<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                             Washington, DC  20549

                                   FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

                                      OR

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

       For the transition period from ________________ to ______________

                         Commission file number 0-1954

                               KOO KOO ROO, INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)

                Delaware                                22-3132583
      -------------------------------               -------------------
      (State or Other Jurisdiction of                (I.R.S. Employer
       Incorporation or Organization)               Identification No.)

        11075 Santa Monica Boulevard, Suite 225, Los Angeles, CA  90025
        ---------------------------------------------------------------
              (Address of principal executive offices) (Zip Code)

                                (310) 479-2080
             ----------------------------------------------------
             (Registrant's telephone number, including area code)


          Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                                Yes   [X]    No [ ]

          As of August 4, 1997, the registrant had issued and outstanding
23,455,694 shares of common stock, $.01 par value per share.

                                 Page 1 of 14
<PAGE>
 
                                   FORM 10-Q
                                     INDEX
<TABLE>
<CAPTION>
                                                                  PAGE NO. 
<S>                                                               <C>
PART I.  FINANCIAL INFORMATION           
 
Item 1.  Financial Statements:
     Condensed Consolidated Statements of Operations for the         
     Three and Six Months Ended June 30, 1996 and 1997               3 
 
     Condensed Consolidated Balance Sheets as of                     
     December 31, 1996 and June 30, 1997                             4
 
     Condensed Consolidated Statements of Cash Flows for the         
     Six Months Ended June 30, 1996 and 1997                         5
 
     Notes to Condensed Consolidated Financial Statements            6
 
Item 2.   Management's Discussion and Analysis                  
     of Financial Condition and Results of Operations               7-11
 
 
PART II.  OTHER INFORMATION
 
Item 1.   Legal Proceedings.                                         12
 
Item 2.   Changes in Securities.                                     12
 
Item 3.   Defaults Upon Senior Securities                            12
 
Item 4.   Submission of Matters to a Vote of Security Holders.       12
 
Item 5.   Other Information                                          12
 
Item 6.   Exhibits and Reports on Form 8-K                           13
 
Signatures                                                           14
</TABLE>

                                 Page 2 of 14
<PAGE>
 
                        PART 1 - FINANCIAL INFORMATION
                        ------------------------------

ITEM 1. FINANCIAL STATEMENTS


                      KOO KOO ROO, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                             Three              Three              Six               Six
                                                          Months Ended       Months Ended     Months Ended      Months Ended
                                                            June 30,           June 30,         June 30,          June 30,
                                                              1996               1997             1996              1997
                                                       ----------------   ----------------  ---------------   ---------------
<S>                                                    <C>                <C>               <C>               <C>
Revenues:
Sales                                                     $ 8,661,890        $16,591,438      $16,019,263       $28,535,878       
Interest and other                                            714,959            297,989          833,591           701,920 
                                                          -----------        -----------      -----------       ----------- 
     Total revenues                                         9,376,849         16,889,427       16,852,854        29,237,798 
Cost of sales                                               5,910,355         11,681,045       11,055,763        20,190,290 
                                                          -----------        -----------      -----------       ----------- 
     Gross profit                                           3,466,494          5,208,382        5,797,091         9,047,508 
Operating expenses                                          5,099,234          8,046,583        9,206,354        15,409,545 
                                                          -----------        -----------      -----------       ----------- 
Loss before minority interest and joint ventures           (1,632,740)        (2,838,201)      (3,409,263)       (6,362,037)
Equity in net loss of joint ventures                              -             (203,303)             -            (338,303)
Minority share of net loss                                     37,301            144,394          111,256           308,583 
                                                          -----------        -----------      -----------       ----------- 
     Net loss                                              (1,595,439)        (2,897,110)      (3,298,007)       (6,391,757)
Dividends on preferred stock                                 (375,000)          (629,895)             -          (1,067,756)
Deemed dividends on preferred stock                               -             (743,000)        (424,200)       (1,028,000)
                                                          -----------        -----------      -----------       ----------- 
Net loss applicable to common stockholders                $(1,970,439)       $(4,270,005)     $(3,722,207)      $(8,487,513)
                                                          ===========        ===========      ===========       ===========   
Per Common Share:                                                                                                           
Net loss                                                  $     (0.11)       $     (0.15)     $     (0.23)      $     (0.36)
Dividends on preferred stock                                    (0.02)             (0.07)           (0.03)            (0.12)
                                                          -----------        -----------      -----------       ----------- 
Net loss per common share                                 $     (0.13)       $     (0.22)     $     (0.26)      $     (0.48)
                                                          ===========        ===========      ===========       ===========   
Weighted average number of common and                                                                                       
common equivalent shares                                   14,785,915         19,046,463       14,571,560        17,601,149 
                                                          ===========        ===========      ===========       ===========   
</TABLE>

