U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

(Mark One)
[X]  Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 [Fee Required] For the fiscal year ended December 28, 1997

                                       OR

[ ]  Transition  report  pursuant  to  Section  13 or 15 (d)  of the  Securities
     Exchange Act of 1934 [No Fee Required]

                          Commission File No. 33-95796
                          ----------------------------


                         HARVEST RESTAURANT GROUP, INC.
                  -------------------------------------------
                 (Name of Small Business Issuer in its Charter)


            Texas                                         76-0406417
--------------------------------               --------------------------------
(State or other jurisdiction                  (IRS Employer Identification  No.)
of incorporation or organization)


             1250 N.E. Loop 410, Suite 335 San Antonio, Texas 78209
             ------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

         Issuer's telephone number, including area code: (210) 824-2496

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

                          Common Stock, $.01 par value
                     Series A Preferred Stock, $1 par value
                              (Title of Each Class)

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

Check if  there is no  disclosure  contained  herein  of  delinquent  filers  in
response to Item 405 of Regulation  S-B, and will not be contained,  to the best
of the Registrant's  knowledge,  in definitive  proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

As of March  27,  1998,  the  market  value of the  Registrant's  Common  Stock,
excluding  shares held by affiliates,  was  $5,326,536  based upon a closing bid
price of $2.06 per share of Common Stock on the NASDAQ  SmallCap  Market.  As of
March  27,  1998,  2,699,030  shares  of  the  Registrant's  Common  Stock  were
outstanding.

The Registrant's revenues for its most recent fiscal year were $2,037,569

The following  documents are  incorporated  by reference  into Part III, Items 9
through 12 hereof: None.


<PAGE>
                                     PART I



ITEM 1.  DESCRIPTION OF BUSINESS

Except for the historical information contained herein, the matters set forth in
this Form 10-KSB include "forward-looking statements" which can be identified by
the use of  forward-looking  terminology such as "believes",  "expects",  "may",
"should",  or  "anticipates"  and  similar  terminology,  or by  discussions  of
strategy,  future operating results or events. These forward-looking  statements
are  subject  to  risks  and  uncertainties   that  may  cause  actual  results,
performance or achievements of Harvest Restaurant Group, Inc. (the "Company") to
differ materially from those discussed in the forward-looking statements.  These
risks and  uncertainties  include,  among others:  ability to obtain  additional
financing  to continue as a going  concern;  restaurant  performance  (including
sales and margins); possible NASDAQ delisting; competition; availability of site
locations;   development  and  operating  costs;  consumer  acceptance;  adverse
publicity;  availability and terms of capital; products and services; changes in
business strategy; completion of acquisitions;  general economic conditions; and
acts of third parties; as well as other factors as detailed throughout this Form
10-KSB and in the  Company's  reports  filed with the  Securities  and  Exchange
Commission.  The forward-looking statements included in the Report speak only as
of the date  hereof,  and no  assurance  can be given  that the  future  results
covered by the forward-looking statements will be achieved.

General

Harvest  Restaurant  Group,  Inc. owns,  operates and  franchises  quick service
restaurants  under  the  name  "Harvest  Rotisserie",  which  feature  marinated
oak-roasted  rotisserie  chicken,  oak-roasted  turkey  breast,  roast  ham,  an
assortment  of  sandwiches  and  other  fresh  homestyle  food  items.   Harvest
Rotisserie  restaurants  emphasize  rotisserie  oak-roasted chicken and complete
homestyle meals that the Company believes to be consistent with (i) an increased
consumer  demand for  take-home  prepared  foods,  (ii) an  emphasis on quality,
coupled  with  value and  convenience,  and (iii) the  popularity  of  homestyle
cooking.  Harvest  Rotisserie  side  dishes  include hot and cold dishes such as
coleslaw,  various  salads,  baked  beans,  stuffing,  corn,  parsley  potatoes,
macaroni and cheese, steamed fresh vegetables,  mashed potatoes and gravy, rice,
creamed spinach,  cheese rice and baked cinnamon apples.  The Company  maintains
strict  quality  standards in  purchasing,  storing,  preparing  and serving its
entrees, side dishes, desserts and other products.

At December  28,  1997,  the Company had 14 Harvest  Rotisserie  restaurants  in
operation,  four of  which  were  Company-owned  restaurants  in  Texas  and ten
operated as franchised stores in Florida,  Indiana, North Carolina, and Northern
California.  The Company also had executed leases for five additional restaurant
properties in Texas for future  development as Harvest  Rotisserie  restaurants.
Eight of the  franchised  stores were Kenny Roger Roaster  restaurants  prior to
being acquired by the Company in June 1997 and assigned to three area developers
for operation as Harvest Rotisserie franchise restaurants.  The Company provided
financing to the area developers under a secured loan to for the purchase price,
cost of conversion and working capital.

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<PAGE>




Recent Developments

Closure of Restaurants and Write-off of Notes Receivable

During 1997,  the Company began the conceptual  development  of a  multi-branded
restaurant  featuring  Harvest  Rotisserie  along  with  two or more  additional
branded  restaurants in one building  (referred to as "Harvest Food Court").  In
January 1998, the Company decided to concentrate its future expansion efforts on
the development, operation and franchising of its Harvest Food Court restaurants
in Texas. This decision was made partially due to lower per unit development and
operating  costs for a Harvest  Food Court as  opposed to a Harvest  Rotisserie.
Consistent  with this  change in  strategy,  the  Company  no longer  intends to
develop four of the five  properties in San Antonio and Houston,  Texas that the
Company had previously  executed leases for, and is negotiating a disposition of
the properties with the respective landlords. The Company intends to develop one
remaining leased property in San Antonio, Texas, but currently does not have the
necessary  funds. In January 1998, the Company closed its restaurant  located in
Corpus Christi,  Texas. The Company also cancelled previous letters of intent to
acquire  thirteen  additional  Kenny  Rogers  Roasters  restaurants  located  in
Maryland and Utah.

In the first quarter of 1998, three area developers that operate nine franchised
Harvest Rotisserie restaurants in Florida, Indiana and North Carolina closed all
nine of these restaurants.  The closures were the result of restaurant operating
losses caused in part by the inability to develop a sufficient  number of stores
to reach  critical mass in the market place,  and the Company's  decision not to
provide  the  area  developers  with  additional  financing.   The  Company  had
guaranteed the leases for all franchised  locations,  as well as four promissory
notes  connected with two of the franchised  locations and a mortgage note for a
restaurant property purchased by the area developer.

Subsequent to closing the  restaurants,  the Company has  contacted  each of the
lessors  and  lenders in order to obtain  settlement  agreements  on the related
obligations,   and  generally  has  been   successful  in  reaching   settlement
agreements.  The Company is a defendant in four lawsuits  filed in federal court
demanding payment of the four promissory notes it guaranteed in association with
the acquisition of the restaurants in Florida.

As a result of the restaurant closings and defaults by the area developers under
the loan agreements, the Company has recorded losses totaling $3,387,541 in 1997
associated  with the write-off of area  developer  loans and $1,184,656 for real
estate disposition costs for Company-owned and franchised restaurants.

Pending Acquisitions

To facilitate the Company's  expansion of the Harvest Food Court  restaurants in
Texas,  the Company has entered into an agreement in principle to acquire an 80%
interest in the intangible  property  rights of Red Line, Inc for a nominal cash
payment.  Red Line was the franchisor of 25 Red Line Burger restaurants in South
Texas prior to filing for Chapter 11 of the U.S.  Bankruptcy  Code in 1996.  The
Company  intends to  utilize  the Red Line  trademarks  and  systems  within its


                                       3

<PAGE>


Harvest Food Court,  and will seek to enter into new franchise  agreements  with
the former Red Line  franchises  that remain in operation.  The Company may also
seek to acquire  some of the Red Line  properties  and convert them into Harvest
Food  Courts,  which the Company may later offer for resale to new  franchisees.
The success of the acquisition is contingent upon the Company's ability to enter
into  new  franchisee  agreements  for the Red  Line  restaurants  and to  raise
financing  necessary to fund the costs of conversion of the Red Line  franchised
restaurants into Harvest Food Court restaurants.  There can be no assurance that
the Company will be successful in obtaining  such financing or converting any of
the Red Line restaurants into Harvest Food Courts.

On March 24 1998,  the Company  entered into two  nonbinding  agreements for the
exchange  of common  stock of the  Company  for all the issued  and  outstanding
common stock of Surf City Squeeze  Acquisition II, Inc. ("Surf City") and Sports
Group International,  Inc. ("SGI"). The acquisition also requires the payment of
$1,000,000 to the  shareholders of Surf City. The completion of the acquisitions
is subject to a feasibility period that expires April 17,1998. The completion of
the  acquisitions  is also  subject to the  Company  raising  $2,000,000  of new
financing and obtaining approval of the Company's  shareholders and continuation
of  the  Company's  NASDAQ  SmallCap  Market  listing.  Upon  completion  of the
acquisitions,  the Company's current  shareholders would retain  approximately a
25% interest in the Company on a post acquisition basis.

Surf City is the franchisor of 110-store  chain of juice bar  restaurants in the
United  States.  Surf City filed a petition for relief  under  Chapter 11 of the
U.S.  Bankruptcy Code in January 1997, and successfully  emerged from bankruptcy
in January 1998 when its plan of reorganization became effective.

SGI has an exclusive  license for the  international  distribution  of a line of
Spalding sports drinks and water.  The Company  obtained the exclusive  Spalding
license  in 1996,  and  recently  began its  marketing  efforts.  The year ended
December 1997, SGI incurred losses of approximately  $3.4 million on revenues of
$1.5 million,  and had an accumulated  deficit of  approximately  $11 million at
December 31, 1997.


History

The  Company  was  incorporated  in Texas in June 1993 under the name  Clucker's
Tex-Mex Venture, Inc., and changed its name to CluckCorp International,  Inc. in
April  1995,  and changed its name again to Harvest  Restaurant  Group,  Inc. in
October  1997.  Prior to November  1994,  the Company was an area  developer for
Cluckers Wood Roasted Chicken,  Inc.  ("CWRC"),  the developer and franchiser of
the "Cluckers"  restaurant  concept. In November 1994, the Company exchanged its
Cluckers area development agreement with CWRC for systems, franchising materials
and the  exclusive  right to use the  Cluckers  name in Texas.  During  1996 the
Company completed the evolution to the Harvest  Rotisserie  concept and began to
concentrate on the development,  operation and franchising of Harvest Rotisserie
restaurants,  which the Company  believed to be an improvement over the original
Cluckers  concept.  Accordingly in 1996, the Company  converted its one Cluckers
restaurant in San Antonio to a Harvest Rotisserie restaurant.


                                       4

<PAGE>


In July 1996,  the Company sold  1,000,000  shares of Common Stock and 2,300,000
Common Stock Purchase  Warrants ("IPO  Warrants") in an initial public  offering
("IPO") of its securities  through Global Equities Group, Inc.  ("Global" or the
"Representative")  as representative of the underwriters of the IPO. The Company
realized net proceeds of  approximately  $4,700,000  from the IPO based upon the
sale of the Common  Stock at $5.50 per share and the IPO  Warrants  at $.125 per
IPO  Warrant.  Proceeds  from the IPO were  utilized  to repay  bridge-financing
notes,   develop  the  Company-owned   restaurants,   and  develop  a  corporate
infrastructure.

In July  1997,  the  Company  sold  515,000  shares of 12%  Series A  Redeemable
Convertible Preferred Stock ("Series A Preferred Stock") at $10.00 per share and
1,723,400 Redeemable Preferred Stock Purchase Warrants ("Preferred Warrants") in
a public offering of its securities (the "Preferred Offering") through Global as
representative  of the  underwriters  of the  Preferred  Offering.  The  Company
realized net proceeds of  approximately  $4,375,000 from the Preferred  Offering
based upon the sale of the Series A Preferred  Stock at $10.00 per share and the
Preferred  Warrants  at $.10 per  Preferred  Warrant.  Substantially  all of the
proceeds of the Preferred Offering were used to acquire restaurant properties in
certain  metropolitan markets which were resold to area developers for operation
as  franchised  Harvest  Rotisserie  restaurants  and for loans made to the area
developers to the fund the purchase price,  conversion costs and initial working
capital needs.

In  December  1997,  the  Company  sold 150  shares of 7%  Series B  Convertible
Preferred  Stock ("Series B Preferred  Stock") at $10,000 per share in a private
transaction.  The Company  realized net proceeds of $1,340,000 from the sale for
working capital purposes.


Area Developers

The Company's area development agreement requires the development of a specified
number  of  restaurants  within a  delineated  territory  in  accordance  with a
development schedule and provides the area developer with the exclusive right to
open  restaurants  within  the  specified  territory  during  the  term  of  the
development agreement.  The area developers generally pay a nonrefundable fee of
$5,000 per  restaurant  in addition to a restaurant  franchise fee of $35,000 as
each restaurant is opened.

