................................              0               0          54,000
  Income tax reduction arising from utilization of
      loss carry forwards ........................              0               0         (54,000)
                                                     ------------    ------------    ------------
                                                                0               0               0
                                                     ------------    ------------    ------------

Net Income (Loss) For Year .......................   $ (1,173,918)   $ (1,578,167)   $    204,107
                                                     ============    ============    ============

Earnings (Loss) Per Common Share .................   $      (0.44)   $      (0.63)   $       0.09
                                                     ============    ============    ============

Weighted Average Number of Shares Outstanding ....      2,682,533       2,502,759       2,440,583
                                                     ============    ============    ============
    
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Shareholders' Equity
Years Ended December 31
(Canadian Dollars)


                                                                                                     Total
                                                                                  Retained       Shareholders'
                                                         Common Shares            Earnings          Equity
                                                      Number        Amount        (Deficit)        (Deficit)
                                                    ---------    -----------     -----------     -----------
<S>                                                 <C>          <C>             <C>             <C>
Balance, December 31, 1993 ...................      2,430,000    $ 6,770,686     $   369,133     $ 7,139,819
      Issue of shares ........................         63,500        412,979               0         412,979
      Less:  Unpaid shares ...................              0       (411,000)              0        (411,000)
      Net income .............................              0              0         204,107         204,107
                                                    ---------    -----------     -----------     -----------

Balance, December 31, 1994 ...................      2,493,500      6,772,665         573,240       7,345,905
      Issue of shares, net ...................        111,111      1,319,400               0       1,319,400
      Net loss ...............................              0              0      (1,578,167)     (1,578,167)
                                                    ---------    -----------     -----------     -----------

Balance,
  December 31, 1995 ..........................      2,604,611      8,092,065      (1,004,927)      7,087,138
      Issue of shares
        For interest (note 8) ................         70,555        413,878               0         413,878
        For acquisition of subsidiary (note 5)        147,059      1,370,000               0       1,370,000
      Net loss ...............................              0              0      (1,173,918)     (1,173,918)
                                                    ---------    -----------     -----------     -----------

Balance, December 31, 1996 ...................      2,822,225    $ 9,875,943     $(2,178,845     $ 7,697,098
                                                    =========    ===========     ===========     ===========




See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(Canadian Dollars)
                                                   1996            1995            1994
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
Cash Provided By Operating Activities
  Net income (loss) .......................    $(1,173,918     $(1,578,167     $   204,107
  Items not involving cash
      Depreciation and amortization .......      1,553,054       1,223,934         673,756
      Deferred finance charges amortization        184,655               0               0
      Deferred income tax .................              0        (100,000)              0
      Loss on disposal of fixed assets ....          1,531         282,391          10,352
                                               -----------     -----------     -----------
                                                   565,322        (171,842)        888,215
                                               -----------     -----------     -----------

Changes in Non-Cash Working Capital
  Accounts receivable .....................       (121,820)       (162,895)         23,545
  Inventory ...............................       (148,234)          6,317         (37,565)
  Deposits and prepaid expenses ...........       (251,850)        191,803        (118,524)
  Accounts payable and accrued liabilities         390,721         773,544         216,692
                                               -----------     -----------     -----------
                                                  (131,183)        808,769          84,148
                                               -----------     -----------     -----------
                                                   434,139         636,927         972,363
                                               -----------     -----------     -----------

Investing Activities
  Acquisition of fixed assets .............     (3,291,740)     (3,216,156)     (1,382,219)
  Goodwill, net of non-cash consideration .       (646,775)              0               0
  Acquisition of other assets .............       (608,543)       (385,769)       (423,324)
  Cash surrender value of life insurance ..         45,000          45,000          45,000
  Acquisition of trademark ................         (6,850)         (6,850)              0
                                               -----------     -----------     -----------
                                                (4,508,908)     (3,563,775)     (1,760,543)
                                               -----------     -----------     -----------
<PAGE>
<CAPTION>
ELEPHANT & CASTLE GROUP INC.
Consolidated Statements of Cash Flows
Years Ended December 31
(Canadian Dollars)
                                                   1996            1995            1994
                                               -----------     -----------     -----------
<S>                                            <C>             <C>             <C>
Financing Activities
  Deferred finance charges ................        (34,246)       (200,788)              0
  Obligation under capital leases .........        (73,870)        (39,553)        (46,447)
  Proceeds from long-term debt ............              0       5,233,992               0
  Repayment of long-term debt .............        (47,841)        (50,097)        (52,556)
  Issuance of shares for cash .............              0       1,319,400           1,979
                                               -----------     -----------     -----------
                                                  (155,957)      6,262,954         (97,024)
                                               -----------     -----------     -----------

