MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
   
The financial  statements in this annual report include the accounts of On Stage
Entertainment,  Inc., a publicly traded Nevada corporation and its subsidiaries,
Legends in Concert,  Inc., a Nevada  corporation;  On Stage  Marketing,  Inc., a
Nevada corporation;  On Stage Theaters, Inc., a Nevada corporation;  Wild Bill's
California,  Inc.,  a  Nevada  corporation;   Blazing  Pianos,  Inc.,  a  Nevada
corporation;  King Henry's  Inc., a Nevada  corporation;  On Stage  Merchandise,
Inc., a Nevada  corporation;  On Stage Events,  Inc., a Nevada  corporation;  On
Stage Casino  Entertainment,  Inc., a Nevada corporation;  On Stage Productions,
Inc., a Nevada corporation; On Stage Theaters North Myrtle Beach, Inc., a Nevada
corporation;  On Stage Theaters Surfside Beach, Inc., a Nevada corporation;  and
Interactive Events, Inc., a Georgia corporation.

On Stage derives net revenues from four reportable segments:

o    Casinos. The casinos segment primarily sells live theatrical  productions 
     to casinos and commercial clients, worldwide for a fixed fee. In addition,
     this  segment operates our Legends show at the Imperial  Palace and our 
     corporate sales events.
o    Production Services. The  production  services  segment  sells technical 
     equipment and services to commercial clients,  however,  this segment's 
     primary focus is to technically support all of the other segments.
o    Theaters. The theaters  segment owns or rents live  theaters and dinner 
     theaters in urban and resort tourist  locations  primarily in the United 
     States. This segment derives  revenues from the sale of tickets, 
     merchandise and souvenir photography, and food and beverage to patrons 
     who attend live  theatrical  performances  at these  venues.
o    The On Stage entertainment  segment is responsible for the corporate  
     management of all our segments.

The  accounting  policies of the reportable  operating  segments are the same as
those described in the Summary of Accounting Policies.  Management evaluates the
performance of On Stage's operating segments based upon the profit and loss from
operations.

On Stage's reportable segments are strategic business units because each unit
services a different  market or performs a specialized  function in support of a
given market.
    

                                       1
<PAGE>

Results of Operations
   
The  following  table sets forth the various  components of our net revenue as a
percentage of the total net revenue for the periods indicated:
    

                                                   Years Ended December 31,
                                                   1997              1998
                                                  --------         --------
Net revenue.....................................   100.0%            100.0%
Costs of Revenues...............................    72.5              79.8
                                                  --------         --------
Gross profit....................................    27.5              20.2
Selling, general and administrative.............    31.5              22.5
Depreciation and amortization...................     6.2               6.5
Expenses at discontinued location...............     3.1               1.6
Asset impairment loss...........................     0.0               1.5
                                                  --------         ---------
Operating loss..................................   (13.3)            (11.9)
Interest expense, net...........................     5.3               5.6
                                                  --------         ---------
Pre-tax loss....................................   (18.6)            (17.5)
Income taxes....................................     0.1               0.0
Net loss........................................   (18.7)%           (17.5)%
                                                  ========         =========

Net loss for the year ended December 31, 1997, was $2,946,056,  as compared to a
net loss of $4,870,989 for the year ended December 31, 1998.

   
The following  tables sets forth,  the results of operations  for the reportable
segment indicated:
    
                                Year ended December 31, 1997
 
                             Casinos      Events     Merchandise     Theaters
--------------------------- ----------- -----------  ------------ -------------
Net revenues............... $6,326,952  $2,552,440   $  454,842   $ 6,391,840
Cost of revenues...........  3,841,285   1,709,708      103,330     5,627,492
                           ----------- -----------  ------------  -------------
Gross profit...............  2,485,667     842,732       351,512       764,348
Selling, general
 & administrative..........    296,104     639,961        36,359       233,548
  Depreciation &
  amortization.............    141,275       6,221             -       323,336
Discontinued location......          -           -             -       489,285
                            ----------- -----------  ------------  ------------
Operating income (loss)..... 2,048,288     196,550       315,153      (281,821)
Interest expense, net.......         -        (297)            -             -
                            ----------- -----------  ------------  ------------
Net income (loss) before
 income taxes............... 2,048,288     196,847       315,153      (281,821)
Income taxes................         -       3,197             -             -
                            ----------- -----------  ------------  ------------
Net income (loss)...........$2,048,288   $ 193,650    $  315,153   $ (281,821)
                            =========== ===========  ============  ============


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<PAGE>

                          Year ended December 31, 1997
                                  (continued)

   
                             Sub-Total                 
                             Operating                 On Stage       Total
                            Corporations  Production Entertainment Consolidated
--------------------------- -----------   ---------- ------------ -------------
Net revenues............... $15,726,074   $       -  $        -    $15,726,074
Cost of revenues...........  11,281,815     131,709           -     11,413,524
                            -----------   ---------- ------------ -------------
Gross profit...............  4,444,259     (131,709)          -      4,312,550
Selling, general
 & administrative..........  1,205,972       62,985    3,677,178     4,946,135
  Depreciation &
  amortization.............    470,832           -       511,348       982,180
Discontinued location......    489,285           -             -       489,285
                            -----------   ---------- ------------- -------------
Operating income (loss)..... 2,278,170     (194,694)  (4,188,526)   (2,105,050)
Interest expense, net.......      (297)           -      834,630       834,333
                            -----------   ---------- ------------- -------------
Net income (loss) before
 income taxes............... 2,278,467     (194,694)  (5,023,156)   (2,939,383)
Income taxes................     3,197            -        3,476         6,673
                            -----------   ---------- ------------- -------------
Net income (loss)...........$2,275,270    $(194,694) $(5,026,632)  $(2,946,056)
                            =========== =========== =============  =============
    


                          Year ended December 31, 1998
   
                             Casinos      Events     Merchandise     Theaters
--------------------------- ---------- ------------ -------------   ------------
Net revenues............... $6,977,020 $  2,554,942  $  1,243,451  $ 17,064,071
Cost of  revenues..........  4,522,257    1,900,216       812,505    14,727,694
                            ----------- ------------ -------------  ------------
Gross profit...............  2,454,763      654,726       430,946     2,336,377
Selling, general &
administrative.............    417,686      736,365       173,137     1,506,432
Depreciation & amortization    268,780      140,455         5,055     1,086,822
Asset impairment loss......          -            -             -       409,117
Discontinued location
 expenses..................          -            -             -       443,096
                            ----------- ------------ -------------  ------------
Operating income (loss)....  1,768,297     (222,094)      252,754    (1,109,090)
Interest expense, net......      4,712        1,292           193     1,354,370
                            ----------- ------------ -------------  ------------
Net income (loss) before
    Income taxes...........  1,763,585     (223,336)      252,561    (2,463,460)
Income taxes...............         0             0             0             0
                            =========== ============ =============  ============
Net income (loss).......... $1,763,585   $ (223,386)  $   252,561  $ (2,463,460)
                            =========== ============ =============  ============