On June 25, 1997, the Company  completed the purchase of certain assets of eight
Kenny Rogers Roasters (Roasters")  restaurants located in Florida,  Indiana, and
North Carolina from Roasters  Corp., a Florida  Corporation.  The purchase price
included  $1,050,000 in cash and the assumption of certain liabilities and lease
obligations.  For accounting  purposes,  the  acquisition was accounted for as a
purchase,  and the purchase price,  including  related  acquisition  expenses of
$71,405,  was fully allocated to identified  assets and  liabilities.  Effective

                                       5

<PAGE>


concurrent with the  acquisition,  the Company resold these assets to three area
developers,  each  majority-owned  and  controlled  by the same  individual,  in
exchange for a note receivable and the assignment of the assumed  liabilities by
the area  developers.  The Company realized no gain or loss on the resale of the
properties.   The  Company   subsequently   entered  into  one  additional  area
development  agreement  in  Northern  California.  The  combined  total  of  the
agreements  provided  for  the  development  of  up  to  40  franchised  Harvest
Rotisserie  restaurants  over a two to three year  period in  Florida,  Indiana,
North Carolina, and Northern California.

In addition to providing the financing for the purchase of the acquired Roasters
properties,  the Company provided  financing for renovation and a portion of the
working  capital.  The loans were made  pursuant to a  convertible  secured loan
agreement  which  provided for a two to three year draw period up to the maximum
amount as set in the loan agreements.  During the draw period,  interest only is
payable to the Company. Upon expiration of the draw period, the loan converts to
a ten year  amortizing loan with interest at prime plus 4% and a balloon payment
after the fifth year. The loans are secured by a pledge of substantially  all of
the assets of the area  developer and of all the  outstanding  stock held by the
owners of the area developer.  The loan agreement also provides the Company with
an option to  convert  all or any part of the loan  amount at any time after the
draw period into equity of the area developer.

Ten franchised  restaurants were opened in 1997; however in the first quarter of
1998, area developers have closed all nine of the franchised restaurants located
in Florida, Indiana, and North Carolina.  Accordingly, the Company believes that
all of the area developer loans are impaired and has recorded a write-off of the
area developer loans totaling  $3,387,541 as of December 28, 1997. The amount of
the  write-off was equal to the total amount of loans  outstanding.  The Company
also accrued $800,000 as a real estate disposition  liability resulting from the
guarantee of the long-term real estate leases on the franchised restaurants, and
its abandonment of four Compnay-owned leased locations.

No officer or director of the  Company has any equity or  financial  interest in
any area developer.


Franchise Agreements

The Company has completed a Uniform  Franchise  Offering  Circular  ("UFOC") and
related franchise documents for its Harvest Rotisserie restaurants.  The Company
intends to amend its UFOC to also  provide for the  franchising  of Harvest Food
Court restaurants.

The  Harvest  Rotisserie  franchise  agreement  provides  for (i) a $35,000  per
restaurant  franchise fee (ii) a 5% royalty on the  restaurant's  gross revenue,
and (iii) a reserve  for a  national  and local  advertising  fund  contribution
aggregating up to 3% of gross revenues per restaurant.  The franchise agreements
provide for a limited area of exclusivity  surrounding the franchised restaurant
in which the  Company  may  neither  develop  nor  grant to others  the right to
develop additional restaurants.


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<PAGE>


The Company's  franchise  agreement requires that the restaurants be operated in
accordance with the operating  procedures and menus  established by the Company.
The Company conducts regular inspections of its restaurants to determine whether
they meet applicable  quality,  service and cleanliness  standards and will work
with   franchisees   to  improve   substandard   performance  or  any  items  of
non-compliance  revealed  in the  course  of the  inspection.  The  Company  may
terminate  its  agreement  with any  franchisee  that does not comply  with such
standards.  The Company believes that maintaining superior food quality, a clean
and  pleasing  environment  and  excellent  customer  service is critical to the
reputation and success of its  restaurants  and intends to act  aggressively  to
enforce  applicable  contractual  requirements.  Franchisees  could contest such
terminations,  which would cause the  Company to incur  potentially  significant
legal expenses.


Harvest Rotisserie - Current Operations

The  following   discussion  describes  the  current  operations  of  the  three
Company-owned Harvest Rotisserie restaurants located in San Antonio,  Texas. The
Company is not considering opening any additional Harvest Rotisserie restaurants
in 1998.

     Complete  Meal  Value.  The  Company's   restaurants   emphasize  complete,
reasonably  priced meals rather than focusing on discounted  individual items or
an a la carte pricing system.  Complete meals begin at approximately  $3.99, and
menu  combinations  provide  convenient  multiple meal  selections  for couples,
families or larger  groups.  The Company's  operating  philosophy is to provide3
high quality, quick service meals rather than the food often associated with the
fast-food  industry.  The restaurants offer large food portions,  lunch specials
and entree  combinations at lower prices in order to create a competitive "price
to value" concept.

     Fresh,  High Quality,  Convenient  Homestyle Meals. The Company focuses its
Harvest  Rotisserie  restaurant  concept  on  rotisserie   oak-roasted  chicken,
oak-roasted  turkey  breast,  roast ham,  meatloaf,  sandwiches and a variety of
freshly  prepared  side  dishes.  Chicken,  turkey and ham are  delivered to the
Company's  Harvest  Rotisserie  restaurants  several times each week in order to
allow for the fresh  preparation of these food  products.  Cooked food items are
prepared with the use of ovens and steamers, rather than the fryers, grills, and
microwaves used by many other fast-food  establishments.  The Company  maintains
strict  quality  standards in  purchasing,  storing,  preparing  and serving its
entrees,  fresh side  dishes,  desserts and other  products.  All visible fat is
removed from poultry and ham prior to preparation.  The chicken is marinated for
24 hours in a blend of citrus juices, fresh garlic and natural herbs and spices,
and roasted for ninety minutes over hardwood flames in a custom built rotisserie
at temperatures as high as 1,200 degrees.  The  self-basting  characteristic  of
rotisserie  cooking is  believed  to reduce  fat and result in moister  meat and
crispier skin.

     Operations.   The  Company's  Harvest  Rotisserie  restaurants  prominently
display a rotisserie  within  customer  view.  The  location of the  rotisserie,
coupled with the flames  emanating from the hardwood,  creates a focal point for
the restaurants.  Chicken,  turkey and other entrees may be purchased in varying
quantities  or in  combination  with a choice of side dishes.  Most  restaurants
range in size  from  approximately  2,200 to 2,800  square  feet,  offer  inside
seating and takeout service, have drive-through  windows, and seating capacities
for 45 to 70 customers. Generally, restaurant hours are from 11 A.M. to 11 P.M.,
seven days a week.


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     Management  and Training.  A typical  Harvest  Rotisserie  restaurant  will
employ between fifteen and twenty people daily, on a staggered basis designed to
match employee work hours to customer traffic.  Restaurant  personnel  generally
include a manager,  assistant  manager,  cooks,  counter  personnel  and kitchen
workers.  In addition,  restaurant  managers are  responsible  for selecting and
training new employees who will generally undergo an on-the-job  training period
under the supervision of an experienced  employee.  Ongoing employee training is
the responsibility of the restaurant manager.

     Advertising and Promotion. The Company currently markets its restaurants on
a limited basis primarily through restaurant signage,  direct mail, and in-store
displays, which emphasize the quality and homestyle nature of the food products.
The  Company  expanded  its  advertising  efforts  during  the  second and third
quarters of 1997 to include  additional use of print media,  together with radio
commercials. The Company's expanded advertising efforts were intended to promote
awareness of the Harvest Rotisserie restaurants in target markets.

     Unit Economics. The average cost of opening a Harvest Rotisserie restaurant
in a leased facility,  including site selection costs,  leasehold  improvements,
acquisition  of  furniture,  fixtures and  equipment,  opening  inventories  and
certain preopening expenses (including salaries,  training,  travel, advertising
and promotion),  has ranged from $125,000 to $600,000 per restaurant,  depending
upon the  size and  location  of the  restaurant  and the  amount  of  leasehold
improvements  required.  If the  Company  elects  to  purchase  the land  and/or
building, the development costs will be significantly higher.

     Site  Selection.  The Company  considers the location of a restaurant to be
critical to its long-term success and therefore devotes  significant  efforts to
the  evaluation  of  potential  sites.  The  site  selection   process  involves
consideration of a variety of factors including (i) demographics, such as target
population   density  and   household   income   levels,   (ii)   specific  site
characteristics  such as visibility,  accessibility  and traffic  volume,  (iii)
proximity to activity  centers,  (iv)  parking  availability  and (v)  potential
competition in the area. The Company's executive officers inspect each potential
Company-owned  and  franchised  restaurant  location prior to the execution of a
lease.  The opening of new restaurants is contingent  upon,  among other things,
locating   satisfactory   sites,   negotiating   favorable  leases  or  purchase
agreements,  completing construction and securing appropriate government permits
and approvals.  Once a site is available to the Company and necessary  approvals
and permits  have been  obtained,  approximately  60 to 180 days are required to
complete construction and open the restaurant.


Growth Strategy

Historically,  the  Company's  primary  growth  strategy  has been to expand its
Harvest  Rotisserie  restaurant  concept,  principally  by  franchising  through
financed area developers.  However,  the Company is not considering  opening any
additional  Harvest  Rotisserie  restaurants  or entering into  additional  area
developer  agreements  in 1998.  The Company  currently  does not have any funds
available to develop any restaurants.


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The  Company  intends  to  concentrate  its  future  expansion  efforts  on  the
development  of Harvest  Food Court  restaurants  in Texas.  To  facilitate  its
expansion,  the Company has entered into an agreement in principle to acquire an
80% interest in the intangible  property rights of Red Line, Inc. The success of
this acquisition is contingent upon the Company's ability to raise the necessary
financing  to the fund  costs of  conversion  of the Red Line  restaurants  into
Harvest Food Court restaurants.

The Company has also entered into  non-binding  stock exchange  agreements  with
Surf City and SGI. The completion of these  acquisitions  is contingent upon the
completion of a feasibility  period, the Company raising $2,000,000 of financing
necessary to complete the transaction, shareholder approval, and continuation of
the Company's NASDAQ SmallCap Market listing.


Competition

The food service industry is intensely competitive with respect to food quality,
concept,  location,  service  and price.  There are many  well-established  food
service  competitors with  substantially  greater  financial and other resources
than the Company and with substantially longer operating histories.  The Company
competes with take-out food service  companies,  fast-food  restaurants,  casual
full-service dine-in  restaurants,  delicatessens,  cafeteria-style  buffets and
prepared  food stores,  as well as with  supermarkets  and  convenience  stores.
Competitors include pizza restaurants, Chinese food restaurants, other purveyors
of carryout food and convenience dining establishments, including such chains as
Pizza Hut,  McDonald's,  Dairy Queen and others.  Other  rotisserie  chicken and
homestyle  food concept  restaurants,  such as Boston  Market and Kenny  Rogers'
Roasters, provide direct and intensive competition. This intense competition has
resulted  in the sale or  closing  of a number  of  rotisserie  roasted  chicken
restaurants  including  establishments  operated  by the Company and some of the
larger  franchise  chains.  The  inclusion  of roasted or baked  chicken at many
large,  national  food  service  chains,  such  as KFC and  Roy  Rogers,  and in
supermarkets and convenience stores, creates significant additional competition.
Moreover,  other national food service chains or companies  could  introduce new
rotisserie roasted or baked chicken restaurants.

Competition  in the food  service  business  is often  affected  by  changes  in
consumer  tastes,  national,  regional,  and  local  economic  and  real  estate
conditions,  demographic trends,  traffic patterns, the cost and availability of
labor, purchasing power,  availability of product and local competitive factors.
Some or all of these factors could cause the Company and future  franchisees  to
be adversely affected.

The Company also competes for franchisees with  multinational  fast-food chains,
national and regional  restaurant chains and other regional and local restaurant
franchisers.  Most restaurant  franchisers  have greater market  recognition and
greater financial, marketing and human resources than the Company.

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Trademarks and Service Marks

The Company has  registered  with the United States Patent and Trademark  Office
its "Harvest Rotisserie" name,  trademark and service mark ("Marks").  There can
be no  assurance  that the Company  will obtain  sufficient  protection  for its
Harvest  Rotisserie  Marks or,  that it will  have the  financial  resources  to
enforce or defend its Marks.


Government Regulation

The Company's  restaurants must comply with federal,  state and local government
regulations  applicable to consumer  food service  businesses,  including  those
relating  to the  preparation  and  sale of  food,  minimum  wage  requirements,
overtime, working and safety conditions,  mandated health insurance coverage and
citizenship   requirements,   as  well  as   regulations   relating  to  zoning,
construction,  health,  business licensing and employment.  The Company believes
that it is in compliance with these provisions.

Certain states and the Federal Trade Commission  require a franchiser to provide
specified  disclosure  statements  to potential  franchisees  before  granting a
franchise.  Additionally,  many states  require the  franchiser  to register its
Uniform Franchise  Offering Circular ("UFOC") with the state before it may offer
a franchise.  The Company  believes that its Harvest  Rotisserie  UFOC (together
with any  applicable  state  versions  or  supplements)  complies  with both the
Federal Trade  Commission  guidelines and all applicable  state laws  regulating
franchising in those states in which the Company intends to offer franchises.