                                 Page 3 Of 14
<PAGE>

                      KOO KOO ROO, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                  June 30,
                                                                December 31,        1997   
                                                                    1996*        (Unaudited)
                                                               -------------     ------------
<S>                                                             <C>                <C>    
                             ASSETS                  

Current Assets:
   Cash and cash equivalents                                    $  4,591,318     $  9,209,670
   Marketable securities                                           5,220,452        4,684,127
   Receivables                                                     1,802,919        2,075,616
   Inventories                                                       814,830        1,266,508
   Prepaid expenses                                                  195,510          308,733
                                                                ------------     ------------
         Total current assets                                     12,625,029       17,544,654
Property and equipment                                            31,307,340       41,700,019
Investments in and advances to related entities                      461,623        1,626,073
Notes Receivable - Long term                                            -           1,685,916
Intangibles and other assets                                       5,378,095       11,760,356
                                                                ------------     ------------
                                                                $ 49,772,087     $ 74,317,018
                                                                ============     ============
                                                                             
                                                                             
                 LIABILITIES AND STOCKHOLDERS' EQUITY                        

Current Liabilities:                                                         
   Accounts payable                                             $  3,263,706     $  4,442,097
   Accrued payroll                                                   634,216          899,708
   Other accrued liabilities                                       1,398,634        2,300,270
   Current portion of long-term debt                                 220,166          493,698
                                                                ------------     ------------
         Total current liabilities                                 5,516,722        8,135,773
                                                                ------------     ------------
Notes and loans payable, long-term                                 1,475,089        1,870,520
                                                                ------------     ------------
Minority interest                                                    230,622               -
                                                                ------------     ------------
Stockholders' Equity:                                                        
  Preferred stock, $.01 par value, 5,000,000                                 
    shares authorized; 1,027,193 and  285,647 shares                         
    of Series A and 0 and 279,856 shares of Series B,                        
    Adjustable Convertible Preferred Stock issued and                        
    outstanding (aggregate liquidation preference $35,126,775)        10,272            5,655
  Common stock, $.01 par value, 50,000,000                                   
    shares authorized; 15,933,822 and 22,674,734                             
    shares issued and outstanding                                    159,339          226,747
  Additional paid-in capital                                      73,623,089      104,003,175
  Accumulated deficit                                            (30,607,536)     (39,258,122)
  Treasury stock, 72,512 and 100,012 shares at cost                   (2,123)        (112,093)
  Common stock issued for unearned compensation                     (633,387)        (554,637)
                                                                ------------     ------------
         Total stockholders' equity                               42,549,654       64,310,725
                                                                ------------     ------------
                                                                $ 49,772,087     $ 74,317,018
                                                                ============     ============
</TABLE>
* Derived from audited financial statements
 
                                 Page 4 of 14
<PAGE>

                      KOO KOO ROO, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                           Six              Six
                                                      Months Ended      Months Ended
                                                         June 30,          June 30,
                                                          1996              1997
                                                      ------------      ------------
<S>                                                   <C>               <C>                  
Cash Flows From Operating Activities:                 
  Net loss                                            $ (3,298,007)     $ (6,391,757)
  Adjustments to reconcile net loss to net cash                         
  used in operating activities:                                         
    Depreciation and amortization                        1,780,306         2,730,440
    Minority interest in net loss                         (111,256)         (308,583)
    Loss/(Gain) on writeoff or sale of assets              278,285          (200,588)
    Common stock issued for expenses and other              75,750                -
    Changes in operating assets and liabilities:                        
      Inventories                                          (80,304)         (221,083)
      Prepaid expenses and other assets                   (303,067)         (113,223)
      Accounts payable                                     256,616           926,022
      Accrued expenses and other liabilities               194,472           545,986
                                                      ------------      ------------
          Net cash used in operating activities         (1,207,205)       (3,032,786)
                                                      ------------      ------------
                                                                        
Cash Flows From Investing Activities:                                   
  Acquisition of property and equipment                 (8,284,720)       (7,423,477)
  Acquisition of Hamburger Hamlet                              -         (10,476,955)
  Purchase of marketable securities                     (6,847,666)       (9,350,130)
  Sale of marketable securities                          2,216,344         9,886,455
  Pre-opening costs                                       (657,607)         (761,363)
  Payments on note from sale of restaurant                     -             100,000
  Payments from sale/leaseback of store assets                 -           1,418,039
  Notes and loans to employees and others                      -            (658,613)
  Lease acquisition and other                             (709,579)          (74,871)
  Investments in and advances to related entities         (221,108)       (1,164,450)
                                                      ------------      ------------
          Net cash used in investing activities        (14,504,336)      (18,505,365)
                                                      ------------      ------------
                                                                        
