<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB

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

For the quarterly period ended   September 30, 1996
                                 ------------------

                                       OR

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

For the transaction period from        to
                               --------  -------
 
Commission File Number     0 - 23136
                        --------------


                        COUNTRY STAR RESTAURANTS, INC.
             ----------------------------------------------------
            (Exact name of registrant as specified in its charter)
 

         Delaware                                                62-1536550
 -----------------------------                               ------------------
(State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)


       11150 SANTA MONICA BOULEVARD, LOS ANGELES, CA         90025
    --------------------------------------------------------------------
           (Address of Principal Executive Offices)        (Zip Code)


                                (310) 268-2200
               --------------------------------------------------
              (Registrant's telephone number, including area code)

                                Not applicable
   -------------------------------------------------------------------------
  (Former name, former address, and former fiscal year, if changed since last
   report)
                                        
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
                                                      -----     ------

The number of shares of common stock outstanding as of October 31, 1996:

12,790,163
<PAGE>
 
                         COUNTRY STAR RESTAURANTS, INC.

                                     INDEX
<TABLE> 
<CAPTION> 
                                                                   Page
                                                                   ----
<S>           <C>                                                 <C>   
PART I  -      Financial Information
 
   Item 1.     Financial Statements
 
               Condensed Balance Sheet at
                  September 30, 1996 and December 31, 1995.......   F-2
 
               Condensed Statements of Operations
                  for the Quarter Ended September 30, 1996
                  and September 30, 1995.........................   F-4
 
               Condensed Statements of Cash Flows
                  for the Nine Months Ended September 30, 1996
                  and September 30, 1995 (unaudited).............   F-5
 
               Notes to Condensed Financial Statements
                  (unaudited)....................................   F-7
 
    Item 2.    Management's Discussion and Analysis of Financial 
                  Condition and Results of Operations............     1
 
    Item 6.    Exhibits and Reports on Form 8-K..................     7
 
</TABLE> 
SIGNATURES
                                     F - 1
<PAGE>
 
                         COUNTRY STAR RESTAURANTS, INC.

                            Condensed Balance Sheet

                               September 30, 1996
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                   September 30,
                                                       1996         December 31,
                                                   (Unaudited)          1995
<S>                                               <C>              <C> 
                                    ASSETS
CURRENT ASSETS
 Cash and cash equivalents                            $ 2,340,050        9,760,675
 Trade Receivables                                        228,406
 Inventories                                              692,152          380,608
 Prepaid expenses and other                               243,871          200,343
                                                      -----------      -----------
    Total current assets                                3,504,479       10,341,626
                                                      -----------      -----------
 
PROPERTY AND EQUIPMENT AT COST, net of
 accumulated depreciation of $1,110,958 
 and $478,476 for 1996 and 1995
 Leasehold improvements                                12,545,154        5,264,336
 Equipment                                              1,450,090          926,304
 Capital lease                                            795,484          602,372
                                                      -----------      -----------
     Total property and equipment                      14,790,728        6,793,012
                                                      -----------      -----------
 
INVESTMENTS IN AND ADVANCES TO
 LAS VEGAS, LLC                                                            852,488
                                                      -----------      -----------
 
OTHER ASSETS
 Memorabilia                                              430,114          179,047
 Construction in Progress - Atlanta                     8,353,886        1,142,012
 Orlando Pre Development                                   20,390
 Pre-Opening Costs-Net of Accumulated
  Amortization of $472,893 for 1996                     1,592,571
 Other                                                    192,829          233,566
                                                      -----------      -----------
      Total other assets                               10,589,793        1,554,625
                                                      -----------      -----------
      Total assets                                    $28,885,000      $19,541,751
                                                      ===========      ===========
</TABLE>

                                     F - 2
<PAGE>
 
                         COUNTRY STAR RESTAURANTS, INC.

                            Condensed Balance Sheet

                               September 30, 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                               September 30,
                                                                    1996               December 31,
                                                                (Unaudited)                1995
                     LIABILITIES AND STOCKHOLDERS' EQUITY
 
<S>                                                            <C>                     <C> 
CURRENT LIABILITIES 
  Accounts payable trade and                                     
   construction                                                $  3,877,241            $    155,386                
  Accrued liabilities                                               155,209                 153,562
  Notes Payable                                                                             495,000
  Capital lease obligation - current portion                        173,205                  83,660
  Deposits and other current liabilities                              6,653
                                                               ------------            ------------
                                                                
         Total current liabilities                                4,212,308                 887,608
                                                               ------------            ------------
 
LONG-TERM LIABILITIES
  Capital lease obligation, net of current portion                  294,247                 278,879
                                                               ------------            ------------
                                                            
         Total long term liabilities                                294,247                 278,879
                                                               ------------            ------------
                                                            
         Total liabilities                                        4,506,555               1,166,487
                                                               ------------            ------------
 
Minority Interest in Las Vegas Investment                         4,229,643
 

STOCKHOLDERS' EQUITY
  Preferred stock, $0.001 par value, 2,000,000 shares 
    authorized, 600,137 and 1,277,089 shares issued
    and outstanding for September 30, 1996 and December 
    31, 1995                                                            600                   1,277 
  Common stock, $0.001 par value, 25,000,000 shares
    authorized, 12,687,587 and 5,947,577 shares issued and
    outstanding for September 30, 1996 and December 31, 1995         12,687                  50,948
  Additional paid-in-capital                                     35,663,597              29,454,152
  Unamortized stock option cost                                    (344,185)               (232,892)
  Accumulated deficit                                           (15,183,897)            (10,853,221)
                                                               ------------            ------------
 
         Total stockholders' equity                              20,148,802              18,375,264
                                                               ------------            ------------
 
         Total liabilities and stockholders' equity            $ 28,885,000            $ 19,541,751
                                                               ============            ============
</TABLE>
 
              See accompanying notes to financial statements.

                                      F-3
<PAGE>
 
                         COUNTRY STAR RESTAURANTS, INC.