    
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<PAGE>

                          Year ended December 31, 1998
                                (continued)

   
                            Sub-Total
                            Operating                   On Stage       Total
                            Corporations  Production Entertainment Consolidated
--------------------------- ------------  ---------- ------------  -------------
Net revenues............... $27,839,484   $   7,992   $       -    $ 27,847,476
Cost of  revenues..........  21,962,672     265,852           -      22,228,524
                            -----------   ----------  ----------   ------------
Gross profit...............   5,876,812    (257,860)          -       5,618,952
Selling, general &
administrative.............   2,833,620     255,640    3,187,065      6,276,325
Depreciation & amortization   1,501,112      44,704      260,710      1,806,526
Asset impairment loss......     409,117           -           -         409,117
Discontinued location
 expenses..................          -            -           -         443,096
                            -----------   ----------  ----------   ------------
Operating income (loss)....     689,866    (558,204)  (3,447,775)    (3,316,112)
Interest expense, net......   1,360,567           -      194,310      1,554,877
                            -----------   ----------  -----------  ------------
Net income (loss) before
    Income taxes...........    (670,700)   (558,204)  (3,642,085)    (4,870,989)
Income taxes...............
                            ===========   ==========  ===========   ============
Net income (loss).......... $  (670,700) $ (558,204) $(3,642,085)   $(4,870,989)
                            ===========   ==========  ===========   ============
    

Year Ended December 31, 1997 versus Year Ended December 31, 1998

Net Revenues
   
Revenues  were  $27,847,000  for the year ended  December  31, 1998  compared to
$15,726,000 for the year ended December 31, 1997, an increase of $12,121,000, or
77.1%.  On Stage's  revenue is derived from four  principal  segments:  casinos,
events, merchandise, and theaters.

Casino  revenues were  approximately  $6,977,000 for the year ended December 31,
1998 compared to $6,326,000 for the year ended December 31, 1997, an increase of
$651,000, or 10.2%. The increase was primarily attributable to new show openings
at Hilton  Hotel & Casino and Trump Taj Mahal Hotel & Casino in  Atlantic  City,
New Jersey, as well as new shows at Crown Casino in Melbourne,  Australia, River
Palms  Resort  Casino in  Laughlin,  Nevada  and  Muckleshoot  Casino in Auburn,
Washington.  The increase was partially  offset by decrease  attributable to the
Legends show at the Imperial Palace in Las Vegas, Nevada.
    
                                       4
<PAGE>

Events revenues were $2,555,000 for the year ended December 31, 1998 compared to
$2,552,000  for the year ended  December  31,  1997,  an increase of $3,000,  or
0.12%.
   
Merchandise  revenues were approximately  $1,243,000 for the year ended December
31, 1998 compared to $455,000 for the year ended  December 31, 1997, an increase
of $788,000,  or 173.2%. This increase was mainly attributable to an increase in
photo  sales  as a  result  of the  Kodak  Relationship  and  the  inclusion  of
properties acquired from Gedco USA Acquisition in 1998.

Theaters revenues were approximately $17,064,000 for the year ended December 31,
1998 compared to $6,392,000 for the year ended December 31, 1997, an increase of
$10,672,000,  or 166.9%.  This increase in revenues was primarily  attributed to
new Legends show  openings  since March 1998 at the Legends  Theater in Branson,
Missouri,  the Legends  show at the Sheraton  Centre in Toronto,  Canada and the
inclusion of Gedco  properties.  This increase was partially offset by decreases
attributable  to the  discontinuation  of the  Legends  show in  Daytona  Beach,
Florida  and  decrease in revenues  derived  from the Legends  Theater in Myrtle
Beach, South Carolina.
 
Costs of Revenues

Total costs of revenues were  $22,228,524  for the year ended  December 31, 1998
compared to  $11,414,000  for the year ended  December 31, 1997,  an increase of
$10,814,524,  or 94.8%. Costs of revenues increased to 79.8% of net revenues for
the year  ended  December  31,  1998,  as  compared  to 72.6% for the year ended
December  31,  1997.  This  increase  in cost of  revenues  as a percent  of net
revenues was primarily  attributable to a change in the mix of our revenues from
primarily theater shows to a combination of theater and dinner theater shows.

Selling,  General and Administrative

Selling,  general and administrative expenses were approximately  $6,276,000 for
the year ended  December  31,  1998  compared to  $4,946,000  for the year ended
December 31, 1997, an increase of  $1,330,000,  or 26.8%.  Selling,  general and
administrative  expenses  decreased  to 22.5% of net revenues for the year ended
December  31, 1998,  as compared to 31.5% for the year ended  December 31, 1997,
which was primarily attributable to a consolidation of operations resulting in a
reduction  of  work  force  due  to  elimination  of  duplicate  or  overlapping
positions.
    



                                       5
<PAGE>

Depreciation and Amortization

   
Depreciation  and  amortization  was $1,807,000 for year ended December 31, 1998
compared  to  $982,000  for the year ended  December  31,  1997,  an increase of
$825,000,  or 84.0%.  The increase  was  primarily  due to capital  additions to
current shows, expenses related to a discontinued location and the determination
at December 31, 1998 of the impairment of net assets acquired in connection with
the Interactive Events, Inc. purchase.

Expenses to Discontinued Location

On Stage decided to discontinue  operations of our Legends production in Daytona
Beach,  Florida on  December  31,  1997.  As part of the  closing,  we  incurred
additional expenses of $489,285 during 1997. Additionally,  in 1998 we wrote-off
$443,096 of Net Assets.  We have plans to transfer the  remaining  furniture and
equipment  currently  located at the Daytona Beach  facility to other  locations
during 1999.

Asset Impairment Loss

On Stage decided to  restructure  our Legends  production in Toronto,  Canada on
December 31, 1998.  As part of the  restructuring,  we had an  impairment of net
assets and wrote off $409,000.

Operating Income
 
On  Stage's  operating  loss was  approximately  $3,316,000  for the year  ended
December 31, 1998 compared to an operating loss of $2,105,000 for the year ended
December 31, 1997, an increase in loss of  $1,211,000.  This increase in loss is
primarily  attributable  to  recurring  losses at our  Toronto  and  Buena  Park
locations.
 
Interest Expense,  Net Asset

Interest expense was  approximately  $1,555,000 for year ended December 31, 1998
compared  to  $834,000  for the year ended  December  31,  1997,  an increase of
$721,000 or 86.4%.  The increase was primarily  due to additional  debt incurred
for the Gedco acquisition and the Fox Family acquisition in 1998.

