SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                                   (MARK ONE)

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



                                       OR

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

       For the transition period from January 1, 1997 to December 31, 1997

                        Commission file number 333-29093

                          GALVESTON'S STEAKHOUSE CORP.
                          -----------------------------
                 (Name of Small Business Issuer in Its Charter)

           Delaware                                     94-3248672
----------------------------------              -------------------------
 (State or other jurisdiction of                    (I.R.S. Employer
 Incorporation or organization)                     Identification No.)

                 151 East Alessandro Blvd., Riverside, CA 92508
                -------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

                                 (909) 789-7606
                                 --------------
              (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. (X) Yes ( ) No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Park III of this Form 10-K or any amendment to the
Form 10-K. [X]

The Issuer's revenues for its most recent fiscal year were $1,867,671.

     The aggregate market value of the common equity held by  non-affiliates  as
of June 1, 1998, was $11,428,775.

                                    PART III

Item 6.  Exhibits, List and Reports on Form 8-K

         (a)   The following documents are filed as part of  this report.

         1.  Financial Statements.  The Registrant's Financial Statements for
             the year ended December 31, 1997.

         2.  Financial Statement Schedules.

<PAGE>
         3.  Exhibits.

                  Exhibit 27- Financial Data Schedule


         (b) No reports on Form 8-K were  filed  during the last  quarter of the
period covered by this report.


                                   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, this 2nd day of June, 1998.


                                           GALVESTON'S STEAKHOUSE CORP.

                                           By: /s/ Richard M. Lee
                                              --------------------------------
                                           Chairman of the Board of Directors,
                                           Chief Executive Officer
                                           (Principal Executive Officer)



In accordance  with the  Securities  Exchange Act of 1934,  this report has been
signed below by the  following  persons on behalf of the  registrant  and in the
capacities and on the dates indicated.

SIGNATURE                         TITLE                             DATE

/s/ RICHARD M. LEE        Chairman of the Board                  June 2, 1998
Richard M. Lee            Chief Executive Officer
                          and Director (Principal
                          Executive Officer)

/s/ HIRAM J. WOO          President, Secretary                   June 2, 1998
Hiram J. Woo              Treasurer and Director
                          (Principal Financial Officer)



<PAGE>

                          GALVESTON'S STEAKHOUSE CORP.

                              FINANCIAL STATEMENTS
                               FOR THE YEAR ENDED
                              DECEMBER 31, 1997 AND
                          THE PERIOD FROM JUNE 3, 1996
                        (INCEPTION) TO DECEMBER 31, 1996




<PAGE>



                                                    GALVESTON'S STEAKHOUSE CORP.

                                                                        CONTENTS
                                                               December 31, 1997

--------------------------------------------------------------------------------
                                                                   Page

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                   1

FINANCIAL STATEMENTS

     Balance Sheet                                                 2 - 3

     Statements of Operations                                        4

     Statements of Stockholders' Deficit                             5

     Statements of Cash Flows                                      6 - 7

     Notes to Financial Statements                                 8 - 23



<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholders
Galveston's Steakhouse Corp.

We have audited the accompanying  balance sheet of Galveston's  Steakhouse Corp.
(a Delaware  corporation) as of December 31, 1997, and the related statements of
operations,  stockholders'  deficit, and cash flows for the year then ended, and
for the  period  from June 3, 1996  (inception)  to  December  31,  1996.  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 Galveston's Steakhouse Corp. as
of December 31, 1997,  and the results of its  operations and its cash flows for
the year  then  ended,  and for the  period  from June 3,  1996  (inception)  to
December 31, 1996 in conformity with generally accepted accounting principles.



SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
April 2, 1998, except as to Notes
  15 and 16, as to which the date
  is May 29, 1998


<PAGE>

<TABLE>
<CAPTION>

                                                                                        GALVESTON'S STEAKHOUSE CORP.
                                                                                                       BALANCE SHEET
                                                                                                   December 31, 1997
--------------------------------------------------------------------------------------------------------------------


                                                           ASSETS
<S>                                                                                              <C>
Current assets
     Cash and cash equivalents                                                                     $         64,726
     Other receivables                                                                                      156,015
     Advances to officers                                                                                   179,739
     Inventories                                                                                             25,411
     Prepaid expenses                                                                                        10,452
     Other                                                                                                   72,861
                                                                                                   ----------------

         Total current assets                                                                               509,204

Furniture and equipment, net                                                                                905,084

Other assets
     Intangible assets, net                                                                                 498,921
     Deferred offering costs                                                                                296,845
     Liquor license and other assets                                                                         41,979
                                                                                                   ----------------

                  Total assets                                                                     $      2,252,033
                                                                                                   ================

</TABLE>

   The accompanying notes are an integral part of these financial statements.


<PAGE>
<TABLE>
<CAPTION>

                                                                                       GALVESTON'S STEAKHOUSE CORP.
                                                                                          BALANCE SHEET (Continued)
                                                                                                  December 31, 1997

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


                                       LIABILITIES AND STOCKHOLDERS' DEFICIT

<S>                                                                                              <C>
Current liabilities
     Current portion of notes payable                                                              $      2,340,001
     Accounts payable                                                                                        36,375
     Accrued liabilities                                                                                     76,190
     Accrued interest                                                                                       309,630
     Accrued payroll costs                                                                                   85,544
                                                                                                   ----------------

         Total current liabilities                                                                        2,847,740

Notes payable, net of current portion                                                                       818,999
                                                                                                   ----------------

              Total liabilities                                                                           3,666,739

Commitments and contingencies

Stockholders' deficit
     Preferred stock, $.001 par value
         4,000,000 shares authorized
         0 shares issued and outstanding                                                                          -
     Preferred stock, Series B, Convertible, $.001 par value
         1,000,000 shares authorized
         1,000,000 shares issued and outstanding                                                              1,000
     Common stock, $.01 par value
         10,000,000 shares authorized
         825,000 shares issued and outstanding                                                                8,250
     Additional paid-in capital                                                                             596,563
     Accumulated deficit                                                                                 (2,020,519)
                                                                                                   ----------------

              Total stockholders' deficit                                                                (1,414,706)

                  Total liabilities and stockholders' deficit                                      $      2,252,033
                                                                                                   ================
</TABLE>

   The accompanying notes are an integral part of these financial statements.