Insurance

The  Company  carries  general  liability,   product  liability  and  commercial
insurance of up to  $2,000,000,  which it believes is adequate for businesses of
its size  and  type.  However,  there  can be no  assurance  that the  Company's
insurance  coverage will remain  adequate or that  insurance will continue to be
available to the Company at reasonable rates.

Franchisees  are  required to maintain  certain  minimum  standards of insurance
pursuant to their franchise  agreements  including  commercial general liability
insurance,  worker's  compensation  insurance and all risk property and casualty
insurance. The Company requires that it be named as an additional insured on any
such policies.

                                       10

<PAGE>



Employees

At March 27, 1998, the Company had approximately  100 employees,  of whom 10 are
corporate management and administrative  personnel,  6 are restaurant management
personnel, and the remaining serve as restaurant hourly employees. The Company's
employees  are not  represented  by a union and the  Company  believes  that its
relations with its employees are satisfactory.




                                       11

<PAGE>




ITEM 2.  DESCRIPTION OF PROPERTY

The Company  leases 2,500 square feet of space for its executive  offices in San
Antonio,  Texas under a  month-to-month  lease for $3,300 per month. The Company
believes  its  executive  office  facilities  are  adequate for its needs in the
foreseeable  future  and  that  additional  space if  needed,  is  available  at
reasonable rates.

As of December 28, 1997, the Company had three Company-owned  Harvest Rotisserie
restaurants  in  operation in San Antonio,  Texas and one  restaurant  in Corpus
Christi,  Texas.  The  Company  had also  executed  leases  for five  additional
restaurant properties for future Harvest Rotisserie  restaurants to be developed
in San Antonio and Houston,  Texas.  In January 1998, the Company decided not to
develop at least four of its five  properties in San Antonio and Houston,  Texas
which the Company had  previously  executed  leases for,  and is  negotiating  a
disposition of the properties with the respective landlords. The Company intends
to develop the  remaining  leased  property in San Antonio,  Texas but currently
does not have the funds  necessary to do so. In January 1998, the Company closed
its restaurant located in Corpus Christi, Texas.

In  addition,  during  the first  quarter  of 1998,  nine of the  Company's  ten
franchised  locations  were closed.  The Company had  guaranteed the real estate
leases on all  franchised  locations.  The  Company  has  accrued a real  estate
disposition  liability  of  $800,000  at December  28,  1997,  which the Company
believes will be sufficient to settle all obligations  related to the closing of
the  Company-owned  and  franchised  restaurants,  and  the  abandonment  of the
restaurant properties under development.




                          Form of                 Lease              Monthly
Location                  ownership               Expiration         Rent
--------                  ---------               ----------         ----

Operating Harvest Rotisserie Restaurants:

Fredericksburg Road       Building Lease          August 1998        $2,554
San Antonio, TX

Walzem Road               Building Lease          February 2006      $2,700
San Antonio, TX

Tezel Road                Real Estate  N/A        N/A                N/A
San Antonio, TX           Owned


Undeveloped Site:

4620 Broadway (1)         Building Lease          January 2002       $4,900
San Antonio, TX

                                       12

<PAGE>



Closed Restaurants and Abandoned Properties:

South Padre Island Drive      Building Lease         November 1999       $5,000
Corpus Christi, TX

2Hwy 281/Loop 1604 (2)        Ground Lease           February 2022       $4,500
San Antonio, TX

DeZavala Road (2)             Ground Lease           May 2027            $5,000
San Antonio, TX

South Braeswood Road (2)      Building Lease         January 2004        $3,000
Houston, TX

11730 West Avenue (2)         Building Lease         May 2002            $4,500
San Antonio, TX



(1)  The Company  currently  does not have the funds  required  to develop  this
     property,  and  is  seeking  a  joint  venture  partner  to  share  in  the
     development cost.

(2)  The Company  intended to develop  these  properties  as Harvest  Rotisserie
     restaurants when initially  acquired but has since decided to abandon these
     lease sites.





                                       13

<PAGE>




ITEM 3.  LEGAL PROCEEDINGS

The Company is a named party in the following legal proceedings:

On January 22, 1998,  the Company and its Florida area  developer  were named as
defendants in three separate lawsuits filed in Florida in Broward County Circuit
Court by K.R.  Chicken  Associates,  K.R.  Sarasota  Associates,  Ltd., and K.R.
Memphis-Florida   Associates  Limited   Partnership.   (Case  numbers  98-01090,
98-01092,  and  98-01093)  The  plaintiffs  are seeking to  foreclose a security
interest on promissory  notes of the Company's  Florida area developer,  Florida
Harvest,  Inc.,  which are guaranteed by the Company in the aggregate  principal
amount of $455,244. The plaintiffs have agreed not to proceed with further legal
action  until  after  May 1,  1998,  to allow the  parties  the  opportunity  to
negotiate a settlement.

On January 27,  1998,  the Company and Florida  Harvest,  Inc.  its Florida area
developer,   were  named  as  defendants  in  a  lawsuit  filed  in  Florida  in
Hillsborough  County  Circuit  Court  by Pollo  Operations,  Inc.  (case  number
98-00604)  The  plaintiff is seeking to  foreclose a mortgage  lien and security
interest in real  property.  The Company is guarantor  of the $868,000  mortgage
note payable to Pollo  Operations,  Inc. The Company's  area developer is in the
process of marketing the real property,  and the  plaintiffs  have agreed not to
proceed with further legal action until the sale of the property is completed.




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

There were no matters  submitted to a vote of security holders during the fourth
quarter of fiscal 1997.




                                       14

<PAGE>




                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market for Common Stock

The Company's  Common Stock has traded on the NASDAQ  SmallCap  Market under the
symbol  "ROTI"  since  July 9,  1996.  The  following  table  sets forth for the
quarters  indicating  the  range  of high and low  closing  sale  prices  of the
Company's  Common Stock for each quarter of fiscal 1996 and 1997, as reported by
the NASDAQ SmallCap Market.

                                                                Price
                                                         ------------------
                                                            High      Low
                                                            ----      ---

          Fiscal Year 1996:
          Third Quarter       (October 6, 1996)          $   8.25  $   5.67
          Fourth Quarter      (December 29, 1996)        $   7.75  $   5.75

          Fiscal Year 1997:
          First Quarter       (April 20, 1997)           $   7.75  $   6.00
          Second Quarter      (July 13, 1997)            $   8.00  $   4.75
          Third Quarter       (October 5, 1997)          $   5.09  $   1.43
          Fourth Quarter      (December 28, 1997)        $   2.63  $    .75

          Fiscal Year 1998:
          First Quarter       (Through March 27, 1998)   $   2.06  $    .50

The National  Association of Securities  Dealers,  Inc.,  which  administers the
NASDAQ  SmallCap  Market,  sets the criteria for  continued  eligibility  on the
NASDAQ  SmallCap  Market.  In order to  continue  to be  included  on the NASDAQ
SmallCap Market, a company must maintain $2 million in value of its net tangible
assets,  a $1 million  market  public  float,  two  market-makers,  at least 300
holders of the Common  Stock,  500,000  shares in the public float and a minimum
bid price of $1.00 per share. At this time the Company does not meet the minimum
net tangible  asset  criteria,  and which  cannot be met by the Company  without
obtaining  additional  equity capital.  The Company's failure to meet the NASDAQ
SmallCap Market's  maintenance  criteria may result in the discontinuance of the
inclusion  of its  securities  in the NASDAQ  SmallCap  Market.  In such  event,
trading,  if any, in the  securities  may then  continue to be  conducted in the
non-NASDAQ  over-the-counter  market  in what are  commonly  referred  to as the
electronic  bulletin board and the "pink sheets." As a result, a shareholder may
find it more  difficult to dispose of or obtain  accurate  quotations  as to the
market value of the securities.


                                       15

<PAGE>




Holders of Record

As of March 27, 1998, the Company had  approximately  600 beneficial  holders of
its Common Stock.

Dividend Policy

The Company  has never paid cash  dividends  on its Common  Stock and intends to
retain earnings, if any, for use in the operation and expansion of its business.
The  amount  of  future  dividends,  if any will be  determined  by the Board of
Directors  based  upon the  Company's  earnings,  financial  condition,  capital
requirements and other conditions.

Description of Securities

Common Stock

The Company is  authorized to issue  20,000,000  shares of $.0l par value Common
Stock.  At  December  28,  1997,  there were  2,698,630  shares of Common  Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders, including the
election of  directors.  There is no right to cumulate  votes in the election of
directors.  Holders of Common Stock have no preemptive  rights and have no right
to convert their Common Stock into any other securities.  All of the outstanding
shares of Common Stock are fully paid and non-assessable.

Preferred Stock

The Company is authorized to issue 5,000,000  shares of preferred  stock,  $1.00
par value (the "Preferred  Stock").  The Preferred Stock may,  without action by
the  stockholders of the Company,  be issued by the Board of Directors from time
to time,  in one or more series for such  consideration  and with such  relative
rights, privileges and preferences as the Board may determine.  Accordingly, the
Board has the power to fix the dividend rate and to establish the provisions, if
any,  relating to voting  rights,  redemption  rate,  sinking fund,  liquidation
preferences  and conversion  rights for any series of Preferred  Stock issued in
the future.

In 1997,  the  Board of  Directors  of the  Company  authorized  two  series  of
Preferred Stock, i) Series A Redeemable  Convertible  Preferred Stock ("Series A
Preferred  Stock")  consisting  of up to  3,000,000  shares,  and (ii)  Series B
Convertible  Preferred  Stock ("Series B Preferred  Stock")  consisting of up to
1,000 shares.


                                       16

<PAGE>



Series A Redeemable Convertible Preferred Stock

At  December  28,  1997 there were  515,000  shares of $1.00 par value  Series A
Redeemable Convertible Stock. Series A Preferred Stock shareholders are entitled
to receive dividends at the quarterly rate of $.30 per share, payable in cash or
in the Company's Common Stock at the sole discretion of the Company.  The Series
A Preferred Stock may be redeemed in whole or in part by the Company at any time
after  March 11,  1998,  for cash or in Common  Stock of the Company in its sole
discretion,  at 110% of the bid price per share of the Series A Preferred  Stock
on the NASDAQ  SmallCap  Market for the 20 trading days prior to the  redemption
date.

The Series A Preferred  Stock  automatically  converts  into Common Stock at any
time after March 11, 1998 if the closing price for the Series A Preferred Stock,
as quoted on the NASDAQ  SmallCap  Market or any national  securities  exchange,
exceeds $20.00 per share for ten consecutive  trading days. The holder of Series
A Preferred Stock has the right, at the holder's option, at any time after March
11,  1998,  to convert any or all such  shares of Series A Preferred  Stock into
Common Stock. The number of shares of Common Stock issuable upon conversion of a
share of Series A Preferred  Stock is equal to $10.00 divided by $3.70,  subject
to certain adjustments.

The holders of the Series A Preferred  Stock have no voting  rights except as to
matters affecting the rights of Series A Preferred Stockholders or as to matters
that all  stockholders  are entitled to vote on as a matter of law. The Series A
Preferred Stock has a liquidation preference of $10.00 per share.

Series B Preferred Stock

At December 28,  1997,  there were 150 shares of Series B Preferred  Stock.  The
Series B  Preferred  Stock is  convertible  into either the  Company's  Series A
Preferred Stock or the Company's  Common Stock. The conversion rate per share is
equal to $10,000  divided  by the lower of (a) $11.00 or (b) 80% of the  average
bid price of the Series A Preferred or Common  Stock at the time of  conversion.
Provided,  however,  in order to convert  into  Common  Stock,  the price of the
Common Stock must be above $3.00 per share.  The Series B Preferred Stock accrue
dividends at the rate of 7%  annually,  payable at the time of  conversion.  The
Series B  Preferred  Stock is junior to the  Series A  Preferred  Stock,  has no
voting rights and has a liquidation preference of $10,000 per share.

Redeemable Preferred Stock Purchase Warrants

At December 28, 1997 there were 1,723,400  Redeemable  Preferred  Stock Purchase
Warrants outstanding ("Preferred  Warrants").  Each Preferred Warrant represents
the right to purchase one share of Series A Preferred Stock at an exercise price
of $10.50 per share until June 11, 2002.

Preferred  Warrants may be redeemed,  in whole or in part,  at the option of the
Company, upon 30 days' notice, at a redemption price equal to $.01 per Preferred
Warrant at any time after March 11, 1998 if the closing  price of the  Company's
Series A Preferred  Stock on the NASDAQ SmallCap Market averages at least $11.00
per share for a period of 20 consecutive  trading days or if the Company redeems
the Series A Preferred Stock.


                                       17

<PAGE>


Common Stock Purchase Warrants.

At  December  28,  1997 there were  2,300,000  Common  Stock  Purchase  Warrants
outstanding  (the "IPO  Warrants").  Each IPO  Warrant  entitles  the  holder to
purchase one share of Common Stock at $4.00 per share until July 9, 2001.

IPO Warrants may be redeemed, in whole or in part, at the option of the Company,
upon 30 days notice,  at a redemption price equal to $.01 per IPO Warrant at any
time after July 9, 1997, if the closing  price of the Company's  Common Stock on
the NASDAQ  SmallCap Market averages at least $8.00 per share for a period of 20
consecutive trading days.