Seasonality and Quarterly Results
 
On Stage's business has been, and is expected to remain,  highly seasonal,  with
the majority of our revenue being  generated  during the months of April through
October.  Part of our business  strategy is to increase sales in tourist markets
that experience  their peak seasons from November  through March so as to offset
seasonality in revenues.  The Gedco asset acquisition has helped to mitigate the
seasonality  in our revenues  seasonality  by increasing our sales from November
through March.
    

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<PAGE>
   
The  following  table sets forth On Stage's  net  revenues  for each of the last
eight quarters ended December 31, 1998:
 
                                  Net Revenues
                                ($ in thousands)
 
                     March 30,       June 30,     September 30,   December 31,
                    ----------     -----------    ------------    ------------
Fiscal 1997........  $  2,719       $    3,979    $    5,071      $    3,957
Fiscal 1998........  $  3,724       $    8,245    $    8,059      $    7,819

Tax Net Operating Losses

At  December  31,  1997 and  1998,  On Stage  had  federal  net  operating  loss
carryforwards  of  approximately  $3,138,544  in 1997,  and  $6,315,193 in 1998,
respectively.  Under  Section  382 of the  Internal  Revenue  Code,  significant
changes in ownership  contemplated by us may restrict the future  utilization of
these tax loss carryforwards.  The net deferred tax assets have a 100% valuation
allowance, as management cannot determine if it is more likely than not that the
deferred tax assets will be realized.
    
Liquidity and Capital Resources

General
   
On Stage  has  historically  met our  working  capital  requirements  through  a
combination  of cash  flow  from  operations,  equity  and  debt  offerings  and
traditional  bank  financing.  We  anticipate,  based on our proposed  plans and
assumptions  relating to our operations,  that our current cash, cash equivalent
balances,  anticipated  revenue from operations and our working capital line are
insufficient to fund our ongoing operations.

On  Stage  intends  to  manage   short-term   liquidity   concerns  through  the
renegotiations of our expired working capital line,  capital leases and mortgage
facilities.  We have either closed down or restructured  any business units that
were not generating  positive cash flow. In addition,  we have lowered  selling,
general and  administrative  expenses as a percentage of net revenues from 31.5%
in 1997 to 22.4% in 1998 and continues to downsize and  restructure our selling,
general and administrative functions.

In  addition,  we are  continuing  our  efforts to secure  working  capital  for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations.  However, there can be no assurance that we will be
able to secure additional capital or that if such capital is available,  whether
the terms or conditions would be acceptable to us.

For the year ended  December  31,  1997,  On Stage had net cash  deficit used by
operations  of  approximately  $1,099,000.  This net cash deficit was  primarily
attributable  to the losses  incurred  at our  Legends  show in  Daytona  Beach,
Florida, and increases in selling,  general and administrative expenses incurred
in anticipation of the rapid growth of On Stage. For the year ended December 31,
1998,  On Stage had a net cash deficit from  operations of  $1,534,000.  The net
cash deficit provided from operations was primarily  attributable to legal fees,
vacation accruals, asset impairment expenses, and due diligence expenses written
off in  connection  with  prospective  acquisitions,  operational  losses at the
Legends show in Toronto,  Canada, Wild Bill's Dinner Extravaganza in Buena Park,
California, and the debt service on our mortgage and credit line facilities.
    

                                       7
<PAGE>
   
The net cash used in investing  activities  for the year ended December 31, 1997
of $1,241,000 was primarily attributable to capital expenditures and advances on
notes receivable from officers,  and direct acquisition costs. The net cash used
in investing  activities for the year ended December 31, 1998 of $14,548,000 was
primarily  attributable to advances on notes  receivable from officers,  capital
expenditures and direct acquisition costs related to acquisitions.
    
   
On August 13, 1997, On Stage  completed an initial public  offering of 1,400,000
shares of common  stock at $5.00 per share and  redeemable  warrants to purchase
1,610,000  shares of common  stock at $0.10 per warrant.  The net proceeds  were
from the offering, were approximately  $4,856,000,  net of offering underwriting
discounts,  commissions and expenses and costs incurred by us was  approximately
$1,414,000.

Net cash provided by financing  activities  for the year ended December 31, 1997
of $4,373,000 was primarily  generated from our initial  public  offering.  This
increase in cash was  partially  offset by the  repayment  of a $750,000  bridge
loan. Net cash provided by financing  activities for the year ended December 31,
1998 of $14,701,000 was primarily  attributable  to Imperial  Credit  Commercial
Mortgage  Investment  Corporation  funding of  $12,500,000  for the Gedco  asset
acquisition and $1,650,000 million for the Fox Family asset acquisition.
    
 
Working  Capital
   
At December 31, 1997, On Stage had working capital of approximately  $1,797,000,
primarily from proceeds derived from the sale of our common stock and redeemable
warrants from the our initial public offering. The proceeds of the offering were
partially  offset by increases in inventory and deposits.  At December 31, 1998,
we had a working capital deficit of approximately  $16,791,000,  which resulted,
primarily,  from an  increase in our working  capital  line of credit,  accounts
payable, accrued expenses, and accrued payroll and other liabilities. Because of
the recurring  losses,  the working capital  deficit and the loan defaults,  our
auditors have issued a going concern opinion.

On August 13, 1997, On Stage  converted all of the  approximately  $1,800,000 of
principal  amount of  outstanding  convertible  debentures  into an aggregate of
505,649  shares of common stock.  The  conversion  was based upon a ratio of 295
shares  of common  stock for each  $1,000  in  principal  amount of  convertible
debentures.  The  conversion  resulted  in a one-time,  non-recurring,  interest
expense charge in the amount of $194,228 (based on an imputed value of $4.00 per
share of common stock).

On August 13,  1997,  On Stage paid off a $750,000  bridge loan in full,  which,
with principal and interest, totaled $773,000.

As of December 31, 1996, On Stage had a term loan  outstanding  in the principal
amount of $150,000,  with First Security Bank of Nevada,  which accrued interest
at a rate of 11.5% per annum.  On October 10,  1997,  we paid off the balance of
this term loan, in full, which,  including all outstanding principal and accrued
interest, was $19,091.
    
                                       8
<PAGE>
Working Capital Line
   
In May 1997,  First Security Bank of Nevada issued a line of credit to us for up
to $250,000. Borrowings under this line of credit bear variable interest at 1.5%
over the First  Security Bank of Idaho's index 10% per year as of the facility's
inception--and are due on demand. John W. Stuart has personally  guaranteed this
line of credit.

On March 28, 1998,  First  Security  agreed to increase this line of credit from
$250,000 to $1,000,000 and the  expiration  date was extended to March 25, 1999.
As of December 31, 1998, On Stage had drawn $1,000,000 on the line of credit. As
of March 31, 1999, On Stage had failed to pay off any part of the line of credit
and is in default under its terms.  We are  continuing  to negotiate  with First
Security  to either  extend  the line of credit or  convert  it into a term loan
facility.  On April 29, 1999,  we received a notice of default under the line of
credit from First Security. In the notice of default,  First Security Bank asked
On Stage to make a repayment proposal and provide  additional  information on or
before May 3,  1999.  While we are  attempting  to  negotiate  an  extension  or
restructuring  of this  line of  credit,  there  can be no  assurance  that  our
attempts to negotiate an extension or  restructuring of this line of credit will
be successful or that First Security will not take additional  action to collect
this debt.