<PAGE>
<TABLE>
<CAPTION>


                                                                                       GALVESTON'S STEAKHOUSE CORP.
                                                                                           STATEMENTS OF OPERATIONS
                                                                           For the Year Ended December 31, 1997 and
                                                 From the Period from June 3, 1996 (Inception) to December 31, 1996
-------------------------------------------------------------------------------------------------------------------


                                                                                                    Period from
                                                                                                    June 3, 1996
                                                                                   Year Ended      (Inception) to
                                                                                  December 31,      December 31,
                                                                                      1997              1996
                                                                                ---------------    ----------------
<S>                                                                             <C>                <C>             
Restaurants revenues                                                            $     1,867,671    $        416,544
                                                                                ---------------    ----------------

Restaurant costs and expenses
     Food and beverage                                                                  627,165             153,590
     Payroll and payroll related costs                                                  757,232             255,463
     Direct operating costs                                                             400,217             116,819
     Depreciation and amortization                                                      221,737              41,669
     General and administrative expenses                                                350,945             136,467
     Pre-opening and start-up costs                                                      65,155             433,694
                                                                                ---------------    ----------------

         Total restaurant costs and expenses                                          2,422,451           1,137,702
                                                                                ---------------    ----------------

Loss from operations                                                                   (554,780)           (721,158)
                                                                                ---------------    ----------------

Other income (expense)
     Interest and financing costs                                                      (523,187)           (271,373)
     Other                                                                                    -              49,979
                                                                                ---------------    ----------------

         Total other income (expense)                                                  (523,187)           (221,394)
                                                                                ---------------    ----------------

Net loss                                                                        $    (1,077,967)   $       (942,552)
                                                                                ===============    ================

Basic loss per share                                                            $         (1.36)   $          (1.42)
                                                                                ===============    ================ 

Diluted loss per share                                                          $         (1.36)   $          (1.42)
                                                                                ===============    ================ 

Weighted-average shares outstanding                                                     790,296             662,516
                                                                                ===============    ================

</TABLE>

   The accompanying notes are an integral part of these financial statements.


<PAGE>
<TABLE>
<CAPTION>


                                                                                                      GALVESTON'S STEAKHOUSE CORP.
                                                                                                STATEMENTS OF STOCKHOLDERS' DEFICIT
                                                                                           For the Year Ended December 31, 1997 and
                                                                 From the Period from June 3, 1996 (Inception) to December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------



                                                     Preferred Stock                                                     
                                                 Series B, Convertible                        Common Stock               
                                          -----------------------------------     -----------------------------------
                                              Shares              Amount              Shares             Amount          
                                          ----------------    ---------------     ---------------    ----------------    
<S>                                      <C>                  <C>                <C>                <C>                  
Balance, June 3, 1996                                    -    $             -                   -    $              -    
Issuance of common stock                                                                  713,849               7,138    
Issuance of preferred stock                      1,000,000              1,000                                            
Net loss                                                                                                                 
                                          ----------------    ---------------     ---------------    ----------------    

Balance, December 31, 1996                       1,000,000              1,000             713,849               7,138    
Issuance of common stock in
     connection with $150,000
     bridge loans                                                                          30,000                 300    
Issuance of common stock for
     services rendered                                                                     24,950                 249    
Issuance of common stock in
     connection with private
     placement                                                                             56,201                 563    
Capital contribution                                                                                                     
Net loss                                                                                                                 
                                          ----------------    ---------------     ---------------    ----------------    

   Balance, December 31, 1997                    1,000,000    $         1,000             825,000    $          8,250    
                                          ================    ===============     ===============    ================    

</TABLE>


<TABLE>
<CAPTION>
                                            Additional
                                              Paid-in         Accumulated
                                              Capital              Deficit              Total
                                          ----------------    ---------------     ---------------

<S>                                      <C>                 <C>                 <C> 
Balance, June 3, 1996                     $              -    $             -     $             -
Issuance of common stock                           169,225                                176,363
Issuance of preferred stock                                                                 1,000
Net loss                                                             (942,552)           (942,552)
                                          ----------------    ---------------     ---------------

Balance, December 31, 1996                         169,225           (942,552)           (765,189)
Issuance of common stock in
     connection with $150,000
     bridge loans                                  149,700                                150,000
Issuance of common stock for
     services rendered                             124,481                                124,730
Issuance of common stock in
     connection with private
     placement                                      23,157                                 23,720
Capital contribution                               130,000                                130,000
Net loss                                                           (1,077,967)         (1,077,967)
                                          ----------------    ---------------     ---------------

   Balance, December 31, 1997             $        596,563    $    (2,020,519)    $    (1,414,706)
                                          ================    ===============     =============== 

</TABLE>

   The accompanying notes are an integral part of these financial statements.



<PAGE>

<TABLE>
<CAPTION>
                                                                                        GALVESTON'S STEAKHOUSE CORP.
                                                                                            STATEMENTS OF CASH FLOWS
                                                                            For the Year Ended December 31, 1997 and
                                                  From the Period from June 3, 1996 (Inception) to December 31, 1996
--------------------------------------------------------------------------------------------------------------------


                                                                                                      Period from
                                                                                                     June 3, 1996
                                                                                   Year Ended       (Inception) to
                                                                                  December 31,        December 31,
                                                                                      1997               1996
                                                                                ---------------    ----------------
<S>                                                                             <C>                <C>              
Cash flows from operating activities
   Net loss                                                                     $    (1,077,967)   $       (942,552)
   Adjustments to reconcile net loss to net cash
     used in operating activities
       Depreciation and amortization                                                    221,737              41,667
       Amortization of discount on private placement proceeds                           117,748              68,855
       Issuance of common stock in exchange for services
         rendered                                                                       124,730              14,480
   (Increase) decrease in
     Other receivables                                                                 (112,170)            (43,845)
     Advances to officers                                                              (144,349)            (35,390)
     Inventories                                                                          4,880             (30,291)
     Prepaid expenses                                                                    (4,027)             (6,425)
     Liquor license and other assets                                                     14,321                   -
   Increase (decrease) in
     Accounts payable                                                                      (643)             37,018
     Accrued liabilities                                                                 (1,972)             78,162
     Accrued interest                                                                   240,142              69,488
     Accrued payroll costs                                                               44,690              40,854
                                                                                ---------------    ----------------