Increase (Decrease) in Cash ...............     (4,230,726)      3,336,106        (885,204)
Cash and Term Deposits, Beginning of Year .      5,031,758       1,695,652       2,580,856
                                               -----------     -----------     -----------

Cash and Term Deposits, End of Year .......    $   801,032     $ 5,031,758     $ 1,695,652
                                               ===========     ===========     ===========



See notes to consolidated financial statements.
</TABLE>
<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 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.

         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 17.

         Certain of the comparative  figures have been  reclassified in order to
         conform with the current year's presentation.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

         (a)      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.

         (b)      Fixed assets

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

                      Furniture and fixtures    -   10% straight-line method
                      Point of sale hardware    -   10% straight-line method
                      Computer software         -   20% straight-line method
                      Automobile                -   20% straight-line method
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
2.       SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

                  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.

         (c)      Goodwill

                  Goodwill is recorded at cost and amortization is calculated on
                  a  straight-line  basis over 40 years  commencing  in the year
                  following the year of acquisition.

   
         (d)      Pre-opening costs

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

         (e)      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;

                  (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.

                  Gains and losses arising from  translation of foreign currency
                  were included as part of equity. Opening retained earnings has
                  been adjusted to include these gains and losses.

         (f)      Earnings per share

                  Earnings  per share  computations  are  based on the  weighted
                  average number of common shares  outstanding  during the year.
                  There is no  dilative  effect  on  earnings  per share in 1996
                  after the assumed exercise of stock options.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
2.       SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

         (g)      Deferred Income Taxes

                  Deferred  income  taxes  arose in prior  years  from  claiming
                  depreciation for income tax purposes in excess of depreciation
                  recorded for accounting purposes.

3.       FIXED ASSETS
<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
                                       ===========    ===========    ===========

<CAPTION>
                                                         1995
                                                      Accumulated
                                                     Depreciation
                                                         and
                                           Cost      Amortization        Net
                                       -----------    -----------    -----------
<S>                                    <C>            <C>            <C>
Leasehold improvements ............    $ 8,069,310    $ 2,652,604    $ 5,416,706
Furniture and fixtures ............      5,818,990      2,805,708      3,013,282
China, glassware and cutlery ......        355,362              0        355,362
Computer software .................         70,652         60,719          9,933
Automobile ........................         28,298         24,843          3,455
                                       -----------    -----------    -----------

                                       $14,342,612    $ 5,543,874    $ 8,798,738
                                       ===========    ===========    ===========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
4.       OTHER ASSETS
<TABLE>
<CAPTION>
                                                            1996          1995
                                                        ----------    ----------
<S>                                                     <C>           <C>
Accumulated fund value of life insurance ...........    $   18,139    $   63,139
Less:  Amount required to fund subsequent year's
        premium ....................................        18,139        45,000
                                                        ----------    ----------
                                                                 0        18,139
Deferred finance costs .............................       413,657       150,188
Pre-opening costs ..................................       342,832       171,584
Other ..............................................       246,465       216,298
Trademark ..........................................       107,351        99,592
                                                        ----------    ----------
                                                        $1,110,305    $  655,801
                                                        ==========    ==========

</TABLE>

5.      ACQUISITION OF ALAMO GRILL, INC.

         Effective  October 9, 1996,  the  Company  acquired  all the issued and
         outstanding shares of Alamo Grill, Inc. ("Alamo").  The acquisition was
         accounted for by the purchase method.  Assets and liabilities  acquired
         were as follows
<TABLE>
<CAPTION>
<S>                                                                 <C>
Current assets .............................................        $   119,911
Fixed and other assets .....................................            280,770
                                                                    -----------
                                                                        400,681
Liabilities ................................................           (309,328)
                                                                    -----------
Net assets .................................................             91,353
Consideration ($734,320 cash and 147,059 shares) ...........          2,108,128
                                                                    -----------
Excess of consideration over net assets
  allocated to goodwill ....................................        $ 2,016,775
                                                                    ===========
</TABLE>
   