Capital Equipment  Financing  Commitment

On September 29, 1997,  First  Security  Leasing  Company,  a Utah  corporation,
approved  On Stage for a  $1,000,000  lease line of credit.  Advances  under the
lease line incur interest at a rate of 9.75% per annum.  The lease line has been
utilized in the following amounts: $389,290,  $442,997 and $167,713,  commencing
in April 1998 and May 1998,  respectively,  and  terminating  on  October  2001,
September  2001 and November  2001.  We also  received a notice of default under
this lease line on April 29,  1999.  While we are  attempting  to  negotiate  an
extension or  restructuring  of this lease line,  there can be no assurance that
our attempts to negotiate on extension or  restructuring of this lease line will
be successful or that First Security Leasing will not take additional  action to
collect this debt.

Mortgage Financing Commitment

On March 13, 1998, Imperial Credit Commercial  Mortgage  Investment  Corporation
agreed to provide up to  $20,000,000 of mortgage  financing to On Stage.  On the
same date, we used  $12,500,000 of said facility to fund the cash portion of the
Gedco asset  acquisition  and related fees. We  subsequently  used $1,100,000 on
June  30,  1998 to fund the  cash  portion  of the Fox  Family  Acquisition  and
$550,000 on October 7, 1998 for our working capital needs. Concurrently with the
Imperial Credit financing,  Mark Karlan,  the President of Imperial Credit,  was
named a member of On Stage's  board of directors,  filling a vacancy  created by
the  resignation  of Kenneth Berg. We made our January,  February and March 1999
payments under this loan after the due date for those  payments.  As a result of
those delinquencies,  we have incurred late charges and default interest,  which
we have not paid.  We are in default under the Imperial  Credit  facility and we
are unable to borrow additional funds under the facility.  As of May 3, 1999, we
had not made our  payments to Imperial  Credit due April 1, 1999 or May 1, 1999.
We are  currently  negotiating  with  Imperial  Credit  to  extend  some  of the
repayment  terms under this facility and to obtain  waivers or  amendments  with
respect to other defaults under the facility, including a breach of debt service
coverage ratio warranties.

In the event that First  Security,  First Security  Leasing or ICCMIC  initiates
foreclosure  action  against us or our assets,  all or a portion of our property
and assets  securing the credit  facilities and mortgage  financing  extended by
those  lenders may be sold to satisfy our  commitments  under the terms of those
facilities.  We intend to  renegotiate  the terms of our credit  facilities,  to
obtain  extensions  of the  terms of those  facilities  and to seek  alternative
additional  financing.  There  can be no  assurance  that  our  efforts  will be
successful.
    

                                       9
<PAGE>
 
Impact of Inflation
   
On  Stage  believes  that  inflation  has  not  had a  material  impact  on  our
operations.  However,  substantial  increases in material costs could  adversely
affect our operations in future periods.

Year 2000

On Stage believes that our accounting and financial  reporting  systems are Year
2000 ready or Year 2000  compliant.  We have invested in the latest hardware and
software and we have  implemented  standards  that require Year 2000  compliance
from  all  vendors.  We do not  anticipate  any  problems  in  maintaining  this
compliance in the future.

However,  we are still  continuing  to assess  Year 2000  preparedness,  through
actively  coordinating  with vendors,  creditors and financial  organizations to
prepare for possible  repercussions of  non-compliance.  We are also undertaking
exhaustive  surveys in each of our  geographic  locations  to further  determine
preparedness. We have hired Business Communications, Inc. to visit each site and
physically re-certify that each machine,  microprocessor and software program in
use  is  Year  2000  compliant.  We  have  allocated  $50,000  to  complete  our
certification program and we anticipate completion by June 30, 1999.
    
New Accounting Pronouncements
   
Statement of Financial  Accounting Standards No. 129, "Disclosure of Information
about  Capital  Structure"  ("SFAS No. 129") issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard reinstates
various securities  disclosure  requirements  previously in effect under Account
Principles  Board Opinion No. 15, which has been  superseded by SFAS No. 129. On
Stage  adopted  SFAS No.  129 as of  January  1, 1998 which had no effect on our
financial position or results of operations.

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS  No.  130")  issued  by the  FASB  is  effective  for  financial
statements  with  fiscal  years  beginning  after  December  15,  1997.  Earlier
application is permitted.  SFAS No. 130 establishes  standards for reporting and
display  of   comprehensive   income  and  its  components  in  a  full  set  of
general-purpose  financial  statements.  On Stage  adopted  SFAS  No.  130 as of
January  1, 1998  which had no effect on our  financial  position  or results of
operations.

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial  statements  with fiscal years  beginning after December
15, 1997.  Earlier  application  is  permitted.  SFAS No. 131 requires  that the
public  companies  report  specified   information  about  operating   segments,
products,  services and geographical areas in which they operate and their major
customers.  On Stage adopted SFAS No. 131 on January 1, 1998 which had no effect
on our financial position or results of operations; however, disclosures on some
of these items were expanded as a result of adopting SFAS No. 131.
    
   
Statement of Position  98-5,  "Reporting  on the Costs of Start-up  Activities,"
("SOFP 98-5")issued by the American Institute of Certified Public Accountants is
effective for financial  statements  beginning after December 15, 1998. SOP 98-5
requires that the costs of start-up activities, including organization costs, be
expensed as incurred.  Start-up activities are defined broadly as those one-time
activities  related  to opening a new  facility,  introducing  a new  product or
service, conducting business in a new territory,  conducting business with a new
class of customers (excluding ongoing customer acquisition costs, such as policy
acquisition costs and loan origination  costs) or beneficiary,  initiating a new
process in an existing facility, or commencing some new operation. On Stage does
not  expect  the  adoption  of SOP 98-5 to have a material  impact,  if any,  on
ourfinancial position or results of operations.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities"  ("SFAS No. 133")  effective for financial
statements  with  fiscal  years  beginning  after  June 15,  1999.  SFAS No. 133
provides  a  comprehensive  and  consistent  standard  for the  recognition  and
measurement of derivatives  and hedging  activities and requires all derivatives
to be recorded on the balance sheet at fair value.  On Stage does not expect the
adoption  of SFAS No. 133 to have a material  impact,  if any, on our results of
operations, financial position or cash flows.
    