         Net cash used in operating activities                                         (572,880)           (707,979)
                                                                                ---------------    ----------------

Cash flows from investing activities
   Purchases of furniture and equipment                                                 (29,129)           (159,582)
   Increase in intangibles                                                              (15,000)                  -
   Increase in other current assets                                                     (72,861)                  -
   Purchase of Texas Loosey's restaurants                                                     -            (275,000)
                                                                                ---------------    ----------------

         Net cash used in investing activities                                         (116,990)           (434,582)
                                                                                ---------------    ----------------

Cash flows from financing activities
   Proceeds from issuance of notes payable                                              701,282           1,026,117
   Proceeds from issuance of common stock                                                23,720             162,883
   Increase in deferred offering costs                                                 (296,845)                  -
   Increase in common stock in connection with bridge loan                              150,000                   -
   Capital contribution from officers                                                   130,000                   -
                                                                                ---------------    ----------------

         Net cash provided by financing activities                                      708,157           1,189,000
                                                                                ---------------    ----------------

</TABLE>
   The accompanying notes are an integral part of these financial statements.


<PAGE>
<TABLE>
<CAPTION>

                                                                                        GALVESTON'S STEAKHOUSE CORP.
                                                                                STATEMENTS OF CASH FLOWS (Continued)
                                                                            For the Year Ended December 31, 1997 and
                                                  From the Period from June 3, 1996 (Inception) to December 31, 1996
--------------------------------------------------------------------------------------------------------------------


                                                                                                     Period from
                                                                                                    June 3, 1996
                                                                                   Year Ended      (Inception) to
                                                                                  December 31,       December 31,
                                                                                      1997               1996
                                                                                ---------------    ----------------

<S>                                                                             <C>                <C>             
                      Net increase in cash and cash equivalents                 $        18,287    $         46,439

Cash and cash equivalents, beginning of period                                           46,439                   -
                                                                                ---------------    ----------------

Cash and cash equivalents, end of period                                        $        64,726    $         46,439
                                                                                ===============    ================


Supplemental disclosures of cash flow information

   Interest paid                                                                $        13,523    $          3,030
                                                                                ===============    ================


</TABLE>







<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Company Background and Operations
         Galveston's  Steakhouse  Corp., a Delaware  corporation (the "Company")
         was  incorporated  on June 3, 1996. On December 19, 1996,  the Board of
         Directors  adopted a resolution to change the Company's name from Texas
         Loosey's Steakhouse & Saloon, Inc. to Galveston's  Steakhouse Corp. The
         Company owns and  operates a Texas  Loosey's  Steakhouse  and Saloon in
         Torrance,   California,   and  a  Galveston's   Steakhouse  located  in
         Fullerton,  California.  Texas  Loosey's is a casual dining  restaurant
         with a wide variety of menu  choices,  ranging  from Mexican  dishes to
         steak dinners.  Galveston's Steakhouse is a moderately priced steak and
         seafood  restaurant.  Both of these  restaurants were acquired from TLC
         Restaurant  Management Corp. on August 19, 1996,  together with certain
         intangible  assets for a purchase  price of  $1,520,000,  consisting of
         notes payable of $1,245,000 and cash of $275,000.  The  acquisition was
         recorded  under the purchase  method of accounting  and resulted in the
         Company recording $513,000 of goodwill.

         Fiscal Year-End
         The Company  reports its  operations on a 52-53 week fiscal year ending
         on the Sunday  closest to December 31. The current fiscal year ended on
         December 27, 1997; however, for financial statement  presentation,  the
         fiscal year end has been designated as December 31, 1997.

         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 disclosures of contingent assets and liabilities at the
         date of the financial  statements,  as well as the reported  amounts of
         revenues and expenses during the reported periods. Actual results could
         differ from those estimates.

         Stock Split
         Effective August 11, 1997, the Company  effected a 1-for-3.671  reverse
         stock split and on December 30, 1997,  effected a  1.650-for-1  forward
         stock split.  The preferred  stock and options to acquire  common stock
         were  unaffected by the stock split.  All share and per share data have
         been retroactively restated to reflect the stock split.

         Cash and Cash Equivalents
         Cash  and cash  equivalents  consist  of cash on hand and in banks  and
         credit card  receivables.  Credit card  receivables are considered cash
         equivalents  because of their short  collection  period.  The  carrying
         amount of credit card receivables approximates their fair value.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Inventories
         Inventories,  consisting principally of food, beverages, and restaurant
         supplies,  are  valued  at  the  lower of cost (first-in, first-out) or
         market.

         Escrow Deposit and Management Fee
         The Company is  currently  in escrow for the  purchase of the assets of
         two  franchised  Texas  Loosey's  Chili  Parlor and Saloon  restaurants
         located in Riverside and Norco,  California.  In  connection  with this
         acquisition,  the Company has deposited  approximately  $73,000 into an
         escrow  account.  This deposit is being carried in other current assets
         on the  accompanying  balance  sheet at December 31, 1997.  The Company
         assumed   responsibility   for  the  day-to-day   operations  of  these
         restaurants on March 1, 1997. In return for managing these  restaurants
         until  the  purchase  is  consummated,   the  Company  is  receiving  a
         management fee equal to the net income generated by the restaurants. As
         of  December  31,  1997,  the Company  has earned a  management  fee of
         approximately  $43,000. This management fee is reflected in revenues on
         the  accompanying  statement of operations  for the year ended December
         31, 1997.

         Furniture and Equipment
         Furniture and equipment, including leasehold improvements, are recorded
         at cost, less accumulated  depreciation and amortization.  Depreciation
         is provided using the  straight-line  method over the estimated  useful
         lives  of  the  respective  assets,  generally  five  years.  Leasehold
         improvements  are  amortized  using the  straight-line  method over the
         shorter of the useful life of the  improvements  or the remaining lease
         term.

         Maintenance and minor  replacements are charged to expense as incurred.
         Gains  and  losses  on  disposals  are  included  in  the  results  of 
         operations.