Cash Flows From Financing Activities:                                   
  Proceeds from private placements, net                 30,465,492        26,685,435
  Debt repayments                                              -            (201,927)
  Minority capital contributions                           268,414            75,622
  Preferred Stock Dividends                                (49,200)         (292,861)
  Repurchase of Common Stock                                   -            (109,970)
  Exercise of common stock options and warrants             72,562               204
                                                      ------------      ------------
          Net cash provided by financing activities     30,757,268        26,156,503
                                                      ------------      ------------
Net Increase in Cash and Cash Equivalents               15,045,727         4,618,352
Cash and Cash Equivalents, beginning of period           3,501,815         4,591,318
                                                      ------------      ------------
Cash and Cash Equivalents, end of period              $ 18,547,542      $  9,209,670
                                                      ============      ============
</TABLE>

                                 Page 5 of 14
<PAGE>
 
                      KOO KOO ROO, INC. AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. The consolidated financial statements include the accounts of the Company,
   its majority-owned subsidiaries and limited partnerships in which the Company
   has a controlling interest.  All significant inter-company transactions and
   balances have been eliminated.

2. The accompanying unaudited consolidated financial statements were prepared on
   the accrual basis of accounting.  In the opinion of management, all
   adjustments (consisting only of normal, recurring accruals) which are
   necessary for a fair presentation of the financial results for the periods
   presented have been made.  The interim period results of operations are not
   necessarily indicative of the results of operations for the full year.

3. On May 19, 1997, the Company completed the acquisition of 14 Hamburger Hamlet
   restaurants for a total consideration consisting of $9.7 million in cash,
   150,000 shares of restricted common stock and assumption of $250,000 in debt
   and the related real property leases.  Ten restaurants are located in
   California and four in the Washington, D.C. Beltway area.  The Company
   financed the acquisition with cash on hand.  The Company accounted for the
   acquisition using the purchase method of accounting.

4. During the quarter ended June 30, 1997, 653,224  shares of the Company's 5%
   Series A Adjustable Convertible Preferred Stock (the "Series A Convertible
   Preferred Stock") were converted into 5,675,558 shares of the Company's
   Common Stock.  In addition 10,144 shares of the Company's 6% Series B
   Adjustable Convertible Preferred Stock (the "Series B Convertible Preferred
   Stock") were converted into 227,551 shares of the Company's Common Stock.

5. During July 1997, the Company closed its sole restaurant located in Denver,
   Colorado. 

6. In April 1997, the Company approved a plan for the repurchase of up to one
   million shares of the Company's Common Stock.  During the quarter ending June
   30, 1997 the Company repurchased 27,500 shares of Common Stock at an
   aggregate purchase price of approximately $110,000.  The Company does not
   presently plan to acquire additional shares during 1997, although this
   determination is subject to change.

7. Statement of Financial Accounting Standards No. 129, "Disclosure of
   Information about Capital Structure" (SFAS No. 129) issued by the FASB is
   effective for financial statements with fiscal years ending after December
   15, 1997.  The new standard reinstates various securities disclosure
   requirements previously in effect under Accounting Principles Board Opinion
   No. 15, which has been superseded by SFAS No. 128.  The Company does not
   expect the adoption of SFAS No. 129 to have a material effect on its
   financial position or results of operations.

8. Statement of Financial Accounting Standards No. 130, "Reporting
   Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
   financial statements with fiscal years beginning after December 15, 1997.
   Earlier application is permitted.  SFAS 130 establishes standards for
   reporting and display of comprehensive income and its components in a full
   set of general-purpose financial statements.  The Company has not determined
   the effect on its financial position or results of operations from the
   adoption of this statement.

9. Statement of Financial Accounting Standards No. 131, "Disclosures about
   Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
   the FASB is effective for financial statements beginning after December 15,
   1997.  The new standard requires that public business enterprises report
   certain information about operating segments in complete sets of financial
   statements of the enterprise and in condensed financial statements of interim
   periods issued to shareholders.  It also requires that public business
   enterprises report certain information about their products and services, the
   geographic areas in which they operate and their major customers.  The
   Company does not expect adoption of SFAS No. 131 to have a material effect on
   its financial position or results of operations.