                                       18

<PAGE>



ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

General

At the end of the  Company's  fiscal year on December 28, 1997,  the Company had
fourteen  restaurants  in  operation,  however,  ten of these  restaurants  were
subsequently  closed  during the first quarter of 1998.  The Company  opened its
first restaurant in January 1994, and three additional Company-owned restaurants
between  November 1996 and February 1997, and ten  franchised  restaurants  were
opened between July 1997 and October 1997.  Eight of the franchised  restaurants
were originally Kenny Roger Roaster  restaurants  prior to being acquired by the
Company on June 25, 1997. The purchase price included $1,050,000 in cash and the
assumption of certain  liabilities and lease obligations.  Effective  concurrent
with the acquisition,  the Company resold these assets to three area developers,
each  majority-owned  and controlled by the same  individual,  in exchange for a
note  receivable  and the  assignment  of the  assumed  liabilities  by the area
developers.  The  Company  realized  no  gain  or  loss  on  the  resale  of the
properties.   The  Company   subsequently   entered  into  one  additional  area
development  agreement  in  California.  

In addition to providing the financing for the purchase of the acquired  Roaster
properties,  the Company provided financing for the costs to renovate and reopen
the properties as Harvest  Rotisserie  restaurants.  The Company also financed a
portion of the area  developers  initial  working  capital.  The loans were made
pursuant to a convertible  secured loan  agreement  which  provided for a two to
three year draw period up to the maximum amount as set in the loan agreements.

In the first quarter of 1998,  three area  developers that operated nine Harvest
Rotisserie restaurants in Florida, Indiana and North Carolina closed all nine of
these  restaurants.  In addition,  one Company-owned  restaurant was closed, and
development  plans ceased at four other  locations  that were to be developed in
San Antonio, Texas. The Company had entered into long-term real estate leases on
the Company owned  locations,  and guaranteed  similar leases for the franchised
locations,  as well as guaranteed  certain promissory notes connected with three
of the franchised locations.

The Company  believes that all of the area developer  loans are impaired and has
recorded a write-off of loans  totaling  $3,387,541 as of December 28, 1997. The
Company has evaluated its potential costs for the full settlement of each of the
long-term real estate leases,  as well as the assumed  promissory notes, and has
accrued $700,000 as a real estate  disposition  liability with a relating charge
to  operations.  In  addition it accrued  $100,000 as a real estate  disposition
liability and has  recognized a total charge of $484,656  related to the ceasing
of  development  of four  other  Company-owned  restaurants  properties  and the
closing of one operating restaurant.  The charge to operations includes the full
impairment of the leasehold  property and  equipment,  and the  recognition of a
loss on disposition of the restaurant location and applicable rent expense.


                                       19

<PAGE>



     Results of Operations - Fiscal Year 1997 Compared to Fiscal Year 1996

     Revenues. Revenues from Company-owned restaurants for 1997 were $1,637,569,
an increase of over 500% as compared to 1996.  The  increase in revenues was due
to the  opening  of  three  additional  restaurants  between  November  1996 and
February  1997.  Revenues  from these  restaurants  are lower than  management's
expectations and averaged approximately 60% of capacity during 1997. The Company
also recognized  $400,000 in franchise fees which were received from the sale of
ten franchises in 1997.


     Costs and Expenses. Cost of food and paper was 48.4% of restaurant revenues
for 1997,  as compared to 46.4% in 1996.  Food and paper costs  remained  higher
than  historical  averages  during 1997  primarily  due to food usage for recipe
development  and the opening of an  additional  restaurants  during 1997,  which
typically has higher costs during the initial periods after opening.

Restaurant  salaries,  benefits,  occupancy and related expenses,  and operating
expenses  include  all other  restaurant  level  operating  expenses,  the major
components of which are direct and indirect  labor,  payroll taxes and benefits,
operating supplies,  rent, advertising,  repairs and maintenance,  utilities and
other occupancy costs.  The combined total of these expenses was $1,646,175,  or
100.5% of restaurant revenues and $257,806,  or 97.7% of restaurant revenues for
1997 and 1996,  respectively.  A substantial portion of these costs are fixed or
indirectly  variable and therefore were  disproportionate to restaurant revenues
for both years due to low sales  volumes  and the  opening  of new  restaurants,
which have higher expenses during the initial periods after opening.

General and  administrative  expenses  increased  $657,509,  or 52.1% in 1997 as
compared to 1996.  The increase  resulted  from the  development  of a corporate
infrastructure  needed to support the expansion of Company-owned  and franchised
restaurants,  and an advertising  program initiated during the second quarter of
1997  intended  to create  brand  name  recognition  for the  Company's  Harvest
Rotisserie restaurants. In 1997, these expenses included: salaries, benefits and
contract services (39%); professional fees (15%); travel related expenses (13%);
advertising and promotion (19%); and other general and  administrative  expenses
(14%).

Preopening  expenses of $152,548 in 1997 relate to initial costs associated with
the opening of two new Harvest  Rotisserie  restaurants  in 1997 and lease costs
for  maintaining a restaurant site which the Company still intends to develop in
the future.

     Other  Income  (Expense).  Interest  income  increased  $54,333  in 1997 as
compared  to 1996,  primarily  due to  interest  received  on  developer  loans.
Interest and debt  discount  expense  decreased  $435,900 in 1997 as compared to
1996 due to the repayment of $1,684,500 of long-term debt in July 1996.

     Net Loss. The Company  incurred a net loss of $7,240,827 and $2,011,254 for
1997 and 1996, respectively. The increase in net loss for 1997 was primarily due
to losses  associated with the write-off of area developer notes  receivable and

                                       20

<PAGE>


the  disposition of properties for closed  restaurants.  The Company  expects to
incur losses in future  periods until it generates  sufficient  revenues from an
expanded  base  of  restaurants  to  offset  ongoing  operating,  financing  and
expansion  costs.  The Company  currently  lacks the funds  necessary to develop
additional  restaurants and requires additional financing to continue as a going
concern.



Results of Operations - Fiscal Year 1996 Compared to Fiscal Year 1995

     Revenues.  Restaurant revenues for 1996 were $263,892,  a 16.4% increase as
compared  to  1995.  The  increase  in  revenues  was due to the  opening  of an
additional  restaurant in November 1996. On a comparative  basis, the same store
revenues  decreased  $32,820 or 14.5%  between  1996 and 1995,  due in part to a
reduction in the restaurant  operating  hours.  In 1996 this restaurant was also
being used as a training facility.

     Costs and Expenses. Cost of food and paper was 46.4% of restaurant revenues
for 1996,  as  compared to 36.3% in 1995.  The  increase in food and paper costs
resulted  primarily  from food usage for recipe  development  for the  Company's
expanded Harvest Rotisserie menu, and the opening of an additional restaurant in
November 1996, which typically has higher costs during the initial periods after
opening.

Restaurant  salaries,  benefits,  occupancy and related expenses,  and operating
expenses  include  all other  restaurant  level  operating  expenses,  the major
components of which are direct and indirect  labor,  payroll taxes and benefits,
operating supplies, rent, advertising,  repairs and maintenance,  utilities, and
other  occupancy  costs.  The combined  total of these  expenses was $257,806 or
97.7% of restaurant revenue for 1996, as compared to 277,646 or 122% for 1995. A
substantial portion of these costs is fixed or indirectly variable and therefore
is disproportionate to revenues for both periods due to low sales volumes.

General  and  administrative  expenses  increased  $693,593  or  122% in 1996 as
compared to 1995. The increase  resulted from the establishment of the Company's
corporate offices in 1996 and expenses associated with the Company's  financing,
franchising,  and  expansion  activities.  In  1996,  these  expenses  included:
salaries,  benefits and contract services (25%);  professional fees and offering
expenses (37%); travel related expenses (10%);  advertising and promotion (11%);
and other general and administrative expenses (17%).

Preopening expenses increased by $71,711 for 1996 as compared to the same period
in 1995.  A  substantial  portion  of the  increase  relates  to  initial  costs
associated with the development of a new Harvest  Rotisserie  restaurant,  which
opened in November 1996.

     Interest and Debt  Discount  Expense.  Interest and debt  discount  expense
increased  to  $454,818  for  1996,  as  compared  to  $140,497  for  1995.  The
significant  increase  relates to the issuance of $1,684,000  face amount of 10%
Bridge  Notes from  December  1994 to March 1996.  The total amount of amortized
debt discount in 1996 was $367,153. The Bridge Notes were repaid in full in July
1996 from proceeds of the Company's IPO.


                                       21

<PAGE>


     Net  Loss.  The  Company  incurred  a net  loss of  $2,011,254  for 1996 as
compared to $924,483 for 1995.  The increase in net loss for 1996 was  primarily
the result of significantly higher interest,  debt discount expenses and general
and administrative expenses.


Liquidity and Capital Resources

The Company has incurred  operating losses since  inception,  and as of December
28, 1997 had an accumulated deficit of $10,817,623 and a working capital deficit
of $713,637. In addition, during the first quarter of 1998, ten of the Company's
fourteen  restaurants  have  closed.  The  Company is not  currently  generating
sufficient revenues from operations to meet its cash requirements.  All of these
factors raise  substanial  doubts about the  Company's  ability to continue as a
going concern. In order to continue as a going concern, the Company will need to
obtain  additional  funds  through debt or equity  offerings to fund its working
capital needs and the development of new  restaurants and a franchising  program
until  profitable  operations  are  achieved.  Management  believes that it will
require approximately $2 million of additional financing for working capital and
to develop additional restaurants.  

During 1997, the Company used $1,986,540 of cash in its operations.  In order to
continue as a going concern and generate positive cash flow from operations, the
Company  must develop an expanded  base of  profitable  restaurants  and realize
revenues from its franchise  program.  The Company  currently  does not have the
necessary  funds  to  develop  any  additional   restaurants  and  will  require
additional  capital in 1998 for the  development of restaurants  and for working
capital.

During 1997,  the Company  invested  $1,213,603 for the purchase of property and
equipment for Company-owned  restaurants opened in 1997 and provided  $3,387,541
of  financing to its area  developers  in the form of notes  receivable  for the
development and operation of ten franchised Harvest Rotisserie  restaurants.  In
the first quarter of 1998,  the area  developers  closed nine of the  franchised
restaurants.  Accordingly,  the Company  considers the entire amount of the area
developer  loans to be impaired and  recognized a full write-off of the loans as
of  December  28,  1997.  The  Company  has  accrued a real  estate  disposition
liability of $800,000 at December 28, 1997,  which the Company  believes will be
sufficient to settle all obligations related to the closing of the Company-owned
and franchised locations.

To date, the Company has financed its capital and  operational  needs with funds
provided from the sale of its  securities,  including its IPO in July 1996,  the
exercise of common stock warrants in January 1997,  the sale of preferred  stock
and warrants  completed in June 1997, and the private sale of preferred stock in
December 1997.  The Company does not have a working  capital line of credit with
any financial institution.

Sources of capital  are  limited to the  Company's  ability to raise  additional
capital from investors,  and ultimately  achieving  profitable  operations.  The

                                       22

<PAGE>


Company will require additional  capital to continue as a going concern.  If the
Company  is  unsuccessful  in  obtaining   additional  capital,   the  Company's
operations and expansion plans will be substantially curtailed or terminated.



                                       23

<PAGE>


ITEM 7.  FINACIAL STATEMENTS

The financial information required by this item is found beginning on page F-1.




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

There have been no changes in or  disagreements  with  accounting  or  financial
disclosure.




                                       24

<PAGE>




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
Harvest Restaurant Group, Inc.
San Antonio, Texas

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Harvest
Restaurant Group, Inc. and Subsidiaries as of December 28, 1997, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each year in the two year period then ended. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Harvest Restaurant Group, Inc.
and  Subsidiaries  as of December 28, 1997 and the results of its operations and
its cash flows for each year in the two year period then  ended,  in  conformity
with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note B to the
financial statements,  the Company has suffered recurring losses from operations
and has a working  capital  deficiency  that raise  substantial  doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also  described in Note B. The  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.


AKIN, DOHERTY, KLEIN & FEUGE, P.C.


San Antonio, Texas
March 27, 1998


                                       F-1




<PAGE>



Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Balance Sheet


                                                                   December 28,
                                                                       1997
                                                                   ------------

ASSETS
Current Assets
    Cash                                                           $    774,674
    Cash, restricted                                                    300,000
    Inventories                                                          15,345
    Other current assets                                                 17,400
                                                                   ------------
         Total Current Assets                                         1,107,419

Property and Equipment, net                                           2,039,052

Other Assets
    Intangible property rights, net of accumulated
      amortization of $237,750                                          161,750
    Deposits                                                             70,978
    Other assets                                                        110,406
                                                                   ------------
                                                                        343,134
                                                                   ------------

                                                                   $  3,489,605
                                                                   ============



LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
    Accounts payable, trade                                        $    652,817
    Accrued liabilities:
       Real estate disposition costs                                    800,000
       Other accrued liabilities                                        156,460
    Current portion of long-term debt                                   211,779
                                                                   ------------
         Total Current Liabilities                                    1,821,056


Long-term Debt, less current portion                                     41,963

Commitments and Contingencies

Stockholders' Equity
    Preferred stock                                                     515,150
    Common stock - $.01 par value; 20,000,000 shares
       authorized, 2,698,630 shares issued and outstanding               26,986
    Additional paid-in capital                                       11,902,073
    Accumulated deficit                                             (10,817,623)
                                                                   ------------
         Total Stockholders' Equity                                   1,626,586
                                                                   ------------

                                                                   $  3,489,605
                                                                   ============

See notes to consolidated financial statements.