         Intangibles
         Intangibles  consist of a covenant  not to compete made with the former
         owner of the  Fullerton  and Torrance  restaurants  and  goodwill.  The
         covenant not to compete is being  amortized over five years (the length
         of the contract) and goodwill is being  amortized  over a  fifteen-year
         period.   The  Company   continually   evaluates   whether   events  or
         circumstances  have  occurred  that  indicate the  remaining  estimated
         useful life of  goodwill  may  warrant  revision or that the  remaining
         balance of goodwill may not be recoverable.  When factors indicate that
         goodwill should be evaluated for possible impairment,  the Company uses
         an estimate of the related  restaurants'  undiscounted  cash flows over
         the remaining life of the goodwill in measuring whether the goodwill is
         recoverable.

         Deferred Offering Costs
         Costs  incurred in connection  with the Company's  anticipated  initial
         public  offering  ("IPO") are capitalized at December 31, 1997 and will
         be  recorded  as  a  reduction  to  additional   paid-in  capital  upon
         completion of the offering.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Liquor License and Other Assets
         Liquor  licenses  and other  assets  consist  of the  Company's  liquor
         licenses for the Fullerton and Torrance restaurants and  miscellaneous
         rent deposits.

         Stock-Based Compensation
         Statement  of  Financial   Accounting   Standards   ("SFAS")  No.  123,
         "Accounting for Stock-Based  Compensation,"  establishes and encourages
         the use of the fair value based method of  accounting  for  stock-based
         compensation  arrangements  under which compensation cost is determined
         using the fair value of stock-based  compensation  determined as of the
         date of grant and is  recognized  over the periods in which the related
         services are rendered. The statement also permits companies to elect to
         continue using the current implicit value  accounting  method specified
         in Accounting  Principles  Bulletin ("APB") Opinion No. 25, "Accounting
         for  Stock   Issued  to   Employees,"   to  account   for   stock-based
         compensation.  The Company has elected to use the implicit  value based
         method and has  disclosed  the pro forma effect of using the fair value
         based method to account for its stock-based compensation.

         Recently Issued Accounting Pronouncements
         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
         SFAS No. 130, "Reporting Comprehensive Income." This statement requires
         companies  to  classify  items of other  comprehensive  income by their
         nature in a financial  statement and display the accumulated balance of
         other  comprehensive  income  separately  from  retained  earnings  and
         additional  paid-in  capital in the equity  section of a  statement  of
         financial position.  SFAS No. 130 is effective for financial statements
         issued for fiscal years beginning  after December 15, 1997.  Management
         believes  that  SFAS No.  130 will not have a  material  effect  on the
         Company's financial statements.

         In June 1997, the FASB issued SFAS No. 131,  "Disclosure About Segments
         of an Enterprise and Related  Information." This statement  establishes
         additional  standards for segment reporting in the financial statements
         and is effective for fiscal  years  beginning  after December 15, 1997.
         Management believes  that  SFAS  No. 131 will not have an effect on the
         Company's financial statements.

         Reclassifications
         Certain amounts in the 1996 financial statements have been reclassified
         to conform with the current year presentation.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Income Taxes
         The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
         requires the recognition of deferred tax assets and liabilities for the
         expected  future tax  consequences of events that have been included in
         the financial  statements or tax returns.  Under this method,  deferred
         income taxes are recognized for the tax consequences in future years of
         differences  between the tax bases of assets and  liabilities and their
         financial  reporting  amounts at each  period end based on enacted  tax
         laws and  statutory  tax rates  applicable  to the periods in which the
         differences are expected to affect taxable income. Valuation allowances
         are established,  when necessary,  to reduce deferred tax assets to the
         amount  expected  to  be  realized.  The  provision  for  income  taxes
         represents  the tax  payable  for the period and the change  during the
         period in deferred tax assets and liabilities.

         Net Loss Per Share
         In 1997,  the FASB issued SFAS No. 128,  "Earnings per Share." SFAS No.
         128 replaced the previously reported primary and fully diluted earnings
         per share with basic and diluted  earnings  per share.  Unlike  primary
         earnings  per share,  basic  earnings  per share  excludes any dilutive
         effects of  options,  warrants,  and  convertible  securities.  Diluted
         earnings per share is very  similar to the  previously  reported  fully
         diluted earnings per share.  Basic earnings per share is computed using
         the  weighted-average  number of common shares  outstanding  during the
         period.  Common  equivalent shares are excluded from the computation if
         their effect is anti-dilutive.

         Prior to SFAS No. 128, the Securities and Exchange  Commission  ("SEC")
         required that, even where  anti-dilutive,  common and common equivalent
         shares issued during the twelve-month  period prior to the filing of an
         IPO be included  in the  calculation  of earnings  per share as if they
         were  outstanding for all periods  presented  (using the treasury stock
         method and the IPO price).  Because of new requirements  issued in 1998
         by  the  SEC  for  companies   that  recently   completed  an  IPO  and
         interpretation by FASB of the initial  application of SFAS No. 128, the
         number of shares  used in the  calculation  of basic net loss per share
         has   changed  to  exclude   common   equivalent   shares,   even  when
         anti-dilutive.  Net loss per share for all periods  presented  has been
         restated to conform with SFAS No. 128 and Staff Accounting Bulletin No.
         98.

         Fair Value of Financial Instruments
         The Company measures its financial assets and liabilities in accordance
         with  generally  accepted  accounting  principles.  For  certain of the
         Company's financial  instruments,  including cash and cash equivalents,
         accounts  payable,  and  accrued  liabilities,   the  carrying  amounts
         approximate fair value due to their short maturities. The amounts shown
         for notes payable also  approximate fair value because current interest
         rates  offered  to the  Company  for  debt of  similar  maturities  are
         substantially the same.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 2 - OTHER RECEIVABLES

         Accounts  receivable includes a $138,810 receivable from restaurants in
         Riverside and Norco,  California for payroll expenses paid on behalf of
         the  restaurants  by  the  Company,  management  fees,  and  a  $12,000
         receivable arising from the sale of a liquor license during 1996.