                                       10
<PAGE>

Subsequent Events

Notes Payable to Principal Stockholder
   
On April 5, 1999,  On Stage  entered into an agreement  with Mr.  Stuart,  under
which On Stage agreed to accept a bridge loan from Mr. Stuart in an amount of up
to $500,000 in return for a one year promissory note bearing 12% interest,  a 5%
origination  fee and a warrant to  purchase  one share of common  stock for each
$1.00  invested,  provided  that On Stage did not repay Mr. Stuart within thirty
(30) days.  As of May 3, 1999,  On Stage had accepted  $200,000 of the potential
$500,000 from Mr. Stuart.

On March 4, 1999,  the board of  directors  authorized  a loan in the  principal
amount of $100,000  from Mr. Stuart our chairman,  chief  executive  officer and
principal  stockholder.  This Loan is  evidenced by a one year  promissory  note
bearing an  interest  rate of twelve  percent  (12%) per annum,  due on March 3,
2000.  In  consideration  for this Loan,  the board of  directors  approved  the
issuance of warrants to purchase  100,000  shares of common  stock at a price of
$1.00 per share, the market price on the closing date of the Loan. Additionally,
On Stage agreed to pay legal fees incurred by Mr. Stuart in connection with this
transaction,  as well as an  additional  $12,500  for  previous  legal bills Mr.
Stuart personally incurred for On Stage related matters.

In March 1997, On Stage agreed with our underwriter, Whale Securities Co., L.P.,
that it would  neither loan nor advance any sums to or on behalf of Mr.  Stuart,
other than those sums  advanced to Mr.  Stuart from  December  31, 1996  through
August 13, 1997,  the  effective  date of our initial  public  offering  without
Whale's  prior  written  consent.  On October 23, 1997 and again on November 17,
1997,  On Stage  advanced Mr.  Stuart an  aggregate  of  $105,483,  for which it
obtained Whale's prior written  consent.  Whale authorized On Stage on March 25,
1998  to  advance  an  additional  $150,000  to Mr.  Stuart  for  settlement  of
litigation  related to his involvement in the Legends in Concert show in Hawaii.
As of June 30, 1998,  On Stage had advanced Mr. Stuart an aggregate of $136,194,
evidenced by a promissory  note. The funds advanced by On Stage accrued interest
at the rate of ten percent (10%) per annum. The advance to Mr. Stuart became due
and  payable one year from the date of which it was made.  On July 6, 1998,  Mr.
Stuart paid the advance in full.

In February 1997, Mr. Stuart granted to Senna Venture Capital Holdings, Inc., an
affiliate of DYDX Legends  Group L.P.  (and a lender to On Stage),  an option to
purchase 142,292 of his shares of common stock at an exercise price of $5.00 per
share, in  consideration  for (i) DYDX waiving a technical  default under a loan
agreement  entered into  between DYDX and On Stage and (ii) DYDX's  agreement in
connection with a waiver to allow  $1,780,424 in debt  forgiveness to Mr. Stuart
in 1997.  That  option  is  exercisable  for a period  of two  years  commencing
February 9, 1998.

On Stage leases from Mr. Stuart seven  condominium  units in Atlantic  City, New
Jersey for use by On Stage's performers.  The current lease term expires on June
30,  2000.  The total lease  payment to Mr.  Stuart  from On Stage is  currently
$7,833 per month, which amount we believe approximates the fair market value for
the use of these properties.  In addition,  commencing as of January 1, 1997, On
Stage began paying directly the association dues, insurance,  taxes, maintenance
and utilities on the Warwick leases.  On Stage paid aggregate rent to Mr. Stuart
for the leases of $150,686 and $149,686 for each of the years ended December 31,
1997 and 1998, respectively.
    


                                       34
<PAGE>

Note Receivable from Chief Financial Officer
   
On April 13, 1998,  On Stage loaned  $63,213 to Kiran Sidhu,  On Stage's  Senior
Vice President and Chief Financial Officer,  to assist Mr. Sidhu with satisfying
personal  income taxes  incurred as a result of the issuance of 40,532 shares of
common stock in accordance  with the terms of Mr. Sidhu's  employment  agreement
with On Stage.  The note,  which recently matured on April 12, 1999, was secured
by Mr. Sidhu's 40,532 shares of common stock. Mr. Sidhu  subsequently  requested
that On Stage extend the maturity date of the note through to December 31, 1999,
due  primarily to the fact that he does not have  sufficient  funds to repay the
note, coupled with the fact that the common stock which secures the repayment of
the note is not enough to satisfy the outstanding  debt,  since the common stock
has declined in value from $5.00 per share when issued,  to approximately  $1.00
per share as of the maturity  date. On April 13, 1999, On Stage agreed to extend
the maturity date on the note to December 31, 1999.
    

   
On April 16, 1999,  Mr. Sidhu sold Mr. Stuart the 40,532 shares of common stock.
In exchange, Mr. Stuart agreed to assume Mr. Sidhu's $60,798 note in favor of On
Stage,  with recourse only to the 40,532 shares of common stock  purchased  from
Mr. Sidhu.  Mr. Sidhu executed a new promissory note in the principal  amount of
$7,472,  which  was  subsequently  forgiven  as part of Mr.  Sidhu's  employment
restructuring.

Chief Financial Officer Employment Restructuring

On April 16,  1999,  Mr.  Sidhu  agreed to  restructure  his current  employment
agreement with On Stage in an attempt to assist On Stage with  facilitating  our
restructuring plan. Under the terms of his employment  restructuring,  Mr. Sidhu
agreed  to  forego  any   rights  he  had  to  his   employment,   option,   and
confidentiality agreements, in return for the following:

o    a new employment agreement which he will be an "at-will"  consultant at a 
     flat rate of $50.00 per hour; 
o    a new option agreement which affords him the right to purchase  140,000  
     shares of common stock at a strike price of $1.50 per share;  
o    a  reimbursement  of $25,000 for unpaid  insurance,  car allowances and 
     expenses;  
o    $17,887 for all accrued, but unused vacation pay;
o    all earned, but unpaid salary under his old employment  agreement;  and 
o    forgiveness  of a  promissory  note in the amount of $7,472 held by On 
     Stage.

Additionally,  On Stage agreed to pay Mr. Sidhu $25,000  within ninety (90) days
of this  restructuring,  in  consideration  for Mr.  Sidhu's  execution of a new
confidentiality and non-competition agreement.
    
                                       11
<PAGE>

Common Stock Purchase Agreement with Whale Securities Co., L.P.

On or about January 28, 1999, On Stage entered into a Stock  Purchase  Agreement
with our underwriter  Whale Securities Co., L.P., under which On Stage agreed to
sell 150,000 shares of its' common stock to certain of Whale's  customers for an
aggregate purchase price of $100,000.