                                 Page 6 of 14
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS
 
HIGHLIGHTS FOR THE QUARTER ENDED JUNE 30, 1997

     Koo Koo Roo, Inc. ("the Company") has begun implementation of a strategy
refinement of its four operating entities as announced at its Annual Meeting in
June 1997.  These refinements will focus the Company's capital and operating
resources on expansion of its Koo Koo Roo California Kitchen concept.  In April,
the Arrosto units were placed under the management of the Koo Koo Roo store
managers via an intercompany license to reduce labor and operating costs in the
units.  At the same time, senior management at Color Me Mine was replaced and
the strategy of Color Me Mine was changed to focus on franchising to accelerate
corporate development and curtail capital requirements.

     In May, the Company acquired 14 full service restaurants from Hamburger
Hamlet. Based on the historical performance of the acquired assets, this
acquisition will improve cash flow in both the Los Angeles and Washington D.C.
markets where ten and four of the acquired restaurants operate respectively. For
the six weeks of Hamburger Hamlet operations included in the quarter ending June
30, 1997, the acquired operations contributed $113,000 in operating income after
incremental overhead including the costs of relocating its corporate office into
the offices of Color Me Mine. The Company has also implemented a test in the
Sherman Oaks Hamburger Hamlet by offering a limited menu of Koo Koo Roo items;
however, it is too early to assess the success of this program.

     In addition, Koo Koo Roo California Kitchen has developed a three prong
real estate strategy to reduce capital requirements and gain operating
efficiencies at the store level.  This strategy includes its original 3,500
square foot prototype, a new 2,000 foot prototype designed to enable the Company
to open stores in lower density areas, and a 700 to 1,000 square foot kiosk
designed for airports, food courts and the lobbys of office buildings. The
Company opened its first 750 square foot kiosk at National Airport in
Washington, D.C. in July 1997.

     The Company signed eight leases for new Koo Koo Roo California Kitchen
stores in the second quarter and three in the first half of July 1997. The
Company ended the quarter with 41 opened or leased stores in total, 31 opened or
leased in the Southern California market and an average of two stores opened or
leased in each of its five other markets.

     As of August 7, 1997, the Company operated 46 restaurants, including four
new restaurants opened during the quarter ended June 30, 1997 and 14 full
service restaurants acquired from Hamburger Hamlet on May 19, 1997. On May 8,
1997, the first international Koo Koo Roo California Kitchen restaurant was
opened in Toronto, Canada. A second restaurant was opened in Toronto on June 20,
1997. The Company is a 40% partner in the joint venture in Canada. In July 1997,
the Company closed its sole restaurant located in Denver, Colorado due to a
change in its strategy to focus growth in 1997 and 1998 on six markets: Northern
and Southern California, New Jersey, New York, Washington D.C. and Florida.

     As of August 7, 1997, 26 Color Me Mine ceramics studios were open and
operating, including 11 ceramics studios owned and operated by the Company, ten
ceramic studios owned and operated by joint ventures and five franchised
ceramics studios. Since April 1, 1997, Color Me Mine has sold 28 franchise
units.



RESULTS OF OPERATIONS

     The Company incurred a net loss of $2,897,000 during the three months
ended June 30, 1997 compared to a net  loss of $1,595,000 for the quarter ended
June 30, 1996. The net loss for the quarter included a loss of $622,000
attributable to Color Me Mine's operations compared to operating income of
$164,000 for the quarter ending June 30, 1996.

     The net loss attributable to the restaurant operations was due in large
part to the cost of the Company's corporate infrastructure which is designed to
support a larger number of Koo Koo Roo restaurants than were opened, as well as
to losses attributable to new markets.  The Company's corporate overhead
contemplates a greater number of stores and studios than are currently open and
will support a greater rate of new development than is presently occurring.
Management is addressing this imbalance through cost control efforts and an
increase in lease signings which increases planned openings.

                                 Page 7 of 14
<PAGE>
 
     Color Me Mine's new management team, which was put in place in April
1997, has significantly increased franchise sales and streamlined operations.
The majority of its loss is attributable to management salaries, marketing
materials, factory expansion and sales expenses associated with the development
of Color Me Mine franchise sales and support programs.  During the quarter
ended June 30, 1997, the franchise sales effort was changed from a joint
venture to a franchise format, the initial franchise fee was reduced from
$30,000 to $15,000, and certain changes in management and reductions in overhead
costs were implemented consistent with this new focus.  During the quarter
agreements for 28 franchise units were signed. As of June 30, 1997 Color Me Mine
also had four signed letters of intent representing up to 145 franchise units
outside the United States; however, there can be no assurance that these letters
of intent will result in definitive franchise agreements.