NOTE 3 - FURNITURE AND EQUIPMENT

         Furniture  and  equipment  at  December  31,  1997   consisted  of  the
following:
<TABLE>

<S>                                                                                                <C>             
                  Furniture, fixtures, and equipment                                               $        726,684
                  Leasehold improvements                                                                    367,725
                                                                                                   ----------------

                                                                                                          1,094,409
                  Less accumulated depreciation and amortization                                            189,325
                                                                                                   ----------------
                      Total                                                                        $        905,084
                                                                                                   ================

</TABLE>

NOTE 4 - INTANGIBLES

         Intangibles at December 31, 1997 consisted of the following:
<TABLE>

<S>                                                                                              <C>
                  Goodwill                                                                         $        513,000
                  Covenant not to compete                                                                    45,000
                  Other                                                                                      15,000
                                                                                                   ----------------

                                                                                                            573,000
                  Less accumulated amortization                                                              74,079
                                                                                                   ----------------
                      Total                                                                        $        498,921
                                                                                                   ================

</TABLE>

NOTE 5 - NOTES PAYABLE

         As of December 31, 1997, notes payable consisted of the following:

<TABLE>
<S>                                                                                               <C>
                  Notes payable to 1996 private placement  investors.  Principal
                      and accrued  interest  at 8% is payable at the  successful
                      completion  of the IPO.  Additionally,  for  each  $25,000
                      note,  these  investors   received  2,698  shares  of  the
                      Company's
                      common stock.                                                                $      1,000,000

</TABLE>

<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 5 - NOTES PAYABLE (Continued)

<TABLE>
<S>                                                                                               <C>
                  Notes payable to 1997 private placement  investors.  Principal
                      and accrued  interest  at 8% is payable at the  successful
                      completion  of the IPO.  Additionally,  for  each  $25,000
                      note,  these  investors   received  2,698  shares  of  the
                      Company's common stock.                                                     $        500,000

                  Note payable to the former  owner in the  amount of  $375,000,
                      bearing  interest  at  10%  per  annum  accrued  from  the
                      original note date (August 19, 1996) until either February
                      19, 1997 or the  successful  completion  of the  Company's
                      IPO, at which principal and accrued interest is payable in
                      full. Pursuant to an extension agreement,  the due date of
                      this note has been  extended to  February  15,  1998.  The
                      extension agreement also modified the interest rate to 15%
                      per annum from  February  19, 1997  through  February  15,
                      1998. At the date of this report,  the note is in default,
                      and  the  Company  is  renegotiating  the  asset  purchase
                      agreement   relating  to  the   Torrance   and   Fullerton
                      restaurants as more fully
                      described in Note 15.                                                                 375,000

                  Note payable to the former  owner in the  amount of  $870,000,
                      bearing  interest at 8% per annum from the  original  note
                      date (August 19, 1996).  No payments were due on this note
                      until  February  19,  1997,  at which time  interest  only
                      payments of $6,032 are due  monthly for one year.  Monthly
                      principal  and  interest  payments of $10,978 are due from
                      February  19,  1998  through  July  19,  2001,   with  the
                      remaining  principal  balance due via a balloon payment on
                      August 19, 2001.  At the date of this report,  the note is
                      in  default,  and the Company is  renegotiating  the asset
                      purchase  agreement relating to the Torrance and Fullerton
                      restaurants as more fully described
                      in Note 15.                                                                           870,000

                  Notes payable  to  various  individuals  with  interest  rates
                      ranging from 9% to 14%,  maturing in February 1998 or upon
                      the successful completion of the Company's IPO.                                       147,000

                  Convertible  notes payable to various  individuals  which will
                      convert  to the  Company's  common  stock  as  more  fully
                      described in Note 6. This conversion will only take place
                      upon the successful completion of the Company's IPO.                                   92,000

</TABLE>

<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 5 - NOTES PAYABLE (Continued)

<TABLE>
<S>                                                                                               <C>
                  The Company  issued a $25,000 note  payable.  The note payable
                      was comprised of a $25,000 note from the Company and 2,249
                      shares  of the  Company's  common  stock.  The note  bears
                      interest at 8% per annum from the date of  issuance  until
                      the  successful  completion of the Company's IPO. Upon the
                      successful   completion  of  the  Company's  IPO,  accrued
                      interest and principal are due in full (see Note 8).                        $         25,000

                  The Company  obtained  bridge loans in the amount of $150,000.
                      The bridge  loan bears  interest at a rate of 9% per annum
                      from  the   original   note  date  until  the   successful
                      completion  of the  Company's  IPO.  Upon  the  successful
                      completion  of the  Company's  IPO,  accrued  interest and
                      principal are due in full (see Note 9).                                               150,000
                                                                                                   ----------------

                                                                                                          3,159,000
                  Less current portion                                                                    2,340,001
                                                                                                   ----------------

                           Long-term portion                                                       $        818,999
                                                                                                   ================

         Future principal payments due on long-term debt are as follows:

                   Year Ending
                  December 31,

                      1998                                                                         $      2,340,001
                      1999                                                                                   65,847
                      2000                                                                                   71,312
                      2001                                                                                  681,840
                                                                                                   ----------------

                           Total                                                                   $      3,159,000
                                                                                                   ================


</TABLE>


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 6 - CONVERTIBLE DEBT

         The Company has convertible  debt in the amount of $92,000,  payable to
         various  individuals  which will convert to the Company's  common stock
         upon the  successful  completion of the Company's IPO. All note holders
         have  elected to convert  their debt to equity.  The note  holders will
         receive  shares of the  Company's  common stock equal to the  principal
         amount of their note  multiplied  by a factor of three,  divided by the
         IPO price per share. Consequently, the note holders will receive common
         stock worth $276,000, in the aggregate.  Although the note holders have
         elected to convert  their debt to the  Company's  common  stock,  these
         amounts are  carried in debt at December  31,  1997.  The Company  will
         record  the  difference  between  the note  amount of  $92,000  and the
         conversion amount of $276,000 as interest expense upon the closing date
         of the IPO at which time the note holders  will  convert  their debt to
         equity as noted above.


NOTE 7 - PRIVATE PLACEMENTS

         1996 Private Placement
         The Company raised $1,000,000  through a private placement during 1996.
         Each private placement "unit" was a combination of debt and equity. For
         each  $25,000  unit,  an  individual  received a $25,000  note from the
         Company and 2,698 shares of the Company's  common stock. The notes bear
         interest  at 8% per  annum  from  the  original  note  date  until  the
         successful  completion  of  the  Company's  IPO.  Upon  the  successful
         completion of the Company's IPO, accrued interest and principal are due
         in full.