                       Condensed Statements of Operations
                                  (Unaudited)
<TABLE>
<CAPTION>
                                             For the Quarter Ended                    For the Nine Months Ended
                                       ---------------------------------           --------------------------------
                                       September 30,       September 30,           September 30,      September 30,
                                           1996                1995                    1996               1995
                                       -------------       -------------           -------------      -------------
<S>                                     <C>                 <C>                     <C>                <C> 
REVENUES                                                                          
  Food and Beverage                     $ 2,425,600         $ 1,377,212             $ 4,341,883        $ 3,688,711
  Merchandise                               415,782             126,366                 580,801            337,016
  Other                                         540                                       5,658
                                        -----------         -----------             -----------        -----------
     Total revenue                        2,841,922           1,503,578               4,928,342          4,025,727
                                                                                  
OPERATING EXPENSES                                                                
  Cost of sales                                                                   
    Food and beverage                       861,931             426,197               1,397,485          1,112,794
    Merchandise                             238,783              55,371                 325,170            152,787
  Operating payroll                       1,359,901             465,070               2,224,555          1,471,138
  Other operating                         1,264,384             318,963               2,016,176            987,127
  Rent                                      332,591              78,214                 489,284            234,214
  Depreciation and Amortization             717,719             118,934                 951,522            352,737
                                         ----------          ----------              ----------         ----------
     Total operating expenses             4,775,309           1,462,749               7,404,192          4,310,797
                                                                                  
RESTAURANT OPERATIONS, net               (1,933,387)             40,829              (2,475,850)         (285,070)
                                                                                  
INTEREST (INCOME) EXPENSE, net              (49,609)           (217,362)                182,125          (336,727)
                                                                                  
DEPRECIATION AND                                                                  
 AMORTIZATION                                86,472              42,414                 195,787           234,221
                                                                                  
SELLING, GENERAL AND                                                              
 ADMINISTRATIVE EXPENSES                    780,081           1,686,386               2,605,941         3,400,628
                                                                                  
MINORITY INTEREST IN                                                              
 COUNTRY STAR LAS VEGAS LLC                (764,765)                                   (764,765)
                                        -----------         -----------             -----------        -----------
NET LOSS                                $(2,006,334)        $(1,905,333)            $(4,330,688)       $(4,256,646)
                                        ===========         ===========             ===========        ===========
                                                                                  
NET LOSS PER SHARE                      $     (0.16)        $     (0.33)            $     (0.44)       $     (0.80)
                                        ===========         ===========             ===========        ===========
                                                                                  
WEIGHTED AVERAGE NUMBER OF                                                        
 SHARES OUTSTANDING                      12,473,469           5,768,280               9,811,992          5,322,625
                                        ===========         ===========             ===========        ===========
</TABLE>

See accompanying notes to financial statements.

                                      F-4
<PAGE>
 
                         COUNTRY STAR RESTAURANTS, INC.

                       Condensed Statements of Cash Flows
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                  For the Nine Months Ended
                                                               -------------------------------
                                                               September 30,     September 30,
                                                                    1996              1995
                                                               -------------     --------------
<S>                                                            <C>               <C>
OPERATING ACTIVITIES                                                             
  Net loss                                                     $ (4,330,688)      $(4,256,646)
                                                               ------------       -----------
  Adjustments to reconcile net loss to net cash used in                          
    operating activities:                                                        
      Depreciation and amortization                               1,508,913           600,138
      Charge for non-cash settlement                                 80,000      
      Discount on notes payable                                                       240,200
      Amortization of stock option cost, net:                       137,957           177,949
      Executive compensation from release of escrowed                            
        shares                                                                      1,425,000
      Gain on sale of Las Vegas Land                                                  502,230
      Changes in assets and liabilities                                          
         (Increase) decrease in accounts receivable                (228,394)     
         (Increase) decrease in inventories                        (311,544)          (52,891)
         (Increase) decrease in pre-opening costs                (2,065,464)           16,749
         (Increase) decrease in pre-paid expenses                   (43,528)          (76,529)
         (Increase) decrease in other noncurrent assets              40,737          (482,582)
         Increase (decrease) in accounts payable and                             
           accrued liabilities                                    3,723,502           464,608
         Increase (decrease) in Notes payable                      (495,000)     
         Increase (decrease) in deposits and other                               
           current liabilities                                        6,653      
                                                               ------------       -----------
                                                                                 
           Total adjustment                                       2,353,832         2,814,872
                                                               ------------       -----------
           Net cash used in operating activities                 (1,976,856)       (1,441,774)
                                                               ------------       -----------
                                                                                 
INVESTING ACTIVITIES                                                             
  Purchase of leasehold improvements                             (7,619,970)         (166,464)
  Purchase of equipment                                          (1,413,766)     
  Purchase of memorabilia                                          (251,067)          (13,302)
  Proceeds from sale of Las Vegas land                                              1,156,974
  Proceeds from financing of Las Vegas land                                         1,000,000
  Pay-off of Las Vegas debt                                                        (1,823,284)
  Increase in pre-development and lease costs                                      (1,660,387)
  Investment in Country Star Las Vegas                              852,488      
  Minority interest in Country Star Las Vegas                     4,229,643      
  Investment in Country Star Atlanta                             (7,211,874)     
  Investment in Country Star Orlando                                (20,393)     
                                                               ------------       -----------
                                                                                 
           Net cash used by investing activities                (11,434,939)       (1,506,463)
                                                               ------------       -----------
</TABLE>

                                      F-5
<PAGE>
 
                         COUNTRY STAR RESTAURANTS, INC.

                 Condensed Statements of Cash Flows (Continued)
                                  (Unaudited)

<TABLE>
<S>                                                        <C>                 <C>    
FINANCING ACTIVITIES
   Net proceeds from issuance of common
    and preferred stock and warrants                        5,924,000           3,763,352
   Fee for equity placement NASD fee                          (37,743)           
   Issuance of note payable                                                      (250,000)
   Decrease in leasehold improvements payable                                    (400,000)
   Capital lease payments                                     104,913            (146,501)
                                                          -----------          ----------
          Net cash provided by financing activities         5,991,170           2,966,851
                                                          -----------          ----------
                                                                               
NET INCREASE (DECREASE) IN CASH                            (7,420,625)             18,614
                                                          -----------          ----------
                                                                               
CASH - beginning of period                                  9,760,675             543,694
                                                          -----------          ----------
                                                                               
CASH - end of period                                      $ 2,340,050          $  562,308
                                                          ===========          ==========
</TABLE>

See accompanying notes to financial statements.

                                      F-6
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 1 -  BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

          The Company
          -----------

          Country Star Restaurants, Inc. (the Company) was formed for the
          purpose of owning and operating country music, theme-oriented, casual
          dining restaurants in various locations throughout the United States.
          The restaurants will be operated under the name "Country Star,"
          followed by the name of the city.

          For the year ended December 31, 1993, the Company was a development-
          stage Company. In August, 1994, the Company opened its first
          restaurant and began operations. On July 2, 1996, the company opened
          its second restaurant on the Strip in Las Vegas, Nevada. On October
          14, 1996, the Company opened its third restaurant in Atlanta, Georgia.

          Public Offerings
          ----------------

          On December 22, 1993, the Company completed an Initial Public Offering
          (the "IPO") of its common stock and redeemable common stock purchase
          warrants. The net proceeds from the sale of the IPO, approximately
          $6,230,200, were used primarily to construct the Country Star
          Hollywood Restaurant located in Universal City, California, which
          commenced operations during the third quarter of 1994.