                                       F-2


<PAGE>



Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Operations


                                                          Fiscal Year Ended
                                                     December 28,   December 29,
                                                         1997           1996
                                                     -----------    -----------

Revenues
    Restaurant operations                            $ 1,637,569    $   263,892
    Franchise fees                                       400,000
                                                     -----------    -----------
                                                       2,037,569        263,892

Costs and Expenses
    Cost of food and paper                               791,704        122,530
    Restaurant salaries and benefits                     703,148        125,954
    Occupancy and related expenses                       281,611         58,191
    Operating expenses                                   661,416         73,661
    Preopening expenses                                  152,548        131,074
    General and administrative expenses                1,918,707      1,261,198
    Depreciation and amortization                        289,227        104,467
    Loss on abandonment of company-owned properties      484,656
    Loss on disposition of franchised restaurants        700,000
    Write-off of area developer notes receivable       3,387,541
                                                     -----------    -----------
         Total costs and expenses                      9,370,558      1,877,075
                                                     -----------    -----------

Loss from operations                                  (7,332,989)    (1,613,183)

Other income (expense)
    Interest income                                      111,080         56,747
    Interest expense and debt discount                   (18,918)      (454,818)
                                                     -----------    -----------
                                                          92,162       (398,071)
                                                     -----------    -----------

Net loss                                             $(7,240,827)   $(2,011,254)
                                                     ===========    ===========



Per Share Data
    Basic loss per common share                      $     (3.18)   $     (1.29)
                                                     ===========    ===========

    Weighted average number of common
            shares outstanding, basic                  2,380,547      1,553,824
                                                     ===========    ===========




See notes to consolidated financial statements.


                                       F-3


<PAGE>

<TABLE>
<CAPTION>



Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

                                                                                                                 Total
                                                                                Additional                   Stockholders'
                                               Preferred          Common         Paid-In      Accumulated       Equity
                                                 Stock            Stock          Capital        Deficit        (Deficit)
                                                 -----            -----          -------        -------        ---------

<S>                                          <C>              <C>             <C>            <C>             <C>          
Balance at January 1, 1996                   $       --       $      9,900    $    994,007   $ (1,565,542)   $   (561,635)

Issuance of common stock in
   initial public offering                                          10,000        4,730,290                     4,740,290
Other issuances of common stock                                        650          219,233                       219,883
Common stock no longer subject
    to rescission                                                      578          195,240                       195,818
Net loss for the year                                                                          (2,011,254)     (2,011,254)
                                             ------------     ------------    ------------   ------------    ------------

Balance at December 29, 1996                         --             21,128       6,138,770     (3,576,796)      2,583,102

Issuance of common stock
   for exercise of warrants                                          2,562         566,313
                                                                                                                  568,875
Issuance of preferred stock in
   public offering                                515,000                        3,860,436                      4,375,436
Preferred stock dividends paid
   with common stock                                                 3,296          (3,296)
Issuance of preferred stock in
   private placement                                  150                        1,339,850                      1,340,000
Net loss for the year                                                                          (7,240,827)     (7,240,827)
                                             ------------     ------------    ------------   ------------    ------------

Balance at December 28, 1997                 $    515,150     $     26,986    $ 11,902,073   $(10,817,623)   $  1,626,586
                                             ============     ============    ============   ============    ============





See notes to consolidated financial statements.


                                       F-4

</TABLE>
<PAGE>
<TABLE>
<CAPTION>



Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows



                                                                         Fiscal Years Ended
                                                                   December 28,        December 29,
                                                                       1997                1996
                                                                   -----------         -----------
Operating Activities
<S>                                                                <C>                 <C>         
    Net loss for the year                                          $(7,240,827)        $(2,011,254)
    Adjustments to reconcile net loss
      to net cash used in operations:
         Depreciation and amortization                                 289,227             104,467
         Amortization of bridge note discount                                              367,154
         Provision for real estate disposition costs                   800,000
         Impairment of property and equipment                          219,249
         Forfeitures of deposits                                       117,100
         Write-off of area developer notes receivable                3,387,541
         Changes in operating assets and liabilities:
             Inventories                                                (6,687)             (3,614)
             Deferred financing costs                                                      144,074
             Other current assets                                       (6,810)             29,410
             Accounts payable and accrued expenses                     454,667             103,925
                                                                   -----------         -----------
                  Net cash (used) by operating activities           (1,986,540)         (1,265,838)

Investing Activities
    Purchases of property and equipment                             (1,213,603)         (1,059,654)
    Increase in deposits and other assets                             (102,138)           (161,555)
    Issuance of notes receivable to area developers                 (3,387,541)
                                                                   -----------         -----------
                  Net cash (used) by investing activities           (4,703,282)         (1,221,209)

Financing Activities
    Net proceeds from sale of preferred stock and warrants           5,715,436
    Net proceeds from sale of common stock and warrants                568,875           4,960,173
    Proceeds from issuance of bridge notes payable                                         376,370
    Proceeds from bank borrowings                                                          200,000
    Increase in restricted cash for bank obligations                   (80,000)           (220,000)
    Repayments of bridge notes payable                                                  (1,684,500)
    Repayments of bank borrowings                                      (11,258)
                                                                   -----------         -----------
                  Net cash provided by financing activities          6,193,053           3,632,043
                                                                   -----------         -----------

Net increase (decrease)  in cash                                      (496,769)          1,144,996

Cash at beginning of year                                            1,271,443             126,447
                                                                   -----------         -----------

Cash at End of Year                                                $   774,674         $ 1,271,443
                                                                   ===========         ===========





See notes to consolidated financial statements.


                                       F-5
</TABLE>

<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 28, 1997 and December 29, 1996



NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization:  Harvest Restaurant Group, Inc. ("Harvest" or the "Company") is an
operator and developer of a quick service  restaurant concept operated under the
name Harvest  Rotisserie.  The restaurants  provide high quality,  quick service
food  featuring  marinated  oak-roasted  rotisserie  chicken  with a variety  of
homemade side dishes.  At December 28, 1997, there were fourteen  restaurants in
operation,  consisting of three company-owned restaurants in San Antonio, Texas,
one  company-owned  restaurant  in Corpus  Christi,  Texas,  and ten  franchised
restaurants  located in four other states.  During January and February of 1998,
the Company's area developers closed nine of the ten franchised  restaurants and
the Company also closed its Corpus Christi restaurant.

Principles of Consolidation:  The accompanying consolidated financial statements
include  the  accounts of the Company  and its  wholly-owned  subsidiaries.  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

Fiscal Year:  The Company has adopted a 52/53-week  fiscal year that ends on the
last Sunday in December,  and consists of thirteen four-week periods.  The first
quarter  consists  of four  periods  and each of the  remaining  three  quarters
consist of three periods,  with the first,  second and third quarters  ending 16
weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.

Cash  and Cash  Equivalents:  The  Company  considers  all  highly  liquid  debt
instruments  with  an  original  maturity  of  three  months  or less to be cash
equivalents.  At December  28,  1997,  the  Company had  deposits of $291,791 in
financial institutions that exceeded the FDIC insured amount.

Inventories:  Inventories are stated at the lower of cost  (first-in,  first-out
method) or market and consist primarily of restaurant food and paper.

Property and Equipment:  Property and equipment are stated at cost. Depreciation
is provided using the  straight-line  method over the estimated  useful lives or
applicable lease terms of the respective  assets  (generally five to seven years
for  furniture,  fixtures and  equipment  and 15 to 20 years for  buildings  and
leasehold  improvements).  Maintenance  and  repairs  are  charged to expense as
incurred,  while improvements that increase the value of the property and extend
the useful lives are capitalized.

Intangible  Property  Rights:   Intangible  property  rights  acquired  from  an
unaffiliated  corporation are stated at the original acquired cost and amortized
over the expected  period to be benefited.  Amortization  expense of $97,925 and
$39,950 is included in the  accompanying  statements of operations  for 1997 and
1996, respectively.

Long-Lived  Assets:  The Company  periodically  assesses  the  valuation  of its
long-lived  assets  in  light  of  projected   operating  results  and  economic
conditions.  When factors  indicate that the carrying amount of an asset may not
be  recoverable,  the Company  estimates the future cash flows expected from the
use of such asset and its eventual  disposition.  If the sum of the undiscounted
future  cash flows is less than the  carrying  amount of the asset,  the Company
will  recognize an  impairment  loss equal to the excess of the carrying  amount
over the fair value of the asset.

Revenue Recognition: Revenue from Company-owned restaurants is recognized in the
period during which the related food and beverage  products are sold.  Royalties
are  recognized  in the  period  that the  related  franchise  store  revenue is
generated.  Revenue from initial  nonrefundable  franchise and area  development
fees is  recognized  when the  franchise  store  is  opened  and all  conditions
relating  to the sale have been  substantially  performed  or  satisfied  by the
Company.

Preopening  Costs:  Preopening  costs,  which consist  primarily of salaries and
other direct expenses  relating to the set up, initial stocking,  training,  and
general management  activities  incurred prior to the opening of new stores, are
charged to expense as incurred.

Advertising  Costs:  Advertising  costs of $360,028 and $133,366 during 1997 and
1996, respectively, were charged to expense as incurred.

Federal  Income Taxes:  Deferred tax assets and  liabilities  are recognized for
temporary  differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements.  A valuation allowance is provided
against net deferred tax assets when realization is uncertain.

                                      F-6

<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 28, 1997 and December 29, 1996



Loss Per Common  Share:  Loss per common share is presented in  accordance  with
SFAS No. 128  "Earnings per Share",  and is computed by dividing net loss,  less
dividends  on  preferred  stock,  by  the  weighted  average  number  of  shares
outstanding  during each year. The effects of incremental  shares  issuable upon
the assumed  exercise  of stock  options and  warrants is not  presented  as the
results on loss per common share is antidilutive for both 1997 and 1996.

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


NOTE B - UNCERTAINTIES

The accompanying  financial  statements have been prepared  assuming the Company
will  continue as a going  concern.  The Company has incurred  operating  losses
since  inception,  and as of  December  28, 1997 had an  accumulated  deficit of
$10,817,623 and a working capital deficit of $713,637.  In addition,  during the
first quarter of 1998, ten of the Company's fourteen restaurants have closed all
of which  raise  doubts  about the  Company's  ability  to  continue  as a going
concern.  In order to continue  as a going  concern,  the  Company  will need to
obtain  additional  financing  through  debt or  equity  offerings  to fund  the
development  of new  restaurants  and a  franchising  program  until  profitable
operations are achieved.


NOTE C - LONG-TERM DEBT

At December  28,  1997,  the Company had a $200,000  note payable to a financial
institution.  The note is  collateralized  by a $200,000  money market  account,
bears  interest at the rate of 6.50% and is payable in monthly  installments  of
interest only. The principal and accrued interest is due at the maturity date of
April 2, 1998.

At  December  28, 1997 the  Company  has a $53,742  note  payable to a financial
institution,  which the Company had assumed payment responsibility for on behalf
of an  unaffiliated  entity in  connection  with  obtaining  the Corpus  Christi
restaurant  site.  The note bears  interest  at 10.25% and is payable in monthly
installments of $1,394 including principal and interest, and matures in November
2001. Certain equipment, fixtures and equipment collateralize the note.

The Company also has a letter of credit  outstanding at December 28, 1997 in the
amount of  $100,000  issued  in the  favor of a  landlord  as  security  for the
Company's obligations under a real estate lease. The letter of credit is secured
by a $100,000 certificate of deposit.

The Company's weighted-average interest rate on it short-term borrowings, before
amortization  of debt  discount,  was  7.42% in 1997  and  9.8% in  1996.  After
considering amortization of debt discount in 1996, the weighted-average interest
rate was 50.6% in 1996.

                                       F-7


<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



NOTE D - SUPPLEMENTAL FINANCIAL STATEMENT DATA

Property and equipment consists of the following at December 28, 1997:

Land                                                                $   160,000
Buildings and improvements                                              477,936
Furniture, fixtures and equipment                                       679,871
Leasehold improvements                                                  975,261
                                                                    -----------
                                                                      2,293,068
Less accumulated depreciation                                          (254,016)
                                                                    -----------

Property and equipment, net                                         $ 2,039,052
                                                                    ===========


Other accrued liabilities consist of the following at December 28, 1997:

 Payroll and related liabilities                                    $    45,706
 Reporting costs                                                         59,755
 Taxes, other than payroll and income taxes                              50,999
                                                                    -----------

Total other accrued liabilities                                        $156,460
                                                                    ===========


NOTE E - OPERATING LEASES

The Company  currently  conducts the majority of its  operations  and  maintains
administrative  offices in leased  facilities.  The  Company is also the primary
lessee  under  various  leases  for   restaurants   operated  by  the  Company's
franchisees.  See Note L. Lease terms  generally are ten years with two or three
five-year  renewal options.  Most of the leases contain  escalation  clauses and
require payment of common area maintenance charges or taxes, insurance and other
expenses.  The  Company  also  leases  certain  equipment  under  non-cancelable
operating  leases having terms  expiring at various  dates through 2002.  Rental
expense under  operating lease  agreements,  including  common area  maintenance
charges,  was $427,048  and  $120,262 for the years ended  December 28, 1997 and
December 29, 1996, respectively.