QUARTER TO QUARTER COMPARISON

RESTAURANT OPERATIONS

     Restaurant sales were $15,949,000 in the current quarter compared to
$8,378,000 in the same period of the prior year, an increase of 90.4%.  Sales
for the current quarter were produced by 31 Koo Koo Roo restaurants and 14
Hamburger Hamlet restaurants, compared to 21 Koo Koo Roo California Kitchen
restaurants in same quarter of the prior year.  Sales related to Hamburger
Hamlet were generated from six weeks of operations during the quarter and
amounted to $3,443,000, approximately 20% of total restaurant sales.  Four new
Koo Koo Roo California Kitchen restaurants were opened during the current
quarter in  Aliso Viejo and Laguna Hills, California, Falls Church, Virginia and
Westfield, New Jersey.  Average same store sales for the 14 mature Koo Koo Roo
restaurants (which are those open more than 18 months) increased 1.6%.

     Interest and other revenues for the current quarter includes $347,000 in
interest income, offset by $88,000 in interest expense. During the prior year's
quarter, the Company received $379,000 in interest income.  Interest income
resulted from the investment of the net proceeds (approximately $26.7 million)
received from the private placement of the Company's Series B Convertible
Preferred Stock which occurred in February 1997. Interest expense relates to
equipment financing for the two Florida joint venture restaurants and a secured
promissory note in connection with the purchase of a land parcel for the
Burbank, California location.

     Cost of sales were $11,079,000 in the current quarter compared to
$5,821,000 in the same period of the prior year. These costs were flat compared
to the same period of the prior year. Gross profit for the quarters ended 
June 30, 1997 and June 30, 1996, as a percentage of sales, was 30.5%.

     Operating expenses amounted to $7,216,000 in the current quarter compared
to $4,581,000 in the same quarter of the prior year. Operating expenses as a
percentage of revenues decreased to 45.2% from 54.7% in the same quarter of the
prior year. This 9.5 point improvement is due to efficiencies achieved with
increased sales from additional locations opened since the end of the second
quarter of 1996 and sales generated by the 14 Hamburger Hamlet restaurants
acquired during the current quarter. Occupancy costs increased approximately
$554,000 due to new Koo Koo Roo California Kitchen store openings and to six
weeks of occupancy costs associated with the operation of Hamburger Hamlet.
Depreciation and amortization increased by $244,000 due to additional store
openings since the end of the second quarter of 1996 and to the acquisition of
the Hamburger Hamlet restaurants.

     The Company accrued a quarterly dividend to the holders of its Series A
Convertible Preferred Stock amounting to $88,000, which was paid in cash in July
1997. In addition the Company issued Common Stock valued at $121,000 in payment
of dividends related to Series A Convertible Preferred Stock conversions during
the quarter. The Company also accrued non-cash dividends on its Series B
Convertible Preferred Stock, in the amount of $421,000 representing the value of
additional shares of Series B Convertible Preferred Stock payable as a dividend
in kind on August 1, 1997 and $1.0 million representing an imputed dividend on
the Series B Convertible Preferred Stock although no shares were issued or cash
paid. The imputed dividend charge relates to the discount feature associated
with the Series B Convertible Preferred Stock computed in accordance with the
SEC's recent position on accounting for preferred stock which is convertible at
a discount to the market. The Company has the option of paying the dividends on
the Series A and Series B Convertible Preferred Stock in cash or in shares of
Common Stock for the Series A Convertible Preferred Stock or in additional
shares of Series B Convertible Preferred Stock for the Series B Convertible
Preferred Stock.

     The Company's present expansion plans contemplate a number of new store
openings during the balance of 1997 and into 1998.  In connection with new store
openings, pre-opening costs (such as training of new employees and various site
costs) are capitalized until the store is opened at which time they are
amortized on a straight-line basis over the first twelve months of operations.
Pre-opening amortization and equipment and leasehold depreciation is expected to
increase as a result of an increase in store openings.
 
                                 Page 8 of 14
<PAGE>
 
CERAMIC STUDIO OPERATIONS

     Revenues were $790,000 in the quarter ended June 30, 1997 compared to
$548,000 in the quarter ended June 30, 1996.  Sales for the quarter ended June
30, 1997 were produced by 10  Color Me Mine ceramics studios owned and operated
by the Company compared to four ceramics studios owned and operated by the
Company during the quarter ended June 30, 1996.  Franchise fees and royalties
for the quarter ended June 30, 1997 were $148,000 compared to $264,000 for the
quarter ended June 30, 1996.

     Color Me Mine's net loss for the quarter ended June 30, 1997 amounted to
$662,000 compared to operating income of $164,000 for the quarter ending June
30, 1996. The current quarter loss was incurred at a declining rate during the
quarter and management expects continued improvement in its financial
performance during the third quarter due to the opening of signed franchise
studios and the results of cost control efforts.