          On November 10, 1995, the Company completed a public offering (the
          "Secondary Offering") of its 6% Cumulative Convertible Series A
          Preferred Stock ("Series A Preferred"). The net proceeds from the sale
          of the Series A Preferred amounted to approximately $12,372,500 and is
          being used to complete construction and commence the operations of
          Country Star Las Vegas and Country Star Atlanta.

          Cash and Cash Equivalents
          -------------------------

          Cash and cash equivalents are all highly liquid investments with an
          original maturity or purchased with a remaining maturity of three
          months or less, that are readily convertible to known amounts of cash.
          The carrying amount of cash and cash equivalents approximates fair
          value due to their short maturity periods.

          Cash is held in demand-deposit and money-market accounts at quality
          credit financial institutions.  The combined account balance at these
          institutions generally exceeds FDIC insurance coverage, and, as a
          result, there is a concentration of credit risk related to amounts on
          deposit in excess of FDIC insurance coverage.  Management believes the
          risk is not significant.

                                     F - 7
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 1 -  BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
          (CONTINUED)


          Country Star Las Vegas LLC
          --------------------------

          The Company presently reports its investment in Country Star Las
          Vegas LLC using the consolidated method of accounting (see note 8.)

          Inventories
          -----------

          Inventories, consisting primarily of food, beverages and merchandise,
          are stated at the lower of cost or market, determined on a first-in,
          first-out (FIFO) basis.

          Property and Equipment
          ----------------------

          Property and equipment are stated at cost.  Expenditures for additions
          and major improvements and betterments are capitalized.  Expenditures
          for repairs and maintenance and minor improvements and replacements
          are charged to expense as incurred.  When property or equipment is
          retired or otherwise disposed of, the related cost and accumulated
          depreciation are removed from the accounts.

          Depreciation is provided using the straight-line method over the
          estimated useful lives of the related assets, which range from five to
          eight years.  Amortization of leasehold improvements is provided over
          the estimated useful life of the asset or the lease term, including
          option periods, whichever is shorter.

          Earnings per share
          ------------------

          Loss per share is computed based upon the weighted average shares
          outstanding for the period.  Loss per share excludes the effect of
          outstanding warrants and stock options because the effect of such
          inclusion would be to decrease the net loss per share.

          Income Taxes
          ------------

          In accordance with the asset and liability approach specified by
          Statement of Financial Accounting Standards No. 109, "Accounting for
          Income Taxes," deferred tax assets and liabilities are recognized for
          the future tax consequences attributable to differences between the
          financial and tax reporting basis of the Company's assets and
          liabilities.  Further, if it is more likely than not that some portion
          or all of a deferred tax asset will not be realized, a valuation
          allowance is recognized.

          The Company has generated net operating losses since inception for
          financial reporting and income tax purposes.  The Company has a net
          operating loss carryforward of approximately $7.7 million.  The
          potential tax benefit of the Company's net operating

                                     F - 8
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 1 -  BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
          (CONTINUED)


          loss carryforward is $1,575,000, $1,172,000 and $1,020 as of December
          31, 1995, 1994 and 1993. No potential tax benefit has been calculated
          for the nine months ended September 30, 1996. As of December 31, 1995,
          the Company has reserved the tax benefit of the net operating loss
          carryforward, which begins to expire in 2008.

          Additionally, a valuation allowance has been recognized to offset the
          deferred tax asset of $150,000 and $118,000 for 1994 and 1993,
          attributable primarily to the temporary differences for start-up costs
          expensed for financial reporting purposes and capitalized for tax
          purposes due to the uncertainty of realizing the benefit. Accordingly,
          no benefit for income taxes has been reflected for the nine months
          ended September 30, 1996 and 1995.

          Pre-opening Costs
          -----------------

          The Company capitalizes certain costs in connection with the opening
          of restaurants. Amortization of pre-opening costs is provided using
          the straight-line method over twelve months, beginning with the month
          in which the restaurant opens.

          Pre-development Costs
          ---------------------

          Pre-development costs includes those costs incurred to prepare
          restaurants for opening and include such items as design and architect
          fees. Such costs will be transferred to property and equipment and
          depreciated over their useful lives beginning with the month in which
          the restaurant opens.

          Other Assets
          ------------

          Included in other assets are payments made to certain celebrities for
          publicity appearances and endorsements.  Amortization of these
          payments is provided using the straight-line method for the term of
          the contract, or 34 months.

          Use of estimates
          ----------------

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

                                     F - 9
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)

NOTE 2  - BASIS OF PRESENTATION

          The unaudited consolidated financial statements of the Company as of
          September 30, 1996 and 1995 and for the three month period and nine
          month period ended September 30, 1996 and 1995 have been prepared in
          accordance with generally accepted accounting principles for interim
          financial information. Accordingly, they do not include all of the
          information and footnotes required by generally accepted accounting
          principles for complete financial statements. In the opinion of
          management, all adjustments considered necessary for a fair
          presentation have been included and all such adjustments are of a
          recurring nature.
 
          Certain previously reported amounts have been reclassified to conform
          to the current financial statement presentation.

          The financial statements should be read in conjunction with the
          audited financial statements and notes thereto included in the Annual
          Report on Form 10-KSB for the period ended December 31, 1995. It
          should be understood that accounting measurements at interim dates
          inherently involve greater reliance on estimates than at year end. The
          results of operations for the interim periods presented are not
          necessarily indicative of the results for the entire year.


NOTE 3 -  CAPITAL TRANSACTIONS

          In the IPO closing on December 22, 1993, the Company offered and sold
          1,400,000 shares of common stock and 2,100,000 Redeemable Common Stock
          Purchase Warrants (the "Redeemable Warrants")  at a price of $5.00 and
          $0.25 per share, less a 10% underwriting fee and a 3% non-accountable
          expense allowance.  Prior to the IPO, the Company issued 2,290,000
          shares of common stock at a price of $.001 per share.  Pursuant to the
          underwriter's over-allotment option, granted in connection with the
          Company's IPO, on January 27, 1994, the underwriter of the Company's
          IPO exercised its over-allotment option in full, purchasing from the
          Company an additional 210,000 shares of common stock and 315,000
          Redeemable Warrants.  The closing of the over-allotment offering
          occurred on February 3, 1994, at which time the Company received net
          proceeds of $958,268, after deducting legal and related expenses of
          $27,397.  Additionally, in connection with the IPO, the underwriter
          was granted warrants (the "Underwriter's Warrants") to purchase from
          the Company 140,000 shares of common stock and 210,000 warrants, which
          are substantially identical to the Redeemable Warrants except that the
          warrants issuable upon exercise of Underwriter's Warrants cannot be
          redeemed by the Company.  The Underwriter's Warrants are initially
          exercisable at a price of $8.25 per share of common stock and $4.4125
          per share of common stock  for a period of four years commencing one
          year from the date of the IPO.