Future  minimum lease  payments  that are required  under  operating  leases and
sublease proceeds that have initial or remaining  non-cancelable  lease terms in
excess of one year are as follows:

                                             Minimum       Sublease       Net
                                              Rental        Rental      Rental
    Years Ending December:                   Payments      Proceeds    Payments
    ----------------------                   --------      --------    --------

           1998                             $  457,525   $   54,135   $  403,390
           1999                                432,673       54,135      378,538
           2000                                406,824       54,135      352,689
           2001                                397,610       54,135      343,475
           2002                                365,343       54,135      311,208
           Thereafter                        1,899,530                 1,899,530
                                            ----------   ----------   ----------

   Total future minimum lease payments      $3,959,505   $  270,675   $3,688,830
                                            ==========   ==========   ==========

                                       F-8


<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



NOTE F - FEDERAL INCOME TAXES

Deferred income taxes resulted from the following temporary differences and loss
carryforwards at December 28, 1997:


Deferred tax asset - loss carryforwards                            $ 10,900,000
                                                                   ============

Net deferred tax asset at expected rates                           $  3,706,000
Less valuation allowance                                             (3,706,000)
                                                                   ------------

               Deferred tax asset allowed                          $       --
                                                                   ============

The  Company  has not  recorded  any  income  tax  expense  (benefit)  since its
inception.  The  Company's tax operating  loss  carryforwards  are available for
utilization  against  taxable  income and expire in  various  amounts  from 2008
through 2012.


NOTE G - STOCKHOLDERS' EQUITY

Initial Public  Offering:  In July 1996,  the Company sold  1,000,000  shares of
common  stock and  2,300,000  warrants  to purchase  common  stock in an initial
public  offering  of its  securities.  The  Company  realized  net  proceeds  of
$4,740,290  from the  offering  based upon the sale of the common stock at $5.50
per share and the warrants at $.125 per warrant.

Series A Preferred Stock:  The Company has designated  3,000,000 shares out of a
total of 5,000,000  authorized  shares of its $1.00 par value preferred stock as
Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock").
 In June 1997, the Company sold 515,000  shares of Series A Preferred  Stock and
1,723,400  warrants to purchase Series A Preferred  Stock in a public  offering.
The Company  realized net proceeds of  $4,375,436  from the sale of the Series A
Preferred Stock at the face amount of $10 per share and the warrants at $.10 per
warrant.

Dividends on the Series A Preferred  Stock are cumulative and payable  quarterly
in arrears at a quarterly  rate of $.30 per share,  representing  a yield of 12%
per annum. Dividends may be paid in either cash or an equivalent value of common
stock.  The Series A Preferred  Stock has no voting rights and has a liquidation
preference of $10 per share.

The Series A Preferred  Stock is  convertible at the option of the holder at any
time after  March 11,  1998,  into shares of the  Company's  common  stock.  The
initial conversion rate is 2.7 shares of common stock for each share of Series A
Preferred Stock, subject to adjustment in certain events. The Series A Preferred
Stock will  automatically  convert into the  Company's  common stock at any time
after  March 11,  1998,  if the closing  price of the Series A  Preferred  Stock
exceeds $20 per share for ten consecutive days. The Series A Preferred Stock may
also be redeemed at the option of the Company at any time after March 11,  1998,
upon 30 days  written  notice at 110% of the  average  bid price for the  twenty
trading days prior to the redemption date. The Company has the option to pay the
redemption price in either cash or common stock.

Series B  Preferred  Stock:  The  Company  has  designated  1,000  shares of its
authorized  preferred  stock as Series B Convertible  Preferred Stock ("Series B
Preferred  Stock").  In December  1997,  the Company sold 150 shares of Series B
Preferred Stock in a private  transaction.  The Company realized net proceeds of
$1,340,000  from the sale of the Series B  Preferred  Stock at a face  amount of
$10,000 per share.

The Series B  Preferred  Stock is  convertible  at the option of the holder into
either the Company's Series A Preferred Stock or the Company's common stock. The
conversion rate per share is equal to $10,000 divided by the lower of (a) $11.00
or (b) 80% of the average bid price of the Series A Preferred or common stock at
the time of  conversion.  However,  in order to convert into common  stock,  the
price of the common stock must be above $3.00 per share.  The Series B preferred
stock accrue  dividends at the rate of 7% annually,  payable in cash or stock at
the time of conversion.  The Series B Preferred  Stock is junior to the Series A
Preferred  Stock,  has no voting  rights  and has a  liquidation  preference  of
$10,000 per share.


                                       F-9


<PAGE>
<TABLE>
<CAPTION>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



Share Amounts Issued and Outstanding: The Company has issued and outstanding the
following preferred and common stock:


                                                                  Series A       Series B
                                                                  Preferred      Preferred         Common
                                                                    Stock          Stock           Stock
                                                                    -----          -----           -----

<S>                                                              <C>             <C>             <C>
Shares outstanding at January 1, 1996                                  --              --           990,000

    Issuance of common stock in initial public offering                                           1,000,000
    Other issuances of common stock                                                                  65,000
    Common stock no longer subject to rescission                                                     57,750
                                                                  ---------       ---------       ---------

Shares outstanding at December 29, 1996                                --              --         2,112,750

    Issuance of common stock for exercise of warrants                                               256,280
    Issuance of preferred stock in a public offering                515,000
    Issuance of preferred stock in private placement                                    150
    Preferred stock dividend paid with common stock                                                 329,600
                                                                  ---------       ---------       ---------

Shares outstanding at December 28, 1997                             515,000             150       2,698,630
                                                                  =========       =========       =========


Loss Per Common Share: A reconciliation of the calculation of the basic loss per
common share for the years 1997 and 1996 is as follows:

                                                         1997           1996
                                                     -----------    -----------

Net loss                                             $(7,240,827)   $(2,011,254)

Preferred stock dividends paid in common stock          (339,900)
                                                     -----------    -----------

Net loss applicable to common shareholders           $(7,580,727)   $(2,011,254)
                                                     ===========    ===========


Weighted average common shares outstanding             2,380,547      1,553,824
                                                     ===========    ===========

Basic loss per common share                          $     (3.18)   $     (1.29)
                                                     ===========    ===========


Stock  Option  Plan:  The  Company's  1994 Stock  Option Plan  provides  for the
granting of either  incentive  stock  options or  non-qualified  stock  options.
Options can be issued to officers, employees, directors and outside consultants;
however,  incentive  stock  options are issuable  only to eligible  officers and
employees.  The Company has  reserved a total of 500,000  shares of common stock
for the plan. All options  granted under the plan during 1997 and 1996 have been
at or above fair market value at the date of grant and vest over various periods
beginning in 1997 through 2001.

On September 3, 1997 and February 5, 1998,  the Board of Directors  authorized a
repricing of the option exercise price for all outstanding options granted under
the Plan to  $2.25  and  $1.00,  respectively,  with no  change  in the  vesting
periods.  The revised exercise prices  represented  approximately 150% and 200%,
respectively,  of the  fair  market  value  of the  stock  at  the  date  of the
repricing.

The  Company has adopted the  disclosure-only  provisions  of SFAS No. 123.  Pro
forma  information  regarding  net income and  earnings per share is required by
SFAS No. 123,  which also requires that the  information be determined as if the
Company has  accounted  for its employee  stock  options  granted  subsequent to
December 29, 1996, under the fair value method of that Statement.

                                      F-10
</TABLE>

<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



The fair value of options  granted is estimated using the  Black-Scholes  option
pricing model with the following  weighted  average  assumptions at December 28,
1997 and December 29, 1996:

                                               1997               1996
                                             --------           -------

    Expected volatility                         93%                47%
    Risk-free interest rate                    6.6%               6.5%
    Expected lives                          3 years            4 years
    Dividend yield                             none               none


The Black-Scholes option valuation model was developed for use in estimating the
fair  value of trade  options  that have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions including,  the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is  amortized  to expense  over the vesting  periods.  The  Company's  pro forma
information is as follows for the years 1997 and 1996:

                                                   1997                1996
                                               -------------      -------------

Pro forma net loss                             $  (7,323,827)     $  (2,082,678)

Pro forma net loss per common share                    (3.22)             (1.34)

<TABLE>
<CAPTION>

A summary of the activity of the Company's stock option plan is presented below:

                                                          1997                              1996
                                             ------------------------------   -------------------------------
                                                           Weighted-Average                  Weighted-Average
                                               Shares       Exercise Price     Shares         Exercise Price

<S>                                           <C>             <C>               <C>             <C>       
Outstanding options at beginning of year      206,000         $     5.94        80,000          $     2.50
   Granted                                    240,000               2.80       206,000                5.94
   Exercised                                     --                 --            --                  --
   Forfeited                                     --                 --         (80,000)               2.50
                                             --------                         --------

Outstanding options at end of year            446,000         $     4.25       206,000          $     5.94
                                             ========                         ========

Options exercisable at year end               196,375                           85,000
                                             ========                       ==========

Weighted average fair value of
   options granted during the year                            $     2.80                        $     5.94
                                                              ==========                        ==========



                                      F-11

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



The following  table  summarizes  information  about the options  outstanding at
December 28, 1997, after consideration of the repricing on February 5, 1998:

                                     Options Outstanding                           Options Exercisable
                   ------------------------------------------------------     -----------------------------
                                    Weighted-Average
                     Number             Remaining        Weighted-Average       Number     Weighted-Average
  Exercise Price   Outstanding      Contractual Life       Exercise Price     Exercisable   Exercise Price
  --------------   -----------      ----------------       --------------     -----------   --------------

    <S>              <C>               <C>                   <C>               <C>             <C>   
     $ 1.00          446,000           3.3 years             $ 1.00            196,375         $ 1.00


Warrants: The following is a summary of warrants outstanding at December 28, 1997:

                                                       Warrants/         Exercise
Issue Date          Purpose                             Options            Price               Expiration
----------          -------                             -------            -----               ----------

Common stock warrants:

July 1996           Initial public offering            2,300,000            4.00              July 9, 2001
July 1996           Initial public offering              100,000            6.60              July 9, 2001
July 1996           Initial public offering              200,000            4.15              July 9, 2001
                                                      ----------

    Outstanding at December 28, 1997                   2,600,000
                                                       =========

Series A Preferred Stock warrants:

June 1997           Public offering                    1,723,400           10.50              June 11, 2002
June 1997           Public offering                       50,000           16.00              June 11, 2002
June 1997           Public offering                      150,000           10.63              June 11, 2002
                                                      ----------

    Outstanding at December 28, 1997                   1,923,400
                                                       =========


NOTE H - AREA DEVELOPER FINANCING AND WRITE-OFF OF NOTES RECEIVABLE

On June 25, 1997, the Company  completed the purchase of certain assets of eight
Kenny  Rogers  Roasters  restaurants  located  in  Florida,  Indiana,  and North
Carolina from Roasters Corp., a Florida Corporation. The purchase price included
$1,050,000  in  cash  and  the  assumption  of  certain  liabilities  and  lease
obligations.  The acquisition was accounted for as a purchase,  and accordingly,
the purchase  price,  including  related  acquisition  expenses of $71,405,  was
allocated to identified assets and liabilities, with no excess of purchase price
over the net assets acquired.  Effective  concurrent with the  acquisition,  the
Company  resold these assets to three area  developers,  each majority owned and
controlled by the same  individual,  in exchange for a note  receivable  and the
assignment  of the  assumed  liabilities  by the area  developers.  The  Company
realized  no  gain  or  loss  on the  resale  of  the  properties.  The  Company
subsequently   entered  into  one  additional  area  development   agreement  in
California. The combined total of the agreements provided for the development of
up to 40  franchised  Harvest  Rotisserie  restaurants  over a two to three year
period in Florida, Indiana, North Carolina, and California.

In addition to providing the financing for the purchase of the acquired Roasters
properties,  the Company provided financing for the costs to renovate and reopen
the properties as Harvest  Rotisserie  restaurants.  The Company also financed a
portion of the area developers  initial  working  capital needs.  The loans were
made pursuant to a convertible  secured loan agreement  which provided for a two
to  three  year  draw  period  up to the  maximum  amount  as  set  in the  loan



                                      F-12

</TABLE>

<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



agreements.  During the draw  period,  interest  only is payable to the Company.
Upon  expiration of the draw period,  the loan converts to a ten year amortizing
loan with interest at prime plus 4% and a balloon  payment after the fifth year.
The loans are secured by a pledge of substantially all of the assets of the area
developer  and of all the  outstanding  stock  held by the  owners  of the  area
developer. The loan agreement also provides the Company an option to convert all
or any part of the loan  amount at any time after the draw period into equity of
the area developer.