        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, 1996.
<TABLE>
<CAPTION>
                                                          1996           1995
                                                     -------------   -----------
<S>                                                  <C>             <C>        
Sales ............................................   $  31,851,208   $29,376,146
                                                     =============   ===========

Restaurant expenses (including depreciation and
amortization of $1,641,473 in 1996 and
$1,328,611 in 1995) ..............................   $  29,825,626   $27,908,824
                                                     =============   ===========

General and administrative expenses (including
interest on long-term debt of $462,346 in 1996 and
$215,303 in 1995) ................................   $   3,261,582   $ 2,997,715
                                                     =============   ===========

Net loss .........................................   $   1,236,000   $ 1,530,393
                                                     =============   ===========

Net loss per share ...............................   $        0.44   $      0.58
                                                     =============   ===========
</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>
                                                         1996            1995
                                                      ----------      ----------
<S>                                                   <C>             <C>
Trade payables .................................      $1,610,656      $1,088,615
Occupancy costs ................................         176,710         311,702
Accrued salaries, wages and related tax ........         504,168         371,731
Sales tax ......................................         274,227         198,545
Other ..........................................         915,127       1,119,574
                                                      ----------      ----------
                                                      $3,480,888      $3,090,167
                                                      ==========      ==========
</TABLE>

7.      OBLIGATION UNDER CAPITAL LEASES

         The  following is a schedule of future  minimum  lease  payments  under
         capital leases
<TABLE>
<CAPTION>
                                                            1996           1995
                                                         --------       --------
<S>                                                      <C>            <C>

1996                                                     $      0       $ 80,109
1997                                                       19,456         20,100
1998                                                        3,366          3,601
                                                         --------       --------
Total minimum lease payments .....................         22,822        103,810
Less:  Amount representing interest and
        executory costs ..........................          1,411          8,529
                                                         --------       --------
                                                           21,411         95,281
Less:  Current portion ...........................         18,184         71,382
                                                         --------       --------

Obligation under capital leases ..................       $  3,227       $ 23,899
                                                         ========       ========

</TABLE>

        Assets under capital leases consist of certain equipment,  point of sale
        hardware and computer software.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
8.      LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                     1996               1995
                                                                  ----------         ----------
<S>                                                               <C>                <C>
   
General  Electric   Investment  Private  Placement
Partners  II, a  limited  partnership,  $3,000,000
U.S.  ($4,110,000 Cdn.)  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 1996 and 15,000 common shares in
each of  1997,  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                                                         $4,110,000         $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                                             1,123,992          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                                                80,681            104,389                
                                                                                                
Viking  Rideau  Corporation  -  without  interest,                                              
repayable in monthly  instalments  of $1,000,  due                    
October,  1998,  secured  by a charge  on  certain                                              
leasehold improvements                                                22,000             34,000 
                                                                                                
Oxford  Development  Group  Inc.  -  repayable  in                                              
monthly  instalments of $1,943 including  interest                                              
at 8%, due April, 1996                                              
                                                                                                
Less:  Current portion                                                     0             12,133 
                                                                  ----------         ---------- 
                                                                   5,336,673          5,384,514 
                                                                     541,763            451,173 
                                                                  ----------         ---------- 
                                                                  $4,794,910         $4,933,341 
                                                                  ==========         ========== 
</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 three years
         are approximately as follows:
<TABLE>
<CAPTION>
<S>                                                            <C>


              1997                                             $      541,000
              1998                                                    403,000
              1999                                                    283,000
              Thereafter                                            4,110,000
                                                                    =========
</TABLE>
9.      CAPITAL STOCK
   
         (a)      During 1996,  70,555  shares were issued as  consideration  of
                  $413,878 for the below market  interest rate on the $3,000,000
                  U.S.  ($4,110,000  Cdn.)  convertible  subordinated  debenture
                  (note 8).

         (b)      During   1996,   147,059   shares   were   issued   as  agreed
                  consideration of $1,000,000 U.S.  ($1,370,000 Cdn.) to acquire
                  Alamo Grill, Inc.

         (c)      During 1995,  111,111  shares were issued at $9 U.S. per share
                  in conjunction  with the  convertible  subordinated  debenture
                  financing (note 8).