          On July 28, 1995, the Company completed a private placement pursuant
          to which it sold 37 units  (the "Units") to nonaffiliated, accredited
          investors (the Private Placement), each unit consisting of (i) a
          $50,000 6% promissory note due the sooner of twelve (12) months from
          the date of issuance or the Company's receipt of at least $5,000,000
          in gross

                                    F - 10
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)

NOTE 3 -  CAPITAL TRANSACTIONS (CONTINUED)

          proceeds from a public or private sale of its securities, a joint
          venture or licensing agreement (the "Note"), (ii) 5,000 shares of
          common stock, and (iii) 3,000 warrants exercisable at a price at a
          price of $5.00 per share, subject to adjustment, to purchase 3,000
          shares of common stock.  The net proceeds from the Private Placement
          were approximately $1,650,000 (after commissions and expenses) and in
          connection therewith the Company issued an aggregate of 185,000 shares
          of common stock and 111,000 warrants and recorded a discount
          aggregating $655,518 based upon the relative  fair market value of the
          Notes, the common stock and the warrants issued therewith.  The
          discount is to be amortized over the term of the Notes as interest
          expense.  On November 10, 1995, the effective date of the Company's
          Secondary Offering, the common shares were converted into 77,089
          shares of 6% Cumulative Convertible Series A Preferred Stock and the
          promissory notes were repaid.

          On November 10, 1995, the Company offered and sold in the Secondary
          Offering, 1,200,000 shares of 6% Series A Preferred Stock at a price
          of $12.00 per share.  The net proceeds from the sale of the Series A
          Preferred amounted to approximately $12,372,500, after deducting
          expenses of $2,027,500.  Such net proceeds is being used to complete
          the development and construction of Country Star Las Vegas and Country
          Star Atlanta.  In connection with the Secondary Offering, the Company
          agreed to issue the representatives of the several underwriters
          warrants, for nominal consideration, to purchase from the Company
          120,000 shares of Series A Preferred.  Each share of Series A
          Preferred is convertible, unless previously redeemed by the Company,
          into six shares of the Company's common stock.  Unless earlier
          converted or redeemed, the Series A Preferred automatically will
          convert into common stock upon the earlier of May 10, 1997 or the
          Company achieving quarterly revenues from operations of at least
          $7,000,000.  During the nine months ended September 30, 1996, 847,323
          shares of Series A Preferred stock were redeemed for 5,083,938 shares
          of common stock.

          During 1995 the Company sold 25,000 unregistered shares of common
          stock in a private placement transaction and received $100,000.  In
          1995 the Company sold an additional 342,857 unregistered shares of
          common stock and 257,143 warrants in a private placement, for an
          aggregate purchase price of $600,000.

          In addition, warrants, originally sold for $0.25, were exercised for
          275,889 shares of common stock at a price of $4.00 per share for
          aggregate total net proceeds of $1,103,675.

          Effective February 12, 1996, the Company sold 241,905 unregistered
          shares of common stock in a private placement transaction and received
          $635,000.  Effective March 28, 1996 the Company sold an aggregate of
          750,000 unregistered shares of common stock for an aggregate purchase
          price of $2,250,000 and in connection therewith issued an aggregate of
          375,000 warrants to purchase 375,000 shares of common stock for $3.00
          per share in a private placement.  In May and June, 1996, warrants for
          the purchase of 192,000 shares of common stock were exercised, for
          which the company received proceeds of $406,500.  All of the proceeds
          received by the Company from each of the

                                    F - 11
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)

NOTE 3 -  CAPITAL TRANSACTIONS (CONTINUED)

          aforementioned private placements is for further development of the
          Company's Country Star Restaurants and for working capital purposes.

          Effective July 10, 1996, the Company sold an aggregate of 514,288
          shares of common stock in a private placement to two separate
          investors for aggregate gross proceeds of $1,800,000. In connection
          therewith, the Company also issued to these two investors and
          aggregate of 385,715 common stock purchase warrants, each warrant to
          purchase one (1) share of common stock at an exercise price of $3.50
          per share.

          Effective August 28, 1996, one of the two purchasers in the July 10,
          1996 private transaction restructured his transaction with Company in
          connection with causing an additional $900,000 in gross proceeds to be
          invested in the Company. Specifically, the purchaser of 400,000 shares
          of common stock and 300,000 common stock purchase warrants,
          representing $1,400,000 of the $1,800,000 invested in July 1996,
          returned all such securities to the Company and in return, the entire
          $1,400,000 purchase prices was credited, in equal portions, to two
          entities affiliated with such July purchaser. The two entities
          affiliated with such July purchaser invested an aggregate of an
          additional $900,000 in gross proceeds and, when added to the
          $1,400,000 credited to them, purchased an aggregate of $2,300,000
          shares of the Company's Series A Preferred Stock at a purchase price
          $13.50 per share. Consequently, these two affiliated purchasers
          purchased an aggregate of 170,371 shares of the Company's Series A
          Preferred Stock and received an aggregate of 306,667 common stock
          purchase warrants, each warrant to purchase one share of common stock.
          The Company is obligated to file a registration statement on November
          19, 1996 (the "November 19th Registration Statement") with respect to
          the registration of all of the shares of the Series A Preferred Stock
          issued in the August 28, 1996 transaction, all of the remaining
          114,228 shares common stock issued in the July 10, 1996 transaction,
          all of the shares of common stock issuable upon the exercise of the
          remaining 87,715 warrants issued in the July 10th transaction and the
          306,667 warrants issued in the August 28th transaction, and all of the
          shares of common stock issuable upon the conversion of the Series A
          Preferred Stock.

          Effective September 10, 1996 the Company sold an aggregate of 100,000
          shares of common stock to two related individual pension funds for
          aggregate gross proceeds of $200,000.  In connection therewith, the
          Company also issued to these two funds an aggregate of 100,000 common
          stock purchase warrants, each convert to purchase one (1) share of
          common stock at an exercise price of $2.00 per share.  The Company is
          also obligated to include on the November 19th Registration Statement,
          among other securities, all of the shares of common stock issued in
          the September 10th transaction and the shares of common stock issuable
          upon the exercise of the warrants issued in the September 10th
          transaction, and all of the shares of common stock issuable upon the
          conversion of the Series B Preferred Stock issued by the Company in a
          private transaction that resulted in the Company receiving gross
          proceeds of $4,000,000, which was effected on October 11, 1996, as
          more fully described in the Company's Report on Form 8-K annexed
          hereto.