Ten franchised  restaurants were opened in 1997; however in the first quarter of
1998, area developers have closed all nine of the franchised restaurants located
in Florida, Indiana, and North Carolina.  Accordingly, the Company believes that
all of the area developer loans are impaired and has recorded a write-off of the
area  developer  loans  totaling  $3,387,541 as of December 28, 1997. The entire
amount of the area  developer  loans were  written  off, as the Company does not
expect to recover any amounts from the area developers. The costs expected to be
incurred  with respect to the Company's  guarantee of the long-term  real estate
lease  agreements  on  the  franchised  restaurants  is  discussed  in  Note L -
Contingencies.

Total  interest  income for 1997  recognized on the impaired  loans was $65,059,
which is based on the actual amounts  collected.  Interest income is not accrued
on loans considered  impaired.  The total interest income the Company would have
earned based on the contractual terms of the loans was $170,191.


NOTE I - RELATED PARTY TRANSACTIONS

On August 10, 1995, the Company  entered into a five year  employment  agreement
with its Chairman and Chief Executive Officer.  Annual  compensation is fixed at
the larger of $75,000 or 20% of all franchise and area  development fees paid to
the Company,  together with 5% of all royalty fees received by the Company under
any franchise  agreements and area  development  agreements  executed during the
Chairman's  employment.  In September 1996, the employment agreement was amended
to increase his salary from $75,000 to $90,000 per year.

During 1996, the Company paid its Chairman and Chief  Executive  Officer $29,800
for certain furniture and fixtures used in the operations of the Company.

Pursuant to Statement of Financial  Accounting  Standards No. 57. "Related Party
Disclosures"  all the  Company  financed  area  developers  may be  deemed to be
related parties as a result of the lending and franchise  relationships with the
area developers.  No Company officer, director or members of their families have
any direct or  indirect  interest  with any of the  Company's  area  developers.
Franchise  fees  earned from area  developers  in 1997 was  $400,000,  and total
interest income  received from the area  developers in 1997 was $65,059.  During
1997,  the  Company  loaned  $3,381,255  to its area  developers  to finance the
purchase, development and operation of certain restaurant properties.



NOTE J - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

                                                             1997         1996
                                                           --------     --------

Supplemental disclosure of cash flow information:

    Interest paid in cash                                  $ 18,918     $139,423
    Income taxes paid in cash                                  --           --

Supplemental disclosure of noncash investing and financing activities:

    Assumption of note payable for assets                  $ 65,000     $   --
    Payment of preferred stock dividends in common stock    339,900         --


NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS

The only  financial  instruments  of the Company at December  28,1997,  are cash
equivalents and notes payable. The carrying amount of the financial  instruments
approximate fair value.

                                      F-13


<PAGE>


Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996



NOTE L - CONTINGENCIES

As discussed in Note H, nine of the Company's ten franchised  restaurants opened
in 1997 were subsequently closed in the first quarter of 1998. In addition,  one
Company-owned  restaurant was closed,  and development plans were ceased at four
other locations which were to be developed as  Company-owned  restaurants in San
Antonio.  The Company  had  entered  into  long-term  real estate  leases on the
Company-owned  locations,  and  guaranteed  similar  leases  for the  franchised
locations, as well as guaranteeing certain promissory notes connected with three
of the franchised locations.

Subsequent to the closing of the restaurants and ceasing of development  efforts
at the other  locations,  the  Company  has  contacted  each of the  lessors and
lenders in order to obtain settlement agreements on the related obligations. The
Company  generally has been successful in reaching  settlement  agreements.  The
Company is also a defendant in three lawsuits  filed in federal court  demanding
full  payment  plus  court  costs  associated  with  certain   promissory  notes
associated  with the  acquisition of the Kenny Rogers  Roaster's  restaurants in
Florida.

The Company has evaluated its potential costs for the full settlement of each of
the long-term  real estate leases on the franchise  restaurants,  as well as the
assumed  promissory  notes,  and has accrued  $700,000 at December 28, 1997 as a
real estate disposition liability with a relating charge to operations.

The Company  has also  accrued  $100,000  at December  28, 1997 as a real estate
disposition  liability and recognized a total charge of $484,656  related to the
impairment  and  loss  on  the  abandonment  of  the  four  other  Company-owned
restaurant locations as well as the closing of one Company-owned restaurant. The
charge to operations  includes the full impairment of the leasehold property and
equipment,  and the  recognition  of a loss  on  disposition  on the  restaurant
location and applicable rent expense.

Management believes the accrued real estate disposition liability of $800,000 at
December 28, 1997 will be  sufficient to settle all  obligations  related to the
closing of franchised locations, Company-owned location and the restaurant sites
under  development,  and anticipates that settlement  agreements will be reached
with all respective parties during 1998.


NOTE M - SUBSEQUENT EVENTS

On March 24 1998,  the Company  entered into two  nonbinding  agreements  for an
exchange  of common  stock of the  Company  for the all issued  and  outstanding
common stock of Surf City Squeeze  Acquisition Corp. II ("Surf City"),  and SGI,
Inc.  ("SGI").  The  agreement  also  requires the payment of  $1,000,000 to the
shareholders  of Surf City. The completion of the  acquisitions  is subject to a
feasibility  period that expires no later than April 17, 1998. The completion of
the acquisitions is also subject to the Company's ability to raise $2,000,000 of
new financing  and  obtaining  shareholder  approval for the  acquisition.  Upon
completion,  the Company's current shareholders would retain approximately a 25%
interest of the Company on a post acquisition basis.



                                      F-14


<PAGE>


                                    PART III


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


Directors and Executive Officers

The  following  table sets forth  certain  information  regarding  the Company's
executive officers and directors:
<TABLE>
<CAPTION>

                                                                             Officer or
Name                            Age      Office                              Director Since
----                            ---      ------                              --------------
   
<S>                             <C>      <C>                                 <C> 
William J. Gallagher(1)(2)      58       Chairman of the Board of            June 1993
                                         Directors and Chief
                                         Executive Officer

Larry F. Harris                 39       President, Chief Operating          October 1996
                                         Officer and Director

Sam Bell Steves Rosser          34       Vice President - Development        June 1993
                                         and Director

Joseph Fazzone                  37       Chief Financial Officer             January 1997

Michael M. Hogan(1)(2)          49       Director                            August 1996

Theodore M. Heesch(1)(2)        60       Director                            August 1996

(1)  Member of the Compensation Committee
(2)  Member of the Audit Committee

Directors hold office for a period of one year from their election at the annual
meeting  of  stockholders  and  until  their  successors  are duly  elected  and
qualified.  Officers of the Company are elected by, and serve at the  discretion
of,  the  Board of  Directors.  None of the  above  individuals  has any  family
relationship  with any other Director of Executive Officer expect Mr. Rosser who
is Mr.  Gallagher's  son-in-law.  Directors not employed by the Company  receive
$750 each for attending  Board of  Directors'  meetings and are  reimbursed  for
out-of-pocket expenses.


                                       25

</TABLE>

<PAGE>



Background

The following is a summary of the business  experience of each executive officer
and director of the Company for at least the last five years:



     William J.  Gallagher is the Chairman  and Chief  Executive  Officer of the
Company since December 1996 and he devotes approximately 90% of his time in this
capacity.  In addition, he is President of Jagbanc Capital Ltd., a merchant bank
headquartered in San Antonio,  Texas.  From February 1991 to September 1994, Mr.
Gallagher  was  the  founder  and  then  Chairman  and  CEO  of  WaterMarc  Food
Management,  Inc.,  which  operated 32 Marcos Mexican  restaurants,  Billy Blues
Barbecue  Grills,  Longhorn  Cafes  and BBQ  Pete's  restaurants.  In  addition,
WaterMarc  produced and marketed Chris Pitts and Billy Blues Bar-B-Q sauce. From
February 1990 until September 1992, Mr. Gallagher was a Vice President at Kemper
Securities. Prior to 1990, Mr. Gallagher founded or co-founded several companies
including Sunny's National Stores (a 150-unit convenience store chain in Texas),
American Drive-Inn (an 18-unit drive-in restaurant chain in Houston,  Texas) and
the Guadeloupe Valley Winery in New Braunfels,  Texas. Mr. Gallagher also served
as a director  of  Cluckers  Wood  Roasted  Chicken,  Inc.,  the  developer  and
franchiser  of the  "Cluckers"  restaurant  concept,  from June 1993 to November
1994.

     Larry F.  Harris  joined  the  Company in October  1996 as  Executive  Vice
President and Chief  Operating  Officer and was appointed  President in December
1996.  From  December  1994 to  September  1996 he was  Co-President  and  Chief
Operating  Officer for a Monterey  Pasta Company  franchisee.  From June 1994 to
December  1994, he was Director of Operations for a Boston Market area developer
and from 1984 to 1992, he was employed by PepsiCo's Pizza Hut, Inc., division in
various senior management roles,  including  National Director of Operations for
PepsiCo Foods International Mexico.

     Sam Bell Steves  Rosser  joined the Company in June 1993,  as its President
and  assumed  the duties of Vice  President-Development  in March  1995.  He was
employed by Olive Garden  restaurants as a member of the store  operating  staff
from March 1992 until May 1993.  From October 1988 until  December  1991, he was
employed by Dwight L. Lieb, a real estate  developer,  as a commercial  property
manager and leasing agent.

     Joseph  Fazzone  joined  the  Company in  January  1997 as Chief  Financial
Officer.  He has provided  accounting and financial  consulting  services in San
Antonio, Texas as a sole practitioner since November 1994. From December 1991 to
November  1994,  he  served  as  Chief  Financial   Officer  of  WaterMarc  Food
Management, Inc., a restaurant operator and franchiser founded by Mr. Gallagher.
From 1990 to 1991, he served as Corporate  Controller of TI-IN Network,  Inc., a
San Antonio based educational satellite broadcasting network. From 1989 to 1990,
he served as  Manager-Corporate  Planning  and  Financial  Analysis of Intelogic
Trace,  Inc., a nationwide  computer  service  provider.  From 1984 to 1989, Mr.
Fazzone served as an Audit Manager with the San Antonio office of Ernst & Young.
Mr. Fazzone devotes  approximately 90% of his time to the Company's affairs. Mr.
Fazzone is a certified  public  accountant,  having received a B.B.A.  degree in
accounting from Southwest Texas State  University and an M.B.A.  degree from the
University of Texas at San Antonio.


                                       26

<PAGE>


     Michael  M.  Hogan  received  his  B.B.A.  degree  in  accounting  from the
University  of Texas at  Austin in 1972,  and has been  engaged  in the  private
practice of accounting since 1975. His practice emphasizes restaurant formation,
operation  and  financing.  From  1987 to 1989,  he was a  co-founder  and Chief
Financial  Officer of the 18-unit  American  Drive-Inn  restaurants  in Houston,
Texas,  and in 1990 was one of the  founders of two Tejas Grill  restaurants  in
Austin, Texas.

     Theodore  M.  Heesch  has  been  a  registered  architect  specializing  in
restaurant  and hotel design since 1967.  From 1981 to 1987,  he was employed by
McFaddin  Kendrick,  Inc., an  entertainment  club developer,  as Executive Vice
President.  In 1988, Mr. Heesch formed TMHI to offer consulting  services to the
hospitality  industry,  specializing  in the design and  development of food and
beverage  facilities.  In June 1994,  Mr. Heesch became Senior Vice President of
Development for McFaddin Partners, a restaurant developer.

Significant Employee

     Paul C. LaMotta  joined the Company in September  1997 as Vice President of
Operations.  Mr.  LaMotta  has  over  16  years  experience  in  the  multi-unit
restaurant business. From October 1994 to September 1997 he was Vice President -
Operations for BC Superior, a Boston Market area developer,  with responsibility
for over 30  stores in the  southeast  U.S.  Prior to  September  1994,  he held
operations and franchise management positions with Wendy's from February 1994 to
September 1994; Bonanza from July 1992 to February 1994 and Sbarro's May 1986 to
May 1992.




                                       27

<PAGE>
<TABLE>
<CAPTION>




ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth certain information  concerning  compensation for
the past  three  years to the Chief  Executive  Officer  and to other  executive
officers who received  compensation  in excess of $100,000 during the year ended
December 28, 1997.