         As each private placement  participant  received both debt (in the form
         of the note  payable  from the  Company) and equity (in the form of the
         Company's  common stock), a portion of the $1,000,000 face value of the
         debt was  allocated to equity based on an estimate of the relative fair
         value of the debt and equity. As such, the Company has allocated $1,079
         and   $161,804  to  common   stock  and   additional   paid-in-capital,
         respectively.   This  allocation  was  determined  using  an  effective
         interest rate of 30%, as this is management's  estimate of a reasonable
         risk adjusted rate. The remainder was allocated to short-term debt. The
         difference between the face value of $1,000,000 and the amount recorded
         in  short-term  debt will be  accreted  to  interest  expense  over the
         expected life of the debt.

         1997 Private Placement
         The Company raised $500,000  through a private  placement  during 1997.
         Each private placement "unit" was a combination of debt and equity. For
         each $25,000 unit, an individual  investor received a $25,000 note from
         the Company and 2,698 shares of the Company's  common stock.  The notes
         bear  interest  at 8% per annum from the  original  note date until the
         successful  completion  of  the  Company's  IPO.  Upon  the  successful
         completion of the Company's IPO, accrued interest and principal are due
         in full.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 7 - PRIVATE PLACEMENTS (Continued)

         1997 Private Placement (Continued)
         As each private placement  participant  received both debt (in the form
         of a note  payable  from the  Company)  and  equity (in the form of the
         Company's  common  stock),  a portion of the $500,000 face value of the
         debt was  allocated to equity based on an estimate of the relative fair
         value of the debt and equity.  As such, the Company  allocated $540 and
         $22,231 to common stock and additional  paid-in-capital,  respectively.
         This allocation was determined using an effective interest rate of 30%,
         as this is  management's  estimate of a reasonable  risk adjusted rate.
         The remainder was allocated to short-term debt. The difference  between
         the face value of $500,000 and the amount  recorded in short-term  debt
         will be accreted  to interest  expense  over the  expected  life of the
         debt.


NOTE 8 - NOTE PAYABLE

         The  Company  issued a note  payable in 1997 in the amount of  $25,000,
         payable to an individual. As this individual received both debt (in the
         form of the note  payable  from the Company) and equity (in the form of
         the Company's common stock), a portion of the $25,000 face value of the
         note was  allocated to equity based on an estimate of the relative fair
         value of the debt and equity.  As such,  the Company has  allocated $23
         and $926 to common stock and additional paid-in capital,  respectively.
         This allocation was determined using an effective interest rate of 30%,
         as this is  management's  estimate of a reasonable  risk adjusted rate.
         The remainder was allocated to short-term debt. The difference  between
         the face value of the  $25,000 and the amount  recorded  in  short-term
         debt will be accreted to interest expense over the expected life of the
         debt.


NOTE 9 - BRIDGE LOANS

         The Company raised bridge loans of $150,000 in 1997. In connection with
         providing  the bridge loan  financing  to the Company,  the  individual
         lenders  received an aggregate of 30,000 shares of the Company's common
         stock.  Upon issuance of this stock, the Company recorded an additional
         interest charge of  approximately  $150,000  (30,000 shares x $5.00 per
         share, the proposed offering price per share).




<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 10 - PREFERRED STOCK

         On June 3, 1996,  the Company  issued  1,000,000  shares of convertible
         preferred  stock  (Series  B) to the  Chairman  of the  Board and Chief
         Executive Officer of the Company for services  rendered.  The preferred
         stock has a par value of $.001  per  share and  carries  rights to vote
         with the common stock as one class on a  one-vote-per-share  basis. The
         preferred  stock is  convertible  into the Company's  common stock on a
         one-for-one  basis at the option of the holder at the  earlier of eight
         years  following  the  closing  date of the  Company's  IPO or when the
         Company's  annual  net  income  equals  or  exceeds  $3,500,000.   Upon
         conversion,  the holder of the preferred  stock will be required to pay
         to the Company,  in cash, a conversion price (the  "Conversion  Price")
         per share equal to 150% of the IPO price of the Company's common stock.

         The  preferred   stock  carries  no  dividends   prior  to  the  second
         anniversary of the closing date of the proposed IPO, but thereafter, if
         the above  conversion  test is  satisfied,  the  preferred  stock  will
         participate in any dividends declared on the Company's common stock, on
         an "as  converted"  basis.  In the event of a voluntary or  involuntary
         liquidation   or  dissolution  of  the  Company  prior  to  the  second
         anniversary  of the closing date of the proposed  IPO, or subsequent to
         the IPO if annual net profits of $3,500,000 have not been achieved, the
         holder of the  preferred  stock  would be  entitled to the par value of
         $.001  per  share,  or  $1,000  in the  aggregate.  In the  event  of a
         voluntary or  involuntary  liquidation  or  dissolution  of the Company
         subsequent to the Company's achieving $3,500,000 in annual net profits,
         the holder of the  preferred  stock would be entitled to share with the
         holders of the Company's common stock, the assets of the Company, on an
         as converted basis.


NOTE 11 - STOCK-BASED COMPENSATION

         Issuance of Common Stock
         During the  year ended 1997, the Company issued 24,950 shares of common
         stock in  exchange  for services  rendered,  of which 5,618 shares were
         issued to officers.

         Omnibus Stock Option Plan
         In January  1997,  the Board of  Directors  approved the adoption of an
         Omnibus  Stock  Plan (the  "Plan").  The Plan is  intended  to  provide
         incentive to key employees,  officers, and directors of the Company who
         provide significant services to the Company.  There are 400,000 options
         available for grant under the Plan.  Options will vest over a period of
         time as  determined  by the Board of Directors for up to ten years from
         the date of grant. However, no options may be exercisable less than six
         months from the date of grant.  The exercise  price of options  granted
         under the Plan will be determined  by the Board of Directors,  provided
         that,  the exercise price is not less than the fair market value of the
         Company's  common  stock on the date of  grant.  No  options  have been
         granted as of December 31, 1997.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 11 - STOCK-BASED COMPENSATION (Continued)

         Other Stock Options
         During 1996, the Company granted certain stock options to employees and
         directors.  These grants were made outside the Omnibus  Stock Plan.  On
         inception (June 3, 1996) of the Company,  the Company's Chief Executive
         Officer and  President,  who are both  directors,  were granted  82,500
         stock options each. These stock options vest at the earlier of one year
         following  the  successful  completion  of the Company's IPO or June 3,
         1998 and are  exercisable  at $0.60 per share,  which was  management's
         estimate  of the fair  market  value of the stock at the date of grant.
         The stock  options  expire three months  following any  termination  of
         employment  with the Company.  At December 31, 1997,  no stock  options
         were exercisable.