                                    F - 12
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 4  - UNSECURED NOTES PAYABLE

          In December, 1995 the Company entered into a note agreement for
          $495,000 with a limited partnership in conjunction with an investment
          to be entered into in Country Star Las Vegas, LLC.  The note bears
          interest at 6% and is due and payable on December 19, 1996.  On April
          1, 1996 the note was converted into an equity ownership in Country
          Star Las Vegas, LLC.  See Note 8.



NOTE 5 -  MINIMUM LEASE PAYMENTS

          The Company has lease agreements to operate the restaurant facility in
          Universal City, California, and their corporate offices and warehouse
          facilities. The restaurant's initial lease term expires on May 31,
          1997, and under certain conditions is subject to three extensions of
          five years each. The lease requires annual minimum payments of
          percentage rent to be paid, ranging from 6% to 10% of annual sales
          volume, although such percentage rent payments will be foregone by the
          landlord until such time as the Company recoups its investment in the
          leasehold improvements from amounts that would otherwise be payable to
          the landlord as percentage rent.

          The Company has also entered into lease agreements in Las Vegas,
          Nevada, and Atlanta, Georgia, to operate restaurant facilities there.
          The Atlanta lease requires the Company to pay a minimum base rent,
          operating expenses, and a percentage of rent of 6% of gross sales
          after the Company recoups its investment in the leasehold improvements
          from amounts that would otherwise be payable to the landlord as
          percentage rent.  The Las Vegas lease requires the Company to pay base
          rent, with stipulated fixed annual increases for the first two years,
          and thereafter adjust according to the Consumer Price Index (CPI) for
          the remainder of the lease.

          The Atlanta lease has a 20-year term, which will expire in 2015.  The
          Las Vegas lease has a 10-year term, which will expire in 2005.  Both
          leases have an option for renewal.

          The warehouse and corporate facilities have terms expiring in 1997 and
          1999 respectively.

          The Company is subject to minimum annual lease payments as follows:

<TABLE> 
           <S>                                                              <C>
            For the period September 30, 1996 through December 31, 1996      $   603,562
            1997                                                               2,391,000
            1998                                                               2,386,000
            1999                                                               2,477,000
            2000                                                               2,462,000
            Thereafter                                                        21,044,000
</TABLE> 
                                    F - 13
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 6 -  CAPITAL LEASE

          The Company has executed certain leases for signage which are
          accounted for as capital leases.  At the termination of each lease,
          the Company has the option to purchase the signage at a bargain
          purchase amount.  There were three separate leases for the Hollywood
          facility, two of which expired within a twelve month period, and the
          third extending for sixty months, expiring in 1999.  The lease for the
          signage at the Las Vegas facility expires in 1998.

          The Company is subject to minimum annual capital lease payments as
          follows:
<TABLE>
 
           <S>                                                                <C>
            For the period September 30, 1996 through December 31, 1996        $ 53,502
            1997                                                                214,008
            1998                                                                182,008
            1999                                                                108,174
                                                                               --------
 
            Total minimum lease payments                                        557,692
            Less amount representing interest                                   (71,704)
                                                                               --------
 
            Present value of net minimum lease payments                        $485,988
                                                                               --------
</TABLE> 

NOTE 7 -  STOCK OPTIONS

          In July 1993, the Company adopted an Incentive Stock Option Plan. The
          total number of shares with respect to which incentive stock options
          (ISOs) may be granted is 100,000. The exercise price of all ISOs
          granted to an individual owning more than 10% of the Company's
          outstanding voting shares shall be at least 110% of the fair market
          value of such shares on the date of the grant. The maximum exercise
          period for which options may be granted is ten years from the date of
          the grant (five years in the case of an ISO granted to an individual
          owning more than 10% of the Company's outstanding voting shares). The
          aggregate fair market value (determined at the date of the option
          grant) of shares of common stock, with respect to which ISOs are
          exercisable for the first time by the holder of the option during any
          calendar year, may not exceed $100,000. Ninety thousand (90,000)
          options have been granted under the Plan at an exercise price of
          $2.00.

          In January 1994, the Company adopted the 1994 Nonqualified Stock
          Option Plan (the "Plan"). The Plan provides for the grant of
          nonqualified stock options to purchase up to 1,000,000 shares of the
          common stock. The exercise price of options granted under this plan
          shall not be less than 100% of the fair market value of the common
          stock on the date of the grant. In April 1994, the Company granted
          options to purchase 988,000 shares at a price equal to the market
          price on the date of grant. In December 1994, the exercise price was
          adjusted to the then market price of $4.00.

                                     F-14
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 7 -  STOCK OPTIONS (CONTINUED)

          The Company granted options to purchase 467,000 shares to certain non-
          employees for services to be performed. Of this amount, 350,000
          options were granted to certain celebrities pursuant to license
          agreements with such celebrities. In addition, options to purchase
          60,000 shares were issued pursuant to a restaurant management
          agreement. The Company will recognize a charge to earnings over the
          period services are rendered by the non-employees based on the fair
          market value of the options at the date granted.

          During the first nine months of 1996 the Company issued an aggregate
          of 2,082,500 common stock purchase warrants to officers, employees,
          independent contractors, directors and vendors at prices ranging from
          $2.00 to $3.00.  During the first quarter of 1996 the Company also
          repriced 594,565 non-qualified stock options previously granted to
          certain officers, employees, directors, investors and independent
          contractors from $4.00 to $2.00.

          As of September 30, 1996, the Company had reserved an aggregate of
          4,922,590 shares of common stock for the exercise of warrants and
          stock options.


NOTE 8 -  INVESTMENT IN COUNTRY STAR LAS VEGAS LLC

          On September 6, 1995, the Company entered into a definitive agreement
          for the financing of future Country Star Restaurants with NevStar
          Restaurants, LLC ("NevStar") a newly formed Nevada limited liability
          corporation. Such agreement (the "Development Financing Agreement")
          provides that NevStar shall (i) invest $4.5 million of equity in
          Country Star Las Vegas, and (ii) have the right, under certain
          circumstances, to invest up to an additional $12.5 million in equity
          in future domestic Country Star Restaurants, including Country Star
          Atlanta. To secure its investment in Country Star Las Vegas, NevStar
          deposited into escrow $5 million in marketable securities upon the
          execution of the Development Financing Agreement. Pursuant to the
          terms and conditions of the Development Financing Agreement, a limited
          liability corporation has been established to effect each of NevStar's
          and the Company's investment in Country Star Las Vegas (the "Country
          Star Las Vegas LLC"). NevStar will provide $4.5 million of equity
          financing for Country Star Las Vegas LLC and the Company will provide
          the remaining funds necessary for Country Star Las Vegas LLC, or
          approximately $3.0 million (NevStar and the Company, in their capacity
          as investors in the Country Star Las Vegas LLC, are sometimes referred
          to herein as the "Equity Investors"). In connection with NevStar's
          $4.5 million investment in Country Star Las Vegas LLC, The Company
          shall be responsible for legal fees of $225,000 in connection
          therewith and with respect to any additional investments made in any
          future domestic Country Star Restaurants by Nevstar, additional legal
          fees in the same proportion as the $225,000 bears to Nevstar's initial
          $4.5 million investment. All such legal fees will be capitalized by
          the Company.