SIX MONTH COMPARISON

     RESTAURANT OPERATIONS

     Restaurant sales were $27,173,000 for the six months ended June 30, 1997
compared to $15,464,000 for the same period of the prior year, an increase of
75.7%.  Sales for the six months were produced by 32 Koo Koo Roo restaurants and
14 Hamburger Hamlet restaurants which were operating during the six months ended
June 30, 1997, compared to 21 stores open  for the six months ended June 30,
1996.  Six new restaurants were opened during the current  year in Burbank, West
Hollywood, Aliso Viejo and Laguna Hills, California, Westfield, New Jersey and
Falls Church, Virginia.

     Interest and other revenues for the current year includes $556,000 in
interest income offset by $127,000 in interest expense and a gain of
approximately $200,000 on the sale of the restaurant assets located in the Taj
Mahal Hotel and Casino in Atlantic City, New Jersey.  During the prior year, the
Company received $463,000 in interest income.

     Cost of sales were $19,199,000 for the current year compared to $10,806,000
for the same period of the prior year.  These costs increased to 70.7%
of sales compared to 69.9% in the same period of the prior year. As a result,
gross profit for the six months ended June 30, 1997, as a percentage of
revenues, decreased to 29.3% compared with 30.1% in the same period of the prior
year.

     Operating expenses amounted to $13,171,000 for the current year compared
to $8,504,000 for the prior year.  Operating expenses as a percentage of
sales decreased to 48.5% from 55.0% in the same period of the prior year.
This decrease was primarily due to the Company's increased sales resulting from
the additional locations opened since June 30, 1996 and the addition of 14
Hamburger Hamlet restaurants late in the second quarter.  Occupancy costs
increased by approximately $874,000 due to new store openings and the addition
of 14 Hamburger Hamlet restaurants. Depreciation and amortization increased by
$689,000 due to additional store openings since the end of the first quarter of
1996.

CERAMIC STUDIO OPERATIONS

     Revenues for the six month period ended June 30, 1997 were $1.5 million
compared to $828,000 for the six month period ended June 30, 1996.  Franchise
and royalty revenues for the six month period ended June 30, 1997 were $174,000
compared to $273,000 for the six month period ended June 30, 1996.

     Color Me Mine's net loss for the six months ended June 30, 1997 amounted to
$1,712,000 compared to operating income of $134,000 for the six months ended
June 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

     LIQUIDITY.   

     Total cash, cash equivalents and marketable securities at June 30, 1997
amounted to $13.9 million. The Company has been expending cash resources to fund
operations and to build new and remodeled Koo Koo Roo California Kitchen
restaurants and Color Me Mine Studios. The Company completed the construction of
four restaurants during the quarter. As oF June 30, 1997, there was one
restaurant under construction which will require approximately $156,000 to
complete. Purchases of property, equipment and computer hardware and software
together
                                 Page 9 of 14
<PAGE>
 
with costs for acquiring certain locations for the six months ended June 30,
1997 amounted to $7.4 million compared with $8.3 million during the same period
of the prior year.

     Corporate expenses for the development of the Koo Koo Roo California
Kitchen and Color Me Mine concepts, real estate development and the
infrastructure necessary to manage store growth have resulted, to date, in
overall operating losses. The Company's strategy is to control growth of
overhead expenses and build a sufficient number of new stores to generate
positive overall operating cash flow as quickly as possible. This strategy
requires acquisition and development of successful new sites, and while
management has been successful in opening new Koo Koo Roo California Kitchen
restaurants in the past, there can be no assurance that this success will
continue in the future.

     CAPITAL RESOURCES

     As of June 30, 1997, the Company has approximately $2.3 million of long-
term notes and loans payable consisting of $100,000 assumed with the acquisition
of Color Me Mine, $250,000 assumed with the acquisition of Hamburger Hamlet,
$620,000 assumed in connection with a restaurant land purchase  and  $1.4
million in store-level debt financing.  The store-level financing represents two
loans secured by leasehold mortgages and first priority security interests in
all of the furniture, fixtures and equipment at the Company's two joint venture
locations in Florida. The loans are also guaranteed by the Company and its joint
venture partner.  The interest rate on the loans is equal to one percent over
the base rate established by Citibank, N.A. from time to time.  The loans mature
in 2004.