         In October 1996, two employees of the Company were granted an aggregate
         of 60,000 stock  options.  The stock options vest over a period of four
         years and are  exercisable  at the IPO price per share of the Company's
         common  stock.   These  options  expire  three  months   following  any
         termination of employment with the Company. At December 31, 1997, 8,500
         options were exercisable.

         The Company has adopted only the disclosure provisions of SFAS No. 123,
         "Accounting  for  Stock-Based   Compensation."  It  applies  Accounting
         Principles  Bulletin  ("APB")  Opinion  No. 25,  "Accounting  for Stock
         Issued to Employees," and related interpretations in accounting for its
         plans and does not recognize  compensation  expense for its stock-based
         compensation  plans other than for restricted  stock and options issued
         to outside  third  parties.  If the Company  had  elected to  recognize
         compensation  expense  based  upon the fair value at the grant date for
         awards under this plan consistent  with the  methodology  prescribed by
         SFAS No.  123,  the  Company's  net loss  and loss per  share  would be
         reduced  to the pro forma  amounts  indicated  below for the year ended
         December 31, 1997:
<TABLE>

                 <S>                                                         <C>
                  Net loss
                      As reported                                             $(1,077,967)
                      Pro forma                                               $(1,095,691)
                  Basic loss per common share
                      As reported                                             $     (1.36)
                      Pro forma                                               $     (1.39)
</TABLE>

         The effects of applying SFAS No. 123 to the Company's  option grants in
         1996 is  immaterial  to the  Company's net loss and net loss per share;
         therefore,  pro forma disclosures for 1996 have been omitted as allowed
         by SFAS No. 123.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 11 - STOCK-BASED COMPENSATION (Continued)

         Other Stock Options (Continued)
         For purposes of computing  the pro forma  disclosures  required by SFAS
         No.  123,  the fair  value of each  option  granted  to  employees  and
         directors is estimated using the  Black-Scholes  option-pricing  model.
         The fair value is computed as of the date of grant using the  following
         assumptions: (i) dividend yield of 0%, (ii) expected volatility of 44%,
         (iii) weighed-average  risk-free interest rate of approximately 6%, and
         (iv) expected life of 2.53 years.

         The  Black-Scholes  option  valuation  model was  developed  for use in
         estimating  the fair  value of traded  options  which  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.


NOTE 12 - COMMITMENTS

         Lease Commitments
         The  Company  leases  its  Torrance  and  Fullerton   facilities  under
         operating  leases.  These leases  mature at various dates through 2004.
         Both the Torrance and Fullerton leases have two,  five-year  options to
         renew.  For the  year  ended  December  31,  1997 and the  period  from
         inception (June 3, 1996) through December 31, 1996, total rent expense,
         including  associated common area maintenance charges, was $192,974 and
         $51,860, respectively.

         Estimated   future  minimum  lease  payments,   excluding  common  area
         maintenance  charges,  for facilities  under  non-cancelable  operating
         leases are as follows:
<TABLE>
<CAPTION>
                   Year Ending
                  December 31,
                  -------------
                      <S>                                                             <C>
                      1998                                                             $   163,804
                      1999                                                                 165,900
                      2000                                                                  99,600
                      2001                                                                  99,600
                      2002 and thereafter                                                  192,900
                                                                                       -----------

                           Total                                                       $   721,804
                                                                                       ===========
</TABLE>

         In addition, the Company leases certain minor equipment under operating
leases.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 12 - COMMITMENTS (Continued)

         Executive Compensation
         Upon inception of the Company (June 3, 1996),  the Company entered into
         four-year employment agreements with both the Company's Chief Executive
         Officer and President. These agreements are for annual base salaries of
         $50,000 and  $45,000,  respectively.  However,  due to the limited cash
         flows from operations for the periods ended December 31, 1997 and 1996,
         these  individuals have agreed to waive their salary  compensation that
         would be earned up to the  successful  completion of the Company's IPO.
         Had these individuals taken salaries for the periods ended December 31,
         1997 and 1996, the Company would have recognized  additional  aggregate
         salary  expense of  approximately  $95,000 and  $55,000,  respectively,
         which  would  increase  the  Company's  net loss  from  $1,077,967  and
         $942,552 to $1,172,967  and $997,552 for the periods ended December 31,
         1997 and 1996, respectively.

         Consulting Agreement
         In  connection  with the  acquisition  of the  Torrance  and  Fullerton
         restaurants,  the Company  entered  into a  Consulting  Agreement  (the
         "Agreement")  with the seller.  The Agreement  provides that the seller
         will render consulting services for a period of two years in connection
         with the  management,  marketing,  development,  and  expansion  of the
         Company's business. In consideration for such consulting services,  the
         Company will pay the seller  $95,000 per year.  Certain  disputes  have
         arisen with respect to this  agreement as more fully  described in Note
         15.


NOTE 13 - INCOME TAXES

         No  current  provision  for  federal  and state  income  taxes has been
         recorded as the Company  incurred net operating losses through December
         31, 1997 and the period ended  December 31, 1996. At December 31, 1997,
         the Company has approximately  $2,018,000 and $1,009,000 of federal and
         state net operating loss carryforwards, respectively, for tax reporting
         purposes available to offset future taxable income;  such carryforwards
         begin to expire in 2016 and 2001, respectively.