         (d)      During 1994,  63,500 shares were issued to a director at $4.75
                  U.S. per share. At December 31, 1996,  $300,000 U.S. ($411,000
                  Cdn.)  of  these  proceeds  were  unpaid.  The  Company  holds
                  security in excess of the unpaid amount.
    
         (e)      During 1993, stock option plans were adopted as follows

                  (i)      Founders  were  granted  options  to  acquire  up  to
                           100,000  common shares at $6.60 U.S. per share on the
                           5th through 9th  anniversary  date of granting of the
                           options.  These  options will become  exercisable  in
                           1998.

                  (ii)     100,000   common  shares  have  been  set  aside  for
                           granting  of options to key  personnel.  All  options
                           expire on the fifth  anniversary  date of the  grant.
                           Options  have been granted for  approximately  85,000
                           common  shares.  4,168 of the options were  exercised
                           subsequent to December 31, 1996.

                  (iii)    20,000 common shares have been set aside for granting
                           of options to  independent  directors of the Company.
                           During 1993,  options to purchase an aggregate 10,000
                           shares at $6.00 U.S.  per share  were  granted to two
                           directors.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
9.      CAPITAL STOCK (Continued)

         (f)      During 1995, the Company  issued  warrants  entitling  holders
                  thereof to purchase a total of 295,000 common shares at prices
                  ranging from $4.75 U.S. to $6.00 U.S. per share.  The warrants
                  expire from June 30,  1998 to November 1, 2000.  31,000 of the
                  warrants have been exercised subsequent to December 31, 1996.

10.     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
                  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 12).  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, 1996 approximates $697,000.

                  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.

        (c)       The Canadian  subsidiary  is  guarantor  on a lease  agreement
                  covering  the  former  Sarnia,  Ontario  restaurant  location.
                  Monthly  rentals  approximate  $9,000  each  to the end of the
                  lease in 1998.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
11.     COMMITMENTS

        The  subsidiaries  are committed to leases on their nineteen  restaurant
        locations  extending  into the 2007 fiscal year.  Minimum annual rentals
        for the restaurants  excluding realty taxes, common area maintenance and
        other charges are as follows:
<TABLE>
<CAPTION>

          <S>                                                    <C>
          1997                                                   $  2,147,414
          1998                                                      1,806,722
          1999                                                      1,768,906
          2000                                                      1,804,934
          2001                                                      1,766,719
          2002 to 2011 inclusive                                    5,562,376
                                                                 ------------

                                                                 $ 14,857,071
                                                                 ============
</TABLE>

        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%.

12.     OTHER ITEMS

<TABLE>
<CAPTION>
                                                  1996          1995          1994
                                                ---------    ---------     ---------
<S>                                             <C>          <C>           <C>
Abandonment of assets and demolition costs
relating to restaurant lease not renewed ...    $       0    $ 353,021     $       0

Less:  Deferred income tax effect ..........            0     (100,000)            0
                                                ---------    ---------     ---------

                                                        0      253,021             0
Provision for potential damages, abandonment
of assets, legal and other costs relating to
restaurant leases in dispute (note 10) .....            0      646,979             0
                                                ---------    ---------     ---------

                                                $       0    $ 900,000     $       0
                                                =========    =========     =========

</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
13.     INCOME TAX
<TABLE>
<CAPTION>
                                                     1996          1995       1994
                                                     ----          ----       ----
<S>                                                   <C>           <C>    <C>
Statutory rates ...........................           43%           43%           43%
Income tax at statutory rates .............            0%            0%    $ 216,000
Income tax effect related to the following             0%            0%
  Amortization of share issue costs .......            0%            0%     (164,000)
  Amortization of construction
     allowances ...........................            0%            0%      (30,000)
  Non-deductible items ....................            0%            0%       32,000
  Benefit of loss carry-forward application            0%            0%      (54,000)
                                                      --            --     ---------
Effective Rate of Income Tax ..............            0%            0%            0%
                                                      ==            ==     =========
</TABLE>

        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  $1,600,000 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  $1,300,000 U.S. ($1,770,000
                  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.
    

14.     SUBSEQUENT EVENTS
   
         (a)      The  Company  has  signed a Letter of Intent  with  Rainforest
                  Cafe, Inc. to form a joint venture to develop  Rainforest Cafe
                  Restaurants in Canada.  The anticipated  capital  requirements
                  over the next three years is $10 to $15 million cash.