     On May 19, 1997, the Company completed the acquisition of 14 Hamburger
Hamlet restaurants for a total consideration consisting of $9.7 million in cash,
150,000 shares of restricted common stock and assumption of $250,000 in debt and
the related real property leases.  Ten restaurants are located in California and
four in the Washington, D.C. Beltway area.  In certain of the acquired
locations, the Company will test market a menu insert profiling Koo Koo Roo
California Kitchen(TM) and offering selected Koo Koo Roo California Kitchen
menu items in the full service Hamburger Hamlet restaurants.  The Company
financed the acquisition with cash on hand. The Company accounted for the
acquisition using the purchase method of accounting.

     On April 10, 1997, the Company announced that its Board of Directors
authorized a program to repurchase up to one million shares of the Company's
common stock at a time when the stock was priced on Nasdaq at less than $4.00
per share.  Subsequently, the Company's stock price has returned to more stable
prices.  During that time, the Company repurchased 27,500 shares of Common Stock
for an aggregate consideration of approximately $110,000.  The repurchase
program does not obligate the Company to acquire any particular amount of Common
Stock and the program may be suspended at any time at the Company's discretion.

     On August 12, 1997 the Company executed a binding agreement related to the
issuance of $12 million in senior notes due 2000 to an institutional investor in
a private placement. The notes carry an interest rate of 13% payable quarterly
commencing November 15, 1997 and include attached five-year warrants to purchase
330,000 shares of the Company's Common Stock at a price of $6.0281 per share. A
mandatory repayment of $2.5 million of the senior notes will be due 18 months
after issuance and the holder will have the right to require the repurchase of
the senior notes upon the completion by the Company of equity or mezzanine
financings of more than $20 million, or upon a change in control of the Company.
The Company is required to file a shelf registration for the shares of common
stock issuable upon exercise of the warrants within 270 days of closing. The
investors received a $300,000 commitment fee. The placement agents will receive
a $300,000 placement fee and warrants to purchase 60,000 shares of the Company's
Common Stock at a price equal to the closing price on the date of the closing of
the financing. The funding of the loan is expected to occur on August 28, 1997.

     The Company intends to investigate store-level, asset-based financing of
fixtures, equipment and leasehold improvements as its expansion continues.  The
Company has also entered into sale-leaseback agreements for the Burbank and
Aliso Viejo properties.  The Burbank sale and leaseback was completed in May of
1997 and the Company received $1.4 million in proceeds. The Aliso Viejo sale and
leaseback was completed in August 1997 and the Company received $1.4 million in
proceeds.  To date, the development and expansion of Color Me Mine has been
financed by advances from Koo Koo Roo, Inc., such advances totaled approximately
$7.4 million at June 30, 1997.  The Company expects minimal additional capital
requirements at Color Me Mine based on its franchise sales strategy. The Company
is also considering various alternative strategies to finance the further growth
of Color Me Mine, which may include future financing by Color Me Mine as well as
financing that may be provided by future joint venture partners and franchisees.

     The timing of future capital requirements will be affected by, among other
things, the number of stores opened, operating results, real estate development,
and potential other corporate opportunities. In the ordinary course of its
business, the Company regularly investigates and enters into negotiations
related to joint venture, acquisition and strategic development opportunities.
Management believes that the Company's existing capital resources, including the
senior notes, will be sufficient to fund its planned growth into 1998. In
addition, the Company is seeking acquisitions suitable for conversion or 
co-locating with Koo Koo Roo California Kitchen restaurants which would
accelerate the Company's growth and might require additional capital. The
Company may seek additional funds from
                                 
                                 Page 10 of 14
<PAGE>
 
public or private offerings of debt or equity, or may seek bank financing
facilities. There can be no assurance that the necessary additional capital will
be available to the Company on favorable terms or at all.

FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS

     Many of the statements made in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward looking and, among
other things, comment on the prospects for the Company to grow rapidly and
attain profitable operations.   The Company has incurred net losses which have
been increasing as compared to prior years.   Management presently anticipates
that net losses will continue to be incurred for some time, but that the net
loss will decrease during 1997 both in the aggregate and as a percentage of
sales.  The Company's current level of overhead contemplates more restaurants
and ceramics studios than are currently opened, and control over the timing of
the opening of the additional stores necessary to achieve a volume level which
would permit overall Company profitability is subject to factors outside the
control of management, including, among other things, capital availability, site
landlords which are in negotiations with the Company, government permitting
agencies, and other outside parties and agencies including, but not necessarily
limited to, contractors, vendors, and government inspectors.

     The forward-looking statements and comments contained in this Report
concerning, among other things, the prospects for the Company to grow rapidly
and attain profitable operations, are necessarily subject to risks and
uncertainties some of which are significant in scope and nature.  Actual results
will be dependent upon many factors the outcome of which cannot be predicted as
of the date of this Report.  In addition to the matters discussed herein,
factors that should be considered are included under the caption "Business
Risks" in the Company's most recent Form 10-K and "Risk Factors" in its most
recent Form S-3, each of which has been filed with the Securities and Exchange
Commission.