Summary Compensation Table

                                             Annual Compensation
                                    ------------------------------------
                                                                 Other          Long-term
                                                                 Annual        Compensation          All
Name and                                                         Compen-          Awards            Other
Principal Position         Year       Salary         Bonus       sation          Options        Compensation
------------------         ----       ------         -----       ------          -------        ------------

<S>                        <C>       <C>           <C>         <C>                   <C>                 <C>
William J. Gallagher       1997      $89,519       $ 37,156     $17,663               $0                  $0
     Chairman and          1996       79,209              0       3,640                0                   0
     Chief Executive       1995       59,211              0           0                0                   0
     Officer

 Larry F. Harris           1997      $87,692       $ 25,000     $     0               $0                  $0
     President and         1996       23,158              0           0                0                   0
     Chief Operating       1995            0              0           0                0                   0
     Officer


In August 1995, the Company entered into a five-year  employment  agreement with
William J. Gallagher, its Chairman, to act as its franchise sales director based
upon a salary  equal to the greater of $75,000 per year or 20% of all  franchise
and area development  fees paid to the Company,  together with 5% of all royalty
fees received by the Company under any franchise agreements and area development
agreements  which were executed  during the time of Mr.  Gallagher's  employment
agreement. Mr. Gallagher was appointed Chief Executive Officer of the Company in
December 1996 and continues to be responsible for franchise and area development
sales. In September 1996, Mr.  Gallagher's  employment  agreement was amended to
increase  his base salary  from  $75,000 to $90,000  per year.  Mr.  Gallagher's
employment  agreement also provides for the payment of other annual compensation
in the form of an auto allowance and life insurance benefits,  which amounted to
$17,663 in 1997.

Larry F. Harris, the Company's  President,  is paid a base salary of $90,000 per
year and is  entitled  to  incentive  bonuses  aggregating  up to an  additional
$90,000  computed  under a  formula  based  upon  the  number  of  Company-owned
restaurants in operation and gross revenues in connection with the restaurants.

Stock Option Plan

In July 1994, the Company adopted its 1994 Stock Option Plan (the "Plan"), which
provides for the grant to  employees,  officers,  directors and  consultants  of
options to purchase shares of Common Stock,  consisting of both "incentive stock
options"  within  the  meaning of Section  422A of the  United  States  Internal
Revenue Code of 1986 (the "Code") and "non-qualified"  options.  Incentive stock
options are  issuable  only to employees  of the  Company,  while  non-qualified
options may be issued to non-employee directors, consultants and others, as well
as to  employees of the  Company.  In July 1997,  the number of shares of Common
Stock  reserved to be issued under the Plan was increase from 250,000 to 500,000
shares.


                                       28
</TABLE>

<PAGE>


The Plan is  administered  by the Board of  Directors,  which  determines  those
individuals who shall receive options,  the time period during which the options
may be partially or fully  exercised,  the number of shares of Common Stock that
may be purchased under each option and the option price.

The per share exercise  price of the Common Stock subject to an incentive  stock
option may not be less than the fair  market  value of the  Common  Stock on the
date the option is granted.  The per share  exercise  price of the Common  Stock
subject to a non-qualified option is established by the Board of Directors.  The
aggregate fair market value (determined as of the date the option is granted) of
the Common Stock that any employee may purchase in any calendar year pursuant to
the exercise of incentive stock options may not exceed  $100,000.  No person who
owns, directly or indirectly,  at the time of the granting of an incentive stock
option more than 10% of the total combined  voting power of all classes of stock
of the Company is eligible to receive any incentive stock options under the Plan
unless the option  price is at least 110% of the fair market value of the Common
Stock  subject to the  option,  determined  on the date of grant.  Non-qualified
options are not subject to these limitations.

No incentive  stock option may be  transferred by an optionee other than by will
or the laws of descent and distribution, and during the lifetime of an optionee,
the option will be  exercisable  only by him or her. In the event of termination
of employment  other than by death or  disability,  the optionee will have three
months after such termination during which he or she can exercise the option.

Upon  termination  of  employment of an optionee by reason of death or permanent
total disability,  his or her option remains exercisable for one year thereafter
to the extent it was  exercisable  on the date of such  termination.  No similar
limitation applies to nonqualified options.

Options under the Plan must be granted  within ten years from the effective date
of the Plan.  The  incentive  stock  options  granted  under the Plan  cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater  stockholders  are limited to five-year  terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the  optionee  having a fair  market  value equal to the  exercise  price of the
options  being  exercised,  or by a  combination  of such  methods  of  payment.
Therefore,  an optionee may be able to tender shares of Common Stock to purchase
additional  shares of Common Stock and may  theoretically  exercise all of their
stock options with no additional  investment  other than their original  shares.
Any unexercised  options that expire or that terminate upon an optionee  ceasing
to be an officer,  director or an employee of the Company become available again
for issuance.

On September 3, 1997 and February 5, 1998,  the Board of Directors  authorized a
repricing of the option exercise price for all outstanding options granted under
the Plan to  $2.25  and  $1.00,  respectively,  with no  change  in the  vesting
periods.  The revised exercise prices represented  approximately 150% and 200% ,
respectively,  of the  fair  market  value  of the  stock  at  the  date  of the

                                       29

<PAGE>


repricing.  As of March 27, 1998,  options to purchase  483,000 shares have been
granted under the Plan,  but no options have been  exercised to date. A total of
420,000  options  have  been  issued to the  Company's  executive  officers  and
directors, as follows.

                                 Number of       Exercise
     Name                     Options Granted     Price        Expiration Date
     ----                     ---------------     -----        ---------------

     William J. Gallagher         140,000         $1.00        September 2001
     Larry F. Harris              100,000          1.00        September 2001
     Sam Bell Steves Rosser        40,000          1.00        September 2002
     Joseph Fazzone                80,000          1.00        January   2002
     Theodore M. Heesch            30,000          1.00        September 2001
     Michael M. Hogan              30,000          1.00        September 2001
                                 --------
     Total                        420,000
                                 ========




                                       30

<PAGE>




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  table  sets  forth  certain  information  as of March  27,  1998
concerning stock ownership of the Company's Common Stock by all persons known to
the Company to own  beneficially 5% or more of the outstanding  shares of Common
Stock, by each director and by all directors and officers as a group.

Except as  otherwise  noted,  the  persons  named in the  table  own the  shares
beneficially  and of record  and have sole  voting  and  investment  power  with
respect  to all  shares  of  Common  Stock  shown as owned by them,  subject  to
community property laws, where applicable. Each stockholder's address is in care
of the Company at 1250 N.E. Loop 410, Suite 335, San Antonio,  Texas 78209.  The
table also reflects all shares of Common Stock,  which each  individual  has the
right to acquire  within 60 days from the date  hereof  upon  exercise  of stock
options, or common stock purchase warrants.

                                              Number of
                                              Shares of
                                               Common
                                             Stock Owned           Percent of
                                              of Record           Common Stock
    Name                                   and Beneficially          Owned
    ----                                   ----------------          -----

    William J. Gallagher (l) (2)                186,667               6.6%
    Larry F. Harris (3)                         100,000               3.6%
    Sam Bell Steves Rosser (4)                  106,666               3.9%
    Joseph Fazzone (5)                           80,000               2.9%
    Michael M. Hogan (6)                         30,000               1.1%
    Theodore M. Heesch (6)                       30,000               1.1%

    All officers and directors
    as a group (6 persons) (2)(3)(4)          3,119,030              17.1%
                           (5)(6)

(1)  Messrs. Gallagher and Rosser may be deemed to be "promoters" and "founders"
     of the Company as those terms are defined under the Securities Act of 1933,
     as amended, and the rules and regulations promulgated thereunder.
(2)  Includes  140,000  shares  that Mr.  Gallagher  may  purchase  pursuant  to
     options.
(3)  Includes 100,000 shares that Mr. Harris may purchase pursuant to options.
(4)  Includes 40,000 shares that Mr. Rosser may purchase pursuant to options.
(5)  Includes 50,000 shares that Mr. Fazzone may purchase pursuant to options
(6)  Includes 30,000 shares that Mr. Hogan, and Mr. Heesch may purchase pursuant
     to options.


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<PAGE>



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In March 1995, the Company  executed an agreement  with Bruce T. McGill,  then a
director of the Company, to develop up to ten Cluckers  restaurants in Singapore
over a 20-year period. Mr. McGill agreed to pay a $50,000 license fee (including
$20,000  in cash and a  promissory  note for  $30,000),  a 5%  royalty  and a 4%
advertising fee on the gross revenues  generated from the Cluckers  restaurants.
The license was converted to apply to Harvest  Rotisserie  restaurants  in March
1996. In October 1996, the Company  refunded  $10,000 of the deposit,  cancelled
the $30,000  promissory  note and reduced  the number of  restaurants  under the
agreement from ten to two restaurants.  Under the agreement, Mr. McGill also had
the  right of first  refusal  until  March  30,  1997 to match  the terms of any
license the Company agrees to sell to develop Harvest Rotisserie  restaurants in
Malaysia. No restaurants have yet been developed under the agreement.


In August  1995,  the Company  entered  into an  employment  agreement  with Mr.
Gallagher,  the  Chairman  and Chief  Executive  Officer of the Company that was
subsequently amended in September 1996.

During 1996, the Company paid Mr. Gallagher  $29,800 for the purchase of certain
furniture and fixtures used in the operation of the Company.






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<PAGE>



ITEM 13. EXHIBITS AND REPORTS ON FORM -K
----------------------------------------

(a.) Exhibits:

Exhibit No.                         Title
-----------                         -----

2.01           Articles of Incorporation of the Registrant, as amended(l)

2.02           Bylaws of the Registrant(l)

2.03           Articles of Incorporation of Harvest Restaurants, Inc.(l)

2.04           Bylaws of Harvest Restaurants, Inc.(l)

2.05           Articles of Incorporation, of Cluckers Restaurants, Inc.(l)

2.06           Bylaws of Cluckers Restaurants, Inc.(l)

10.01          Incentive Stock Option Plan(l)

10.02          Settlement Agreement with Cluckers Wood Roasted Chicken, Inc.(l)

10.12          Uniform Franchise Offering Circular (Cluckers) (1)

10.13          Form of Franchise Agreement (Cluckers)(1)

10.14          Form of Area Development Agreement (Cluckers)(1)

10.15          Employment Agreement with Mr. Gallagher(l)

10.16          Employment Agreement with Mr. Gibbs (l)

10.17          Area Development Agreement with Mr. McGill(l)

10.20          Uniform Franchise Offering Circular (Harvest Rotisserie)(1)

10.21          Form of Area Development Agreement (Harvest Rotisserie)(1)

10.22          Form of Franchise Agreement (Harvest Rotisserie)(1)

10.23          License Agreement(l)

10.24          License Agreement(l)


                                       33

<PAGE>


10.25          Amendment to Area Development Agreement with Mr. McGill (2)

10.27          Ground Lease      (Harvest Rotisserie - Dezavala) (2)

10.28          Ground Lease      (Harvest Rotisserie - Herzberg) (2)

10-29          Consulting Agreement with the Representative (2)

10.30          Building Lease (Harvest Rotisserie - Corpus Christi) (2)

10.31          Building Lease (Harvest Rotisserie - San Antonio) (2)

10.32          Agreement with Roasters Corp. (2)

10.33          Agreement with Pollo Operators, Inc. (2)

10.34          Building Lease (Harvest Rotisserie - 11730 West Avenue) (2)

10.35          Land Contract (St. Petersburg) (2)

10.37          Subscription Documents relative to purchase of Series B Preferred
               Stock (3)

10.38          Form of Convertible Secured Note issued to area developers

10.39          Form of Revolving Promissory Note issued to area developers

10.40          Share Exchange Agreement with Surf City Acquisition Corp II.

10.41          Share Exchange Agreement with Sports Group International, Inc.

27.1           Financial Data Schedule as of December 28, 1997


(1)  Incorporated  by  reference  to the  Registrant's  definitive  Registration
     Statement on Form SB-2,  file No.  33-95796  declared  effective on July 9,
     1996.
(2)  Incorporated  by  reference  to the  Registrant's  definitive  Registration
     Statement on Form SB-2, file no. 333-21067  declared  effective on June 11,
     1997.
(3)  Incorporated  by  reference  to the  Registrant's  definitive  Registration
     Statement on Form S-3, file no.  333-45189  declared  effective on February
     17, 1998.

(B)  Reports on Form 8-K

The Company  filed a Form 8-K during the fourth  quarter of 1997 dated  December
26, 1997.  The Form 8-K reported  under Item 5. (Other Events) the completion of
the sale of 150 shares of the Company's $1.00 par value Series B Preferred Stock
in a private transaction for gross proceeds of $1,500,000.


                                       34

<PAGE>


                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in San Antonio,Texas, on April 13, 1998.

                                           HARVEST RESTAURANT GROUP, INC.


                                           By: /s/ William J. Gallagher
                                              ----------------------------------
                                              William J. Gallagher
                                              Chief Executive Officer


Pursuant to the  requirements  of the Securities  Act of 1933, as amended,  this
Report has been signed below by the following persons on the dates indicated.

Signature                      Title                             Date
---------                      -----                             ----

/s/ William J. Gallagher       Chairman of the Board of          April 13, 1998
William J. Gallagher           Directors and Chief Executive
                               Officer

/s/ Larry F. Harris            President and Director            April 13, 1998
Larry F. Harris

/s/ Sam Bell Steves Rosser     Vice President - Development,     April 13, l998
Sam Bell Steves Rosser         and Director

/s/ Joseph Fazzone             Chief Financial officer           April 13, 1998
Joseph Fazzone                 and Principal Accounting
                               Officer

/s/ Michael M. Hogan           Director                          April 13, 1998
Michael M. Hogan

/s/ Theodore M. Heesch         Director                          April 13, 1998
Theodore M. Heesch



                                       35