          Upon commencement of operations of Country Star Las Vegas, prior to
          any cash distributions, the Company, which will be responsible for
          managing the day-to-day operations of Country Star Las Vegas, subject
          to NevStar's approval for various matters,

                                     F-15
<PAGE>
 
                        COUNTRY STAR RESTAURANTS, INC.

                   Notes to Financial Statements (Continued)
                                  (Unaudited)


NOTE 8 -  INVESTMENT IN COUNTRY STAR LAS VEGAS LLC (CONTINUED)

          will receive a management fee in the amount of $333,333 per annum,
          payable in equal monthly installments. In connection with the
          Company's management of Country Star Las Vegas, the Company has agreed
          with NevStar that labor costs will be a predetermined percentage of
          Country Star Las Vegas' revenues, which percentage shall vary based
          upon the actual revenues. In the event that actual labor costs for
          Country Star Las Vegas exceeds such percentage of revenues during a
          twelve (12) month period, the Company will be obligated to fund any
          such excess. After the Equity Investors (of which the Company is a 40%
          participant) shall receive a rate of return of 6% per annum on their
          unrecouped investment, all available cash shall be distributed 25% to
          the Company and 75% to the Equity Investors until such time as the
          Equity Investors shall have received cash contributions equal to 100%
          of their investment (during this distribution period the Company owns
          a total of 50.05% of distribution and the minority interest 49.95%).
          Thereafter, all available cash shall be distributed 65% to the Company
          and 35% to the Equity Investors. The Company presently reports its
          investment in Country Star Las Vegas LLC using the consolidated method
          of accounting. On April 1, 1996, a limited partnership invested
          $495,000 in Country Star Las Vegas LLC. See Note 4.

NOTE 9 -  SUBSEQUENT EVENTS

          Effective October 7, 1996 the Company signed a fifteen year lease with
          two successive five year options for a 10,000 square foot Country Star
          Orlando scheduled to begin construction in 1997 and open by summer,
          1997.

          Subsequent to September 30, 1996 the Company raised an additional
          $4,000,000 in a private preferred stock transaction, as more fully
          disclosed in Note 3.

                                     F-16
<PAGE>
 
ITEM 2.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion of the Company's financial conditions and
          results of operations should be read in conjunction with the Financial
          Statements and the Notes thereto.

          GENERAL
          -------

          The Company was formed in May of 1993 and, prior to the opening of
          Country Star Hollywood on August 22, 1994, did not generate any
          revenue.  The following table outlines the specific details of the
          Company's three restaurant locations.
<TABLE>
<CAPTION>
 
SITE           DATE OPENED         SQUARE FOOTAGE   MAX. SEATS
===================================================================
<S>           <C>                  <C>            <C>
HOLLYWOOD      August 22, 1994      14,000         325 + 200 (patio)
LAS VEGAS      July 2, 1996         22,000         600
ATLANTA        October 14, 1996     20,000         400 + 120 (patio)
                                    ------         ----------------
                                    56,000         1,325 + 320
</TABLE>

          The Company incurred significant expenses to complete the development,
          and to construct, open, and begin operations of Country Star Las Vegas
          and Country Star Atlanta. Such additional costs included significant
          construction cost, some of which were unanticipated, plus overtime
          labor costs, architectural and design fees, permit costs, initial
          food, liquor and merchandise inventory, furniture and fixtures,
          initial staffing and related costs, employee training, grand opening
          parties and related expenditures, and initial marketing, advertising,
          and related promotional costs. The Company also signed a lease in
          October to open a Country Star Restaurant in Orlando, Florida.

          As of September 30, 1996, the Company had expended approximately
          $5,108,327 and $8,444,380 with respect to Country Star Las Vegas and
          Country Star Atlanta, respectively, and additional significant costs
          subsequent to September 30, 1996 were expended,  primarily in
          connection with Country Star Atlanta.  Although Country Star Atlanta
          is open and operating, there still remain construction and development
          that require completion.  Accordingly, the Company anticipates it will
          have to spend approximately $1,500,000 to complete the development and
          construction of Country Star Atlanta, in the fourth quarter of 1996.
          The Company has expended $20,390 with respect to Country Star Orlando.

          COUNTRY STAR LAS VEGAS
          ----------------------

          Country Star Las Vegas, a free standing 22,000 square foot building,
          was built on a "fast track" schedule. Site improvement work began in
          January 1996 and the building was completed on June 29, 1996. The
          "Grand Opening" party was held on July 1, 1996 and included a
          celebrity driven concert emceed by Reba McEntire and performances by
          celebrity representatives Vince Gill, Lee Roy Parnell, Tracy Lawrence,
          Bryan White, Leann Rimes, Trisha Yearwood, Charlie Pride, and others.
          In attendance were Las Vegas notables including the Govenor of the
          State of Nevada and Steve Wynn.

                                       1
<PAGE>
 
          The Grand Opening party was scheduled months in advance based on the
          availability of the celebrity representatives.  No in-store training
          could be started prior to the opening of the restaurant, which was not
          completed until right before the Grand Opening Party  As a
          consequence, the company incurred significant extra costs including
          overtime expense in construction and off-site training of staff.
          Further, due to a lack of "soft opening", food and labor costs were
          significantly high as a percentage of sales during the quarter ended
          September 30, 1996.

          The five major components of sales for Las Vegas are:

          1.  residential community which exceeds 1 million
          2.  convention business
          3.  tour groups
          4.  tourists
          5.  entertainment programs

          The Company believes that is has not communicated effectively with Las
          Vegas tourists beyond a certain radius of the site either during  or
          prior to their visit to Las Vegas.  The Company is taking steps to
          attempt to correct this and to date, the Company has spent  over
          $300,000 in advertising, which includes taxi tops, passenger busses,
          airport signage (including video in the baggage area), billboards,
          radio, television, and cable, all of which, in time, the Company
          believes, should convert into increased customer awareness and related
          revenues.