                                 Page 11 of 14
<PAGE>
 
                           PART II. OTHER INFORMATION
                           --------------------------

ITEM 1.  LEGAL PROCEEDINGS.

         The Company has become subject to various lawsuits, claims and other
legal matters in the ordinary course of conducting its business. As of the date
of this Report, management believes that there are no legal proceedings pending,
the adverse resolution of which is expected to have a material adverse financial
impact on the Company's consolidated financial position.

ITEM 2.  CHANGES IN SECURITIES.

         During the quarter ended June 30, 1997 the Company issued 150,000
shares of Common Stock to Hamburger Hamlet in connection with the purchase of 14
restaurants. Such shares were issued in reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act of 1933, as amended
(the "Act").

         In addition, during the quarter ended June 30, 1997 the Company issued
5,675,558 shares of Common Stock in exchange for 653,224 shares of Series A
Convertible Preferred Stock and 227,551 shares of Common Stock in exchange for
10,144 shares of Series B Convertible Preferred Stock.  Such shares of Common
Stock were issued in reliance upon the exemption from registration provided in
Section 3(a)(9) of the Act.  See Note 4 to the  Condensed Consolidated Financial
Statements.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         None

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

         (a)   The annual meeting of shareholders was held on June 17, 1997,
               at which:

               (i)    The following nine individuals were elected as Directors
<TABLE>
<CAPTION>
                                                     VOTES
                                          FOR       AGAINST   ABSTENTIONS
                                       ----------   -------   -----------
               <S>                     <C>          <C>       <C>        
               Kenneth Berg            13,508,011    63,750     296,114
               Robert F. Kautz         13,529,211    42,550     274,914
               John S. Kaufman         13,560,311    11,450     243,814
               Michael D. Mooslin      13,521,636    50,125     282,489
               Morton J. Wall          13,530,036    41,725     274,089
               Kory L. Berg            13,543,962    27,799     260,163
               Mel Harris              13,559,611    12,150     244,514
               Lee Iacocca             13,558,637    13,124     245,488
               Don Wohl                13,536,661    35,100     267,464
</TABLE>
               (ii)   The Stockholders ratified the appointment of BDO Seidman,
                      LLP as independent accountants for the Company for the
                      fiscal year ending December 31, 1997 with an affirmative
                      vote of 13,641,115. There were 75,697 negative votes cast
                      and 87,313 abstentions.

         (b)   A special meeting of shareholders was held on April 17, 1997, at
               which the Stockholders approved a resolution to reserve for
               issuance all shares of Common Stock issuable upon the conversion
               of the Company's 6% Adjustable Convertible Preferred Stock issued
               in a February 1997 private placement, as dividends thereon and in
               respect of related placement agent warrants, which received an
               affirmative vote of 8,736,815. There were 317,566 negative votes
               and 89,039 abstentions.

ITEM 5.  OTHER INFORMATION.

         None

                                Page 12 of 14
<PAGE>
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)   EXHIBITS - Exhibit No. 27, Financial Data Schedule

         (B)   Form 8-k -Filed during the quarter ended June 30, 1997.

               1)     April 10, 1997 (Item 5) relating to the program to
                      repurchase up to one million shares of the Company's
                      Common Stock.

               2)     May 2, 1997 (Item 5) relating to shareholder approval of a
                      reserve for the issuance of shares of the Company's Common
                      Stock issuable upon the conversion of the Company's 
                      Series B 6% Adjustable Convertible Stock issued in
                      February, 1997, and related transactions.
                      
               3)     May 19, 1997 (Item 5) relating to the acquisition of 14
                      Hamburger Hamlet Restaurants.

               4)     June 17, 1997 (Item 5) relating to the Company's press
                      release regarding its annual meeting of shareholders. 

                                Page 13 of 14
<PAGE>
 
                                   SIGNATURES
                                   ----------

       Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf  by the
undersigned thereunto duly authorized.

                                           KOO KOO ROO, INC.



Date:  August 11, 1997                   /s/ KENNETH BERG
      ---------------------------        ------------------------
                                         KENNETH BERG,
                                         CHAIRMAN OF THE BOARD



Date:  August 11, 1997                  /s/ ROBERT F. KAUTZ
      ------------------------          -------------------------
                                        ROBERT F. KAUTZ,
                                        CHIEF FINANCIAL OFFICER


                                 Page 14 of 14