         Deferred  tax  assets,  consisting  primarily  of the tax effect of net
         operating  loss  carryforwards,   are  offset  with  a  full  valuation
         allowance  because of the uncertainty  regarding the  realizability  of
         such  assets.  The  valuation  allowance  increased  from  $347,000  to
         $745,000  during  the  year  ended  December  31,  1997.  Additionally,
         the  effect  of  the  valuation   allowance   represents   the  primary
         reconciling  item  between  tax  expense  computed  using  the  federal
         statutory  tax rate of 34% and the Company's  negligible  effective tax
         rate.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 13 - INCOME TAXES (Continued)

         In February  1998,  the Company  raised gross proceeds of $6,250,000 in
         additional  capital through a public offering.  As a result of bringing
         in additional stockholders there may be a substantial annual limitation
         on the use of net  operating  loss  carryforwards  for both federal and
         state tax  purposes.  In general,  an ownership  change occurs when the
         major  stockholders,  which  includes  groups  of  stockholders  of the
         Company,  have  increased  their  ownership by more than 50  percentage
         points.  If there  has been an  ownership  change,  section  382 of the
         Internal  Revenue Code places a limitation on the amount of income that
         can be offset by net  operating  loss  carryforwards.  The  section 382
         limitation is the product of  multiplying  the Company's  value (at the
         time  of  the  ownership  change)  by  the  highest  federal  long-term
         tax-exempt  rate  for the  month  of the  change  or the two  preceding
         months.  The amount of the potential  limitation,  if any, is yet to be
         determined.


NOTE 14 - RELATED PARTY TRANSACTIONS

         In June 1996, the Company  assumed  $92,000 of  convertible  promissory
         notes from Texas Loosey's  Steakhouse  Holdings,  Inc., an affiliate of
         the Company's Chief Executive Officer and President. The holders of the
         notes may convert the notes into 55,200 shares of the Company's  common
         stock upon the successful completion of the Company's IPO (see Note 6).

         During the year ended  December  31,  1997 and the period  from June 3,
         1996 (inception) to December 31, 1996, the Company made advances to the
         Company's  Chief  Executive  Officer and President  totaling  $179,739,
         which are recorded as advances to officers on the balance sheet.

         In April 1997, the Company issued 2,809 shares of the Company's  common
         stock to the Company's Chief Executive Officer in exchange for services
         rendered.

         In April 1997, the Company issued 2,809 shares of the Company's  common
         stock to the President in exchange for services rendered.

         In April 1997, the Company issued 4,495 shares of the Company's  common
         stock to its attorney in exchange for services rendered.

         In November 1997, the Company's Chief  Executive  Officer and President
         contributed  a total of $130,000 to the Company as  additional  paid-in
         capital. No shares of common stock were issued.

         The President of the Company has  personally  guaranteed  the operating
         lease agreements for the Fullerton and Norco restaurant locations.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 15 - CERTAIN TRANSACTIONS

         Certain  disputes  have  arisen with the  sellers of the  Torrance  and
         Fullerton  restaurants  resulting in an extended  escrow closing period
         and which may effect the ultimate purchase price and/or  acquisition of
         the restaurants.  Additionally, certain disputes have arisen related to
         the Company's  obligation under its consulting agreement with a seller.
         The  Company  has  notified  the  sellers of  material  breaches of the
         sellers' representations and warranties with respect to the acquisition
         agreement,  and the sellers  have  notified  the Company of its default
         with  respect  to two  notes  payable  issued  in  connection  with the
         purchase.

         The disputes in this transaction relate primarily to the sellers' claim
         that the Company is obligated to pay for certain  unpaid federal income
         and  state  sales  taxes  of   approximately   $287,000  and  $193,000,
         respectively,  and  certain  liabilities  to vendors  of  approximately
         $135,000.  These amounts are not reflected in the accompanying  balance
         sheet or statements of operations and the Company intends to vigorously
         defend itself, if necessary, against the claims of the seller.

         The Company has made certain payments in connection with its consulting
         agreement  (see note 12) with a seller  and has  withheld  or  deferred
         certain  other  payments  as a result of  performance  issues  with the
         seller prior to and after possession of the restaurants by the Company.
         At December 31, 1997,  the Company has a possible  liability for unpaid
         amounts to the seller of up to approximately  $140,000.  This amount is
         not  reflected  in the  accompanying  balance  sheet or  statements  of
         operations,  and the Company  intends to vigorously  defend itself,  if
         necessary, against the seller.

         As a result of these  disputes,  the Company has withheld  payment on a
         $375,000 note payable (see Note 5) due  subsequent to the Company's IPO
         in February 1998 and has withheld  certain 1998 monthly payments due on
         a $870,000  note payable  (see Note 5). The  $375,000  note payable has
         been  classified  as a  current  liability  on  the  balance  sheet  as
         management  believes that the resolution of the disputes and payment of
         the note will occur during 1998.  Management and the Company's  counsel
         believe that the default notice and the acceleration payment clauses of
         the notes are not  enforceable  and that the  $870,000  note payable is
         reasonably  classified in accordance with the original payment terms of
         the note;  accordingly,  such note has been excluded from total current
         liabilities on the balance sheet.


NOTE 16 - SUBSEQUENT EVENTS

         In  February  1998,  the  Company  completed  an  IPO  in which it sold
         1,250,000  shares  of  common stock at $5.00 per share.  Gross proceeds
         from the sale were $6,250,000.


<PAGE>
                                                   GALVESTON'S STEAKHOUSE CORP.
                                                  NOTES TO FINANCIAL STATEMENTS
                                                              December 31, 1997
-------------------------------------------------------------------------------


NOTE 16 - SUBSEQUENT EVENTS (Continued)

         In connection  with the IPO in February 1998,  the Company  granted the
         underwriters  warrants to purchase 125,000 shares of common stock at an
         initial  exercise  price of 140% of the IPO  price.  The  warrants  are
         exercisable for a period of four years commencing one year from the IPO
         date.

         In  March  1998,  $1,112,500  of  the  notes  payable  relating  to the
         $1,500,000 private  placements  discussed in Note 7 were converted into
         278,125 shares of the Company's common stock. The remaining  balance of
         $387,500 plus accrued interest was paid-off.

         In March 1998,  the bridge  loans of  $150,000  plus  accrued  interest
         discussed in Note 9 were paid off.

         In March 1998,  certain other notes payable to various  individuals  of
         $87,000 plus accrued interest were paid off.