         (b)      In  February  1997  the  Company  completed  a  financing  for
                  $2,000,000 U.S.  ($2,740,000  Cdn.)  convertible  subordinated
                  notes  with  General  Electric  Investment  Private  Placement
                  Partners  II.  This is the  second  tranche  of the  financing
                  agreement  entered  into in 1995 with the same  company as set
                  out in note 8 above except additional  consideration is 55,555
                  shares. The proceeds are to be used to finance new restaurants
                  in Boston and Seattle.
    
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
14.     SUBSEQUENT EVENTS (Continued)

         (c)      Subsequent to December 31, 1996

                  (i) 4,168 share  purchase  options were exercised for $28,665;
                  (ii) 31,000 share warrants were exercised for $244,203; 
                  (iii) 55,555 shares were issued as  consideration  of $380,552
                  for below market interest rates (note 8); and,
                  (iv) 2,000 shares were issued in lieu of  directors'  fees for
                  $21,235.
 
15.     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  officer's   totalled   $381,000  (1995  -
                  $343,000).

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

         (c)      Accounts  receivable include $56,000 (1995 - $50,000) due from
                  directors  of the  Company.  An  additional  $48,000  (1995  -
                  $60,000) of accounts  receivable is due from a Company that is
                  related to a director and which shares  office  premises  with
                  the Company.

         (d)      Other assets  include  $115,000  (1995 - $115,000)  receivable
                  from  an  entity  in  which  a  director  of the  Company  has
                  significant influence.
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
16.     GEOGRAPHIC SEGMENTED DATA
<TABLE>
<CAPTION>
                                                        1996             1995             1994
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
Sales to unaffiliated customers
  Canada ......................................    $ 21,774,563     $ 19,776,365     $ 19,612,304
  United States ...............................       7,509,387        5,987,974        5,801,971
                                                   ------------     ------------     ------------

                                                   $ 29,283,950     $ 25,764,339     $ 25,414,275
                                                   ============     ============     ============

Income (loss) before income tax and other items
  Canada ......................................    $   (883,013)    $   (149,458)    $    503,427
  United States ...............................        (290,905)        (528,709)        (299,320)
                                                   ------------     ------------     ------------

                                                   $ (1,173,918)    $   (678,167)    $    204,107
                                                   ============     ============     ============
Identifiable assets
  Canada ......................................    $  8,979,418     $ 12,948,148     $  8,229,799
  United States ...............................       5,820,227        2,939,952        2,099,182
                                                   ------------     ------------     ------------

                                                   $ 14,799,645     $ 15,888,100     $ 10,328,981
                                                   ============     ============     ============
</TABLE>

17.     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.  Adoption of this statement
                           by the  Company  will not have a  material  impact on
                           earnings per share.

                  (ii)     Income tax

                           FASB also issued a revised  statement on  "Accounting
                           for  Income  Tax",   SFAS  No.  109,  which  requires
                           companies to recognize  current  changes in tax rates
                           in recording  their deferred  income tax  liabilities
                           effective for fiscal years  beginning  after December
                           15, 1992.  The effect of applying  this  statement is
                           not significant.
    
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
17.     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>
                                          1996            1995            1994
                                      -----------     -----------     -----------
<S>                                   <C>             <C>             <C>

Net income - Canadian GAAP .......    $ 1,173,918     $(1,578,167     $   204,107
Adjustments
  Prior years' income tax
      reassessment ...............              0               0        (167,417)
  Amortization of leasehold
      improvement costs ..........       (116,000)       (122,000)       (128,000)
  Income tax effect of
      adjustments ................              0               0          55,000
                                      -----------     -----------     -----------

Net income (loss) U.S. GAAP ......    $ 1,289,918     $(1,700,167     $   (36,310)
                                      ===========     ===========     =========== 


Net income (loss) per common share
  Canadian GAAP ..................    $     (0.44)    $     (0.63)    $      0.09


  U.S. GAAP ......................    $     (0.48)    $     (0.68)    $     (0.01)


Average number of shares
  outstanding ....................      2,682,533       2,502,759       2,440,583
                                      ===========     ===========     ===========
</TABLE>


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

         Under U.S.  GAAP,  interest  expense would be imputed with respect to a
         non-interest  bearing  loan $22,000  (1995 - $34,000)  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, 1996 would have been to decrease fixed assets and long-term debt by
         approximately $2,500 (1995 - $4,000).