          A major strength of the Country Star concept is that 25% of all radio
          stations in the United States are broadcasting country music full
          time. In 70% of all radio markets, country music is either number one
          or two. In Las Vegas, there are two country music stations: KNRW and
          KFM. The company has jointly promoted many events with both stations.
          KFM 102 in particular has, on a regular basis, broadcast live from
          Country Star. Typically, this type of broadcast takes place during the
          noon hour and includes a presentation to a country star of a "Star" to
          be placed on a booth or table with that person's name. The
          presentation is followed by a mini performance and live on-the-air
          performance. Among the stars who have participated in this or similar
          type of live broadcast are Charlie Pride, Doug Supernaw, Tracy
          Lawrence, Leann Rimes, Eddie Rabbit, and Mark Wills.

          Further the Company believes the anticipated opening of the "New York,
          New York Hotel and Casino", located on the Strip, near Country Star
          Las Vegas will increase the traffic volume for the Las Vegas site.
          Country Star Las Vegas has also implemented significant entertainment
          programs.  Country Star line dancers and waiter/waitress singers
          entertain throughout the night.  On Sundays beginning in September,
          1996, Country Star Las Vegas began the "Gospel Sunday Brunch" with
          gospel music groups and three seatings on Sundays. Weekly events at
          the restaurant have included numerous country music celebrities
          cooperating with Country Star  in various presentations.  In
          accordance with the Company's concept as an entertainment venue,
          Country Star recently began late-night dancing in the restaurant on
          Friday and Saturday nights, and is currently looking for a nightly
          entertainment show which would be appropriate and draw late night
          business.


          COUNTRY STAR ATLANTA
          --------------------

          The general contractor on Country Star Atlanta anticipated a "turn
          over" date to be September 9, 1996. Based on that schedule, the
          Company began hiring in mid-August, 

                                       2
<PAGE>
 
          and by early September, the Company had hired approximately 200
          persons. These staff were trained off-site and were on the payroll
          beginning in August 1996. Each staff member received up to 40 hours of
          classroom training and several were flown to Las Vegas and Hollywood
          (which are substantially similar in design) to observe and train.

          On September 9, 1996, the facility was not available.  Due to
          construction delays, some of which were caused by an unusually rainy
          September, the restaurant was actually turned over to Country Star
          Atlanta in early October.  This later than expected turnover resulted
          in loss of employees and added additional costs in rehiring and
          training staff.  The Company is in negotiations with the General
          Contractor regarding the Company's added costs.

          COUNTRY STAR HOLLYWOOD
          ----------------------

          The reconstruction of the front entrance to Universal Studios, which
          began November 27, 1995, and was completed approximately July 15,
          1996, had and continues to have material adverse effect on Country
          Star Hollywood.  The reconstruction of the Plaza areas which, among
          other elements, included a new entrance and an architectural fountain,
          also included a new tree shading program which partially blocks the
          front entrance (Juke Box) from "Universal City Walk" entertainment
          zone, although the electronic message board located at the end of the
          patio is now more visible.  Additionally, the exiting from both the
          amusement park and the Universal Amphitheater is no longer directly
          across from Country Star.  The Company is in negotiations with MCA
          regarding the reconstruction process and the related effect on the
          Company.

          COUNTRY STAR ORLANDO
          --------------------

          In October, 1996 the Company signed a lease to open a Country Star
          Restaurant in Orlando, Florida at the Pointe Orlando Entertainment
          Center which is expected to be completed in the summer of 1997 and
          will be located across the street from the Convention Center in
          Orlando, Florida.  Subject to securing the necessary financing, the
          Company presently anticipates opening Country Star Orlando in July of
          1997.


          RESULTS OF OPERATIONS
          ---------------------

          FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
          ---------------------------------------------

          For the three months ended September 30, 1996 the Company had a net
          loss of $2,006,334, compared with a net loss of $1,905,333 for the
          three months ended September 30, 1995. Losses attributed to restaurant
          operations were $1,933,387 compared with $1,585 for the three months
          ended September 30, 1995. Restaurant operations for the quarter are
          not comparable as the Company opened its second restaurant, Country
          Star Las Vegas, on July 2, 1996. Included in the Country Star Las
          Vegas loss from operations is amortization of pre-opening expense in
          the amount of $472,892.

          COUNTRY STAR HOLLYWOOD
          ----------------------

          For the three months ended September 30, 1996 losses from restaurant
          operations for Country Star Hollywood were $422,545 compared with
          $1,585 for the three month ended September 30, 1995.  Revenues from
          Country  Star Hollywood for the three months ended September 30, 1996
          were $1,142,410 compared to $1,503,578 for the three months ended
          September 30, 1995 representing a  decrease of 24%.  Management

                                       3
<PAGE>
 
          attributed the decrease in sales to several major factors as discussed
          in the "General" overview section, which includes the reconstruction
          of the Plaza and the exiting from the Park and Amphitheater. Also, the
          Reba McEntire July, 1995 concerts were a major component in the
          revenues for the quarter ended September 30, 1995.

          Merchandise revenues for the three months ended September 30, 1996
          were $109,338 compared with $126,365 for the quarter ended September
          30, 1995. This represents 9.6% of total revenue for the quarter ended
          September 30, 1996 as compared to 8.0% for the quarter ended September
          30, 1995. The merchandise sales as a percentage of the total for the
          quarter represents a 20% increase in percentage merchandise sales. The
          company expects that as stores open and customer awareness increases
          merchandise sales as a percentage of total sales will increase.

          Food and beverage cost of sales for the three months ended September
          30, 1996 were $368,980 and represented 36% of food and beverage
          revenue. Food and beverage cost of sales for the three months ended
          September 30, 1995 were $426,197 and represented 31% of sales. It is
          estimated that higher food cost of sales for the quarter is a result
          of the majority of Country Star Hollywood kitchen management, the
          executive Chef, Layne Wootten and corporate staff being all involved
          in the training of employees at Country Star Las Vegas and Atlanta.

          Merchandise cost of sales for the three months ended September 30,
          1996 were $70,353 and were $55,371 for the three months ended
          September 30, 1995. Merchandise cost of sales as a percentage of
          merchandise sales was 64% and 44% for the quarters ending September
          30, 1996 and 1995 respectively. This increase in merchandise cost is a
          result of the Company's beginning a new "logo merchandise" line with
          the opening of Country Star Las Vegas. Further, the classic logo held
          in inventory by Country Star Hollywood began being sold at cost in
          late July, 1996 which also contributed to an unusually high cost of
          sales. Additionally, a significant amount of classic logo items were
          given away as corporate and store promotions.

          Payroll and related taxes for the three months ended September 30,
          1996 were $456,434 (net of $50,634 corporate line dancers) and were
          $465,070 representing approximately 40% and 31% of total revenue for
          the three months ended September 30, 1996 and 1995 respectively.
          Payroll was higher in the quarter ended September 30, 1996 due to
          numerous Country Star Hollywood employees involved in training both on
          site in Hollywood and at Country Star Las Vegas and Atlanta.