                                       12
<PAGE>

                  On Stage Entertainment, Inc. and Subsidiaries

                             _______________________

               Report on Audited Consolidated Financial Statements


                 For the Years Ended December 31, 1997 and 1998

                            _______________________

<PAGE>
                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

                                                                Page Number

List of Financial Statements..................................      F-2

Report of Independent Certified Public Accountants............      F-3

Consolidated Financial Statements
     Balance Sheets...........................................      F-4
     Statements of Operations.................................      F-5
     Statements of Stockholders' Equity (Deficit).............      F-5
     Statements of Cash Flows.................................      F-8
     Summary of Accounting Policies...........................      F-11
     Notes to Financial Statements............................      F-17

<PAGE>


                          ON STAGE ENTERTAINMENT, INC.

                          List of Financial Statements


The following financial statements of On Stage and the report of our Independent
auditors  thereon,  included  in the 1998  Annual  Report to  Stockholders,  are
incorporated by reference in Item 7:

Report of BDO Seidman, LLP Independent Certified Public Accountants

Balance sheet at December 31, 1998 and 1997

Statements of Operations for the years ended December 31 1998 and 1997

Statements of  Stockholders'  Equity  (Deficit) for the years ended December 31,
1998 and 1997

Statements of cash Flow for the years ended December 31, 1998 and 1997

Notes to Financial Statements

                                      F-2
<PAGE>

               Report of Independent Certified Public Accountants

Board of Directors and Stockholders of
On Stage Entertainment, Inc. and Subsidiaries

We have  audited  the  accompanying  consolidated  balance  sheets  of On  Stage
Entertainment,  Inc. and  subsidiaries as of December 31, 1997 and 1998, and the
related statements of operations,  stockholders' equity (deficit) and cash flows
for  each  of  the  years  then  ended.  These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material   respects,   the  financial  position  of  On  Stage
Entertainment,  Inc. and  Subsidiaries  at December  31, 1997 and 1998,  and the
results  of their  operations  and their  cash  flows for each of the years then
ended, in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 2 to the
consolidated financial statements,  the Company has suffered recurring operating
losses,  and  at  December  31,  1998,  has  a  working  capital  deficiency  of
$16,791,483  that raise  substantial  doubt  about its  ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2. The consolidated  financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


                                                 /s/ BDO SEIDMAN, LLP

Los Angeles, California
April 5, 1999



                                      F-3
<PAGE>

                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                               
                                              Years ended December 31,
                                         ----------------------------------
                                                1997             1998
                                         ---------------    ---------------
Assets
Current assets
   Cash and cash equivalents...........   $   2,323,559      $   1,009,768
   Accounts receivable, net ...........         455,340          1,264,526
   Inventory...........................         118,700            243,413
   Deposits............................         342,096            125,784
   Prepaid and other assets............         271,338            594,777
   Notes receivable from 
     officers (Note 7).................         136,194             77,330
                                         --------------       -------------
Total current assets...................       3,647,227          3,315,598
                                         --------------       -------------
Property, equipment and leasehold 
   improvements (Notes 1 and 3)........       5,008,835         24,130,663
Less:  Accumulated depreciation 
   and amortization....................      (2,553,347)        (4,396,229)
                                         --------------      -------------
Property, equipment and leasehold 
   improvements, net...................       2,455,488         19,734,434
                                         --------------       -------------
Cost in excess of net assets acquired,
   net of accumulated amortization of
   $7,370 at December 31, 1997 (Note 4)        116,415                  -
Direct acquisition costs (Note 11).....        258,133                  -
Deferred financing costs, net of  
   amortization of $80,813(Note 11)....              -           1,039,187
                                         --------------        ------------
                                          $  6,447,263         $24,089,219
                                         ==============        ============

   Liabilities and Stockholders' Equity

Current liabilities
  Working capital line (Note 3).......   $          -         $    999,679
  Accounts payable and accrued expenses        880,286           2,533,232
  Accrued payroll and other liabilities        698,499           1,891,924
   Current maturities of long-term 
   debt (Note 3)......................         271,918          14,682,246
                                         --------------        -----------
Total current liabilities.............       1,850,703          20,107,081
                                         --------------        -----------
Long-term debt, less current 
  maturities (Note 3).................         550,332             786,468
                                         --------------        -----------

Total liabilities.....................       2,401,035          20,893,549
                                         --------------        ----------- 

                                      F-4
<PAGE>

Commitments and contingencies (Note 4)
Stockholders' equity (deficit) (Notes 3 
  and 5)
  Preferred stock, par value $1 per share, 
  1,000,000 shares authorized; none 
  issued and outstanding...............              -                   -
  Common stock; par value $0.01 
  per share; authorized 25,000,000
  shares 6,595,500 and 7,452,350 shares 
  issued and outstanding...............         65,955              74,523
   Additional paid-in capital..........      7,340,013          11,254,587
   Accumulated other comprehensive 
    income
    Currency exchange adjustment.......              -              67,289
   Accumulated deficit.................     (3,329,740)         (8,200,729)
                                          --------------       -----------
Total stockholders' equity.............      4,076,228           3,195,670
                                          --------------       -----------  
                                          $  6,477,263         $24,089,219
                                          ==============       ===========   


See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                      F-5
<PAGE>

                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

   
                                                  Years Ended December 31,
                                            ---------------------------------
                                                  1997              1998
                                            ---------------    --------------
Net revenues.............................   $   15,726,074    $   27,847,476
Direct production costs..................       11,413,524        22,228,524
                                            ---------------    --------------
Cost of revenues.........................        4,312,550         5,618,952
                                            ---------------    --------------
Operating expenses
 Selling, general and administrative.....        4,946,135         6,276,325
 Depreciation and amortization...........          982,180         1,806,526
 Impairment loss (Note 12)...............                -           409,117
 Expenses at discontinued location 
 (Note 8)................................          489,285           443,096
                                            ---------------    --------------
Operating loss...........................       (2,105,050)       (3,316,112)

Interest expense, net (See Note 9)......           834,333         1,554,877
                                            ---------------    --------------
Loss before income taxes.................       (2,939,383)       (4,870,989)

Income taxes (Note 10)...................            6,673                -
                                            ---------------    --------------
Net loss.................................   $   (2,946,056)    $  (4,870,989)
                                            ---------------    --------------
Basic loss per share.....................   $        (0.55)    $       (0.68)
                                            ---------------    --------------
Diluted loss per share...................   $        (0.55)    $       (0.68)
                                            ---------------    --------------
Basic average number of common 
 shares outstanding......................        5,365,851         7,191,276
                                            ---------------    --------------
Diluted average number of common 
 shares outstanding......................        5,365,851         7,191,276
                                            ---------------    --------------
    
See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements. 