   
                  Reconciliation of stockholders'  equity reported in accordance
                  with Canadian GAAP and U.S. GAAP
<TABLE>
<CAPTION>
                                          1996           1995           1994
                                      -----------    -----------    -----------
<S>                                   <C>            <C>            <C>        
Stockholders' equity, December 31,
  under Canadian GAAP .............   $ 7,697,098    $ 7,087,138    $ 7,345,905
Cumulative adjustments reducing
  net income reported under
  Canadian GAAP to net income
  under U.S. GAAP .................      (751,217)      (635,217)      (513,217)
                                      -----------    -----------    -----------

Stockholders' equity U.S. GAAP ....   $ 6,945,881    $ 6,451,921    $ 6,832,688
                                      ===========    ===========    ===========
</TABLE>
<PAGE>
ELEPHANT & CASTLE GROUP INC.
Notes to Consolidated Financial Statements
Years Ended December 31
(Canadian Dollars)
--------------------------------------------------------------------------------
17.   DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
      ACCOUNTING PRINCIPLES (CANADIAN GAAP AND U.S. GAAP) (Continued)

         (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>
                                             1996         1995            1994
                                             ----         ----            ----
<S>                                        <C>           <C>            <C>
Cash surrender value of life
  insurance .........................      $ 45,000      $ 45,000       $ 45,000
Acquisition of fixed assets .........             0       (20,000)             0
Obligation under capital
  leases ............................             0        18,000              0
                                           ========      ========       ========
</TABLE>

         Under U.S.  GAAP,  the following  supplemental  disclosure of cash flow
         information would be made

<TABLE>
<CAPTION>

                                      1995              1995              1994
                                      ----              ----              ----
<S>                                 <C>               <C>               <C>
Interest .................          $151,580          $ 78,570          $ 45,237
Income tax ...............                 0            75,000            92,417
                                    ========          ========          ========
</TABLE>
<PAGE>

         (d)      Stock option plans

                  The Company adopted an employee,  a founder's and a director's
                  stock option plan in 1993.  Stock option  activity under these
                  plans is summarized as follows:
<TABLE>
<CAPTION>
                                        Employees                             Founders                         Directors
                                  ---------------------------        ----------------------------      ----------------------------
                                  Number        Exercise             Number         Exercise           Number         Exercise     
                                  of Shares     Price (U.S.$)        of Shares      Price (U.S.$)      of Shares      Price (U.S.$)
                                  ---------     -------------        ---------      -------------      ---------      ------------- 
<S>                               <C>            <C>                 <C>            <C>                 <C>            <C>   
Granted 1993 (inception)          50,000         $5.40               100,000        $6.60               10,000         $6.60       
1995                                                                                                                               
-Granted                          18,000          4.75                     0         0.00                    0          0.00       
-Cancelled                        (4,200)         5.40                     0         0.00                    0          0.00       
                                                                                                                                   
December 31/95                    63,800          5.22               100,000         6.60               10,000          6.00       
1996 - Granted                    22,000          7.20                     0         0.00                    0          0.00       
                                                                                                                                   
                                                                                                                                   
Outstanding, December 31/96       85,800        $6.73*               100,000        $6.60*             10,000          $6.00*      
</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.  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 1996 and 1995 net loss per share would have been
                  immaterial.
    
<PAGE>
                                    PART III


ITEM 9            DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL,
                  PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                  ACT

         The  information  required  by  this  Item 9 will be  contained  in the
Company's  definitive  proxy  materials  to be  filed  with the  Securities  and
Exchange Commission and is incorporated herein by reference.


ITEM 10           EXECUTIVE COMPENSATION

         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 and is incorporated herein by reference.


ITEM 11           SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         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 as is incorporated be reference.


ITEM 12           CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         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 and is incorporated herein by reference.


                                     PART IV


ITEM 13           EXHIBITS, 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>
                                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.

<PAGE>

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

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

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"

----------------------

*  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.
<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\Dan DeBou
         ------------------
         Dan DeBou 
         Chief Financial Officer

Date:    December 29, 1997