          Other operating costs for the three months ended September 30, 1996
          and 1995 were $401,100 and $318,963 representing 32% and 21% of
          revenues respectively.  Other operating costs for the quarter ending
          September 30, 1996 were higher as a result of increased advertising
          costs ($26,000) repairs and maintenance ($9,000), property taxes
          ($12,000),  and new menus and dishes ($51,000) which included the new
          "logo" design.

          Rent for the quarter ending September 30, 1996 and 1995 was
          comparable.

          Interest income (expense) net for the three months ended September 30,
          1996 and 1995 were $49,609 and ($217,362) respectively. Income for the
          three months ending September 30, 1996 relates to interest on
          certificate of deposit and money market accounts net of capital lease
          expense. Interest expense for the three months ending September 30,
          1995 relates to capital leases and interest expense on the mortgage
          with respect to property owned by the company in 1995 and sold in
          August, 1995.

                                       4
<PAGE>
 
          Other income relates to management fees of $27,500 per month for
          managing Country Star Las Vegas, a limited liability company with
          outside shareholders.

          Selling, general and administrative expenses for the three months
          ended September 30, 1996 and 1995 were $780,081 and $1,496,497
          representing 27% and 100% of total revenues for their respective
          periods.  Selling, general and administrative expenses consist
          primarily of corporate salaries, promotions, legal and professional
          fees, insurance, travel and other related expenses.  During the third
          quarter of 1995 the Company incurred a non-cash non-recurring charge
          to executive compensation in the amount of $1,425,000 relating to a
          release of escrowed shares of which approximately $600,000 relates to
          the period ending September 30, 1995.

          Minority interest in Country Star Las Vegas LLC represents a 49.95%
          held by minority interests and their related share of losses for the
          quarter ended September 30, 1996.

 
          FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
          --------------------------------------------

          For the nine months ended September 30, 1996, the Company had a net
          loss of $4,330,688 compared with a net loss of $4,256,646 for the nine
          months ended September 30, 1996. Negative cash flow from restaurant
          operations was $1,524,328 for the nine months ended September 30, 1996
          compared to $67,667 positive cash flow for September 30, 1995.

          The significant increase in net loss, negative cash flow from
          operations and depreciation and amortization is the result of Country
          Star Las Vegas beginning operations on July 2, 1996 and more fully
          discussed in the preceding narrative.

          Additionally, revenue, operating expenses, merchandise sales, other
          operating costs, rent relating to operations are not necessarily
          comparable based on the Las Vegas store opening July 2, 1996.  The
          differences are so varied that the discussion for the three month
          period ending September 30, 1996 and 1995 is not applicable.

          Selling, general and administrative expenses for the nine months ended
          September 30, 1996  were $2,585,170 and $3,400,628 for the period
          ending September 30, 1995.  The major difference between the periods,
          is explained by $1,425,000 charged to executive compensation as a non-
          recurring charge for escrowed founders shares released from escrow
          during the period ending September 30, 1995.  The shares were valued
          at market and charged against earnings as executive compensation.

          LIQUIDITY AND CAPITAL RESOURCES
          -------------------------------

          At November 18, 1996, the Company had cash in bank and money market
          accounts of approximately $2,800,000.  Approximately $1,500,000 of
          said funds are to pay off the construction of Country Star Atlanta.

          In order for the Company to continue to operate its existing Country
          Star Restaurants, and to develop, build, open and operate its next
          Country Star Restaurant in Orlando, Florida (and continue to expand
          thereafter) the Company will require substantial additional financing
          in the immediate future.  The Company has no current arrangements with
          respect to any such additional financing and  there can be no
          assurance whatsoever that the Company will be able to locate any such
          additional financing on a timely basis in sufficient amounts or on
          terms and conditions acceptable to the Company, or at all.  In 

                                       5
<PAGE>
 
          the event that the Company is not successful in securing any other
          sources of financing on a timely basis in amounts and on terms and
          conditions acceptable to the Company, or at all, the Company's ability
          to continue its current operations, as well as its ability to develop,
          build, open and operate Country Star Orlando, and expand thereafter,
          will be materially adversely affected.

          In addition to needing to secure additional financing on a timely
          basis, the Company's ability to attain profitability will depend on
          the Company's ability to reduce expenses, increase the revenues from
          Country Star Hollywood, Country Star Las Vegas and Country Star
          Atlanta, successfully implement its expansion strategy and achieve
          operating efficiencies.


          SEASONALITY

          The Company does not believe that seasonality will have a material
          impact on the Company's overall operations although Country Star
          Hollywood is in a location that experiences significantly higher
          traffic during the summer months due to its popularity as a tourist
          destination.  Consequently, the continuing operation of Country Star
          Las  Vegas and Country Star Atlanta which are now open, should offset
          the seasonality issue as a material impact on the Company's
          operations.


          IMPACT OF INFLATION

          Increases in food and labor costs and interest rates directly affect
          the Company. Many of the Company's employees at Country Star
          Hollywood, Las Vegas and Atlanta are paid at hourly rates related to
          the Federal minimum wage. Any increases in the Federal minimum wage in
          the future would further increase the Company's operating expenses. In
          addition, the Company's leases at Country Star Hollywood, Country Star
          Las Vegas and Country Star Atlanta require the Company, among other
          things to pay taxes, maintenance, insurance, repairs and utility
          costs, all of which are subject to inflation as well as percentage
          rent and periodic escalation of annual rents. Any future leases that
          the Company may enter into with respect to any future Country Star
          Restaurant may also contain similar provisions.

                                       6
<PAGE>
 
          ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
                   --------------------------------
                  
                   EXHIBITS
                     
                   27    Financial Data Schedule

                   99.A  Form 8-K filed October 10, 1996

                   99.B  Form 8-K filed November 14, 1996

                   Reports on Form 8-K

                   On October 10, 1996, the Company filed a Current Report on
                   Form 8-K in connection with a private placement of $4,000,000
                   of the Company's stock.

                   On November 14, 1996, the Company filed a Current Report on
                   form 8-K in connection with the Company's termination of BDO
                   Seidman, LLP as its independent auditor, and the resignation
                   of Robert Linton from the Board of Directors.

                                       7
<PAGE>
 
                                   SIGNATURES
                                   ----------


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly authorized and caused the undersigned to sign this Report on
the Registrant's behalf.
   
                                         COUNTRY STAR RESTAURANTS, INC.

                                    By:  /s/ Robert J. Schuster
                                         ----------------------
                                         Robert J. Schuster
                                         Chief Executive Officer

                                    By:  /s/ Peter R. Feinstein
                                         ----------------------
                                         Peter R. Feinstein
                                         President and
                                         Chief Financial Officer

Dated:  November 18, 1996