                                      F-6
<PAGE>

                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS STOCKHOLDER'S EQUITY (DEFICIT)


                                                                    Accumulated
                                                                       Other
                                                                   Comprehensive
                               Shares         Amount       Capital      Income 
                              ----------   -----------   -----------  ----------
Balance, December 31, 1996.. $ 4,002,044   $   40,020      121,024    $       -
Issuance of common stock 
 in connection with the 
 bridge financing (Note 3)..     195,500        1,956      364,344            - 
Issuance of common stock 
 to officer (Note 4)........      40,532          405      161,724            - 
Warrant exchange (Note 5)...     440,755        4,408       (4,408)           -
Issuance of common stock 
 in connection with 
 Interactive Events 
 acquisition (Note 5)........     11,020          110       60,500            -
Issuance of common stock 
 in connection with the 
 initial public offering 
 (Note 5)....................  1,400,000       14,000    4,841,975            -
Issuance of common stock 
 in connection with the 
 Debentures conversion 
 (Note 3)....................    505,649        5,056    1,794,854            -
Net loss for the year........          -            -            -            -
                               ----------    ---------   ----------   ----------
Balance, December 31, 1997...  6,595,500       65,955    7,340,013            - 

Issuance of common stock in 
 connection with Gedco 
 acquisition (Note 11).......    595,238        5,952   2,494,048             -
Issuance of common stock 
 in connection with Fox 
 Family acquisition (Note 11).   206,612        2,066     721,076             -
Issuance of common stock 
 in connection with 
 private placement (Note 5)..     55,000          550      54,450             -
Issuance of warrants in 
 connection with financing 
 (Note 11)...................          -            -     645,000             - 
Comprehensive loss:
 Net loss for the year.......          -            -           -             -
 Currency exchange adjustment          -            -           -        67,289
                                ----------   ----------  ---------    ----------
Comprehensive loss...........          -            -           -             -
                                ----------   ----------  ---------    ----------
Balance, December 31, 1998...  $7,452,350   $  74,523  $11,254,587    $  67,289 
                               ===========   ==========  ==========   ==========


                                      F-7
<PAGE>


                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (continued)

                              Accumulated     Comprehensive          
                                Deficit           Loss           Total
                              -----------      -----------     -----------
Balance, December 31, 1996.. $  (383,684)     $         -      $ (222,640)    
Issuance of common stock 
 in connection with the 
 bridge financing (Note 3)..           -                -         366,300
Issuance of common stock 
 to officer (Note 4)........           -                -         162,129
Warrant exchange (Note 5)...           -                -               - 
Issuance of common stock 
 in connection with 
 Interactive Events 
 acquisition (Note 5)........          -                -          60,610
Issuance of common stock 
 in connection with the 
 initial public offering 
 (Note 5)....................          -                -       4,855,975
Issuance of common stock 
 in connection with the 
 Debentures conversion 
 (Note 3)....................          -                -       1,799,910
Net loss for the year........ (2,946,056)      (2,946,056)     (2,946,056)

Balance, December 31, 1997... (3,329,740)      (2,946,056)      4,076,228

Issuance of common stock in 
 connection with Gedco 
 acquisition (Note 12).......          -                -       2,500,000      
Issuance of common stock 
 in connection with Fox 
 Family acquisition (Note 12).         -                -         723,142  
Issuance of common stock 
 in connection with 
 private placement (Note 5)..          -                -          55,000
Issuance of warrants in 
 connection with financing 
 (Note 12)...................          -                -         645,000 
Comprehensive loss:
 Net loss for the year.......  (4,870,989)     (4,870,989)     (4,870,989)
Currency exchange adjustment.          -           67,289          67,289
                                ----------      ----------      ---------
Comprehensive loss...........  (4,870,989)    $(4,803,700)       (880,558)
                                ----------      ----------      ---------
Balance, December 31, 1998...  $8,200,729     $(7,749,756)     $3,195,670  
                                ==========      ==========      =========

See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.


                                      F-8
<PAGE>

                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                Increase (Decrease) in Cash and Cash Equivalents

                                                Years ended December 31,
                                          ---------------------------------
                                               1997              1998
                                          --------------     --------------

Cash flows from operating activities
   Net loss ............................. $  (2,946,056)      $  (4,870,989)
   Adjustments to reconcile net 
     loss to net cash used in operating
     activities:
   Depreciation and amortization.........       676,306           1,085,766
   Write off of cost in excess of 
   net assets acquired...................             -             102,131
   Write off of deferred financing costs.             -             275,000
   Impairment loss.......................             -             852,213
   Interest paid in common stock.........       194,228                   -
   Loss on disposal of property 
    and equipment........................       (10,834)                  -
   Issuance of common stock to officer...       162,129                   -
   Non-cash interest.....................       366,300                   -
   Reverse litigation accrual............       (25,000)                  -
   Forgiveness of note receivable 
    from stockholder.....................       221,521                   -
 Increase (decrease) from changes in 
 operating assets and liabilities:
   Accounts receivable...................        46,723            (809,187)
   Inventory.............................       (50,847)             (4,629)
   Deposits..............................      (110,495)            216,312
   Pre-opening costs.....................       129,180                   -
   Prepaid and other assets..............       (35,043)           (165,923)
   Accounts payable and accrued expenses.       281,243             591,900
   Accrued payroll and other liabilities.        76,513           1,193,426
   Litigation settlement accrual.........       (75,000)                  -
                                            ------------        ------------
Total adjustments........................     1,846,924           3,337,009
                                            ------------        ------------
Net cash used in operating activities....    (1,099,132)         (1,533,980)
                                            ------------        ------------


                                      F-9
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                Increase (Decrease) in Cash and Cash Equivalents
                                  (continued)

                                                Years ended December 31,
                                          ---------------------------------
                                               1997              1998
                                          --------------     --------------
Cash flows from investing activities
 Advances on notes receivable 
 from officers...........................      (357,715)            (69,024)
 Pay down on note receivable from 
 officers................................             -             127,888
 Capital expenditures....................      (625,612)           (947,165)
 Payment for acquisitions, net of 
 cash acquired...........................             -         (14,602,005)
 Direct acquisition costs................      (258,133)            942,063
                                            ------------        ------------
Net cash used in investing activities....    (1,241,460)        (14,548,243)
                                            ------------        ------------ 
Cash flows from financing activities:
 Borrowing under working capital line....             -           1,000,000
 Proceeds from long-term borrowing.......             -          13,860,007
 Repayment on long-term borrowing........    (1,140,376)           (213,864)
 Proceeds from bridge notes..............       875,000                   -
 Payments of bridge notes................      (875,000)                  -
 Net proceeds from sale of common 
 stock and warrants......................     4,855,975              55,000
 Offering costs..........................       657,801                   -
                                            ------------         -----------
Net cash provided by financing activities     4,373,400          14,701,143
                                            ------------         ----------- 
Effect of exchange rate charges on cash
 and cash equivalents....................  $         -          $    67,289
                                            ------------         ----------- 
Net increase (decrease) in cash 
and cash equivalents.....................     2,032,808          (1,313,791)
Cash and cash equivalents at 
beginning of year........................       290,751           2,323,559
                                            ------------         ----------- 
Cash and cash equivalents at end of year.  $  2,323,559         $ 1,009,768
                                            ------------         ----------- 

Supplemental Disclosure of Cash 
Flow Information
   Cash paid during the year for:
   Interest..............................  $    278,059         $ 1,551,574
   Taxes.................................  $      6,673         $    44,111
                                           =============         ===========
 
See  accompanying  summary  of  accounting  policies  and notes to  consolidated
financial statements.

                                      F-10

<PAGE>

Supplemental Schedule of Non-Cash Investing and Financing Activities

During 1997 and 1998,  $712,405 and $1,000,000 of leased assets and  obligations
were capitalized, respectively.

During 1997,  the Company  borrowed an aggregate of  $1,000,000  from 21 private
investors,  in return for which the Company issued to such  investors  unsecured
non-negotiable notes payable, which accrued interest at an annual rate of 9% and
which matured upon the  consummation  the initial  public  offering (the "Bridge
Notes"), Common Stock and warrants (collectively,  the "Bridge Financing").  The
Common  Stock  issued in  connection  with the  Bridge  Financing  was valued at
$366,300.  As no  consideration  was paid for the Common  Stock,  this amount is
considered an original  issue discount and amortized over the term of the Bridge
Notes.

During 1997, the Company  exchanged all of its outstanding  warrants for 440,755
shares of Common Stock, which had no effect on the Company's earnings.

During 1997, the Company sold equipment with a historical cost of  approximately
$55,000 at a gain.  The Company  accepted a note  receivable  as payment for the
sale.

Upon the  consummation of the Company's  initial public  offering,  1,799,910 of
outstanding  convertible debentures were converted into 505,549 shares of common
stock.
 
During 1997, the Company issued 11,020 shares of common stock in connection with
the Interactive Events acquisition.

During  1998,  in  connection  with  mortgage  financing  related  to the  Gedco
Acquisition,  the Company  issued  575,000  warrants to purchase  the  Company's
Common Stock to the lender and an affiliate of the lender, which were originally
valued at $500,000  and  accounted  for as an original  issue  discount.  Of the
575,000 warrants originally issued, 325,000 were subsequently repriced (see Note
3) and were valued at $145,000 and accounted for as an original issue  discount.
The Company wrote off the remaining unamortized value of the 325,000 warrants of
$275,000.

                                      F-11

<PAGE>

                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

                         SUMMARY OF ACCOUNTING POLICIES


BUSINESS ACTIVITY

On  Stage   Entertainment,   Inc.  (the  "Company")   produces  and  sells  live
entertainment  and operates live  theaters and dinner  theaters  worldwide.  The
Company has continuous  running shows in gaming and resort venues in California,
Florida,  Missouri,  Nevada,  New Jersey,  Pennsylvania and South Carolina.  The
Company was incorporated on October 30, 1985 in the state of Nevada.

PRINCIPLES OF CONSOLIDATION

The financial statements include the amounts of On Stage Entertainment,  Inc., a
publicly   traded  Nevada   corporation   (the   "Company"  or  "OSE")  and  its
subsidiaries,  Legends in Concert,  Inc., a Nevada corporation ("LIC"); On Stage
Marketing, Inc., a Nevada corporation ("Marketing");  On Stage Theaters, Inc., a
Nevada  corporation  ("Theaters");   Wild  Bill's  California,  Inc.,  a  Nevada
corporation  ("Wild  Bills");  Fort Liberty,  Inc., a Nevada  corporation  ("Ft.
Liberty"); Blazing Pianos, Inc., a Nevada corporation ("Blazing");  King Henry's
Inc., a Nevada  corporation  ("King  Henry"s");  On Stage  Merchandise,  Inc., a
Nevada corporation ("Merchandise");  On Stage Events, Inc., a Nevada corporation
("Events"); On Stage Casino Entertainment, Inc. a Nevada corporation ("Casino");
On Stage  Productions,  Inc.,  a Nevada  corporation  ("Productions");  On Stage
Theaters North Myrtle Beach,  Inc., a Nevada  corporation  ("North Myrtle");  On
Stage Theaters  Surfside Beach,  Inc., a Nevada  corporation  ("Surfside");  and
Interactive   Events,   Inc.,   a   Georgia   corporation   (collectively,   the
"Subsidiaries").  All significant  intercompany  transactions  and balances have
been  eliminated  in  consolidation.  The  consolidated  group  is  referred  to
collectively and individually as the "Company."

ACCOUNTS RECEIVABLE

Accounts  receivable and revenue are recorded as the stage  productions are run.
Accounts  receivable  represents  cash  collected  subsequent to the year-end in
which the show ran.

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 statement and the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from those estimates.

                                      F-12
<PAGE>


INVENTORY

Inventory consists of various stage and lighting supplies and are stated at cost
on a first-in, first-out basis.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property and  equipment are stated at cost.  Expenditures  for  maintenance  and
repairs  are  charged  to  expense  as  incurred.  Renewals  or  betterments  of
significant items are capitalized. When assets are sold or otherwise disposed of
the cost and related  accumulated  depreciation or amortization are removed from
the respective accounts, and any resulting gain or loss is recognized.

Depreciation  and  amortization  of property and  equipment  purchased  prior to
January 1, 1996 are  provided  using  accelerated  methods  while  property  and
equipment  purchased  from January 1, 1996 are  depreciated  on a straight  line
basis  over  the  estimated   useful  lives,  as  indicated   below.   Leasehold
improvements  are amortized over the lesser of the related assets useful life or
the remaining lease term.

                                                           Years
                                                    --------------------
     Buildings....................................          20
     Stage equipment..............................          5-7
     Scenery and wardrobe.........................          5-7
     Furniture and fixtures.......................          5-7
     Vehicles.....................................          3
     Leasehold improvements.......................          10

IMPAIRMENT OF LONG-LIVED ASSETS

The Financial  Accounting Standards Board ("FASB") issued Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed  of" ("SFAS No. 121") which is
effective for financial statements for fiscal years beginning after December 15,
1995. This standard  establishes  guidelines regarding when impairment losses on
long-lived assets,  which include plant and equipment,  and certain identifiable
intangible  assets,  should be recognized  and how  impairment  losses should be
measured. The Company adopted this accounting standard on January 1, 1996 and is
applying the concepts to intangibles  and productive  assets  periodically  (see
Notes 12).

STOCK BASED COMPENSATION

Statements  of  Financial   Accounting   Standards  No.  123,   "Accounting  for
Stock-Based  Compensation"  ("SFAS No. 123")  establishes a fair value method of
accounting for stock-based  compensation  plans and for transactions in which an
entity  acquires  goods or services  from  non-employees  in exchange for equity
instruments.  The Company adopted this  accounting  standard on January 1, 1996.
SFAS  No.  123  also  encourages,  but  does not  require  companies  to  record
compensation cost for stock-based employee compensation.  The Company has chosen
to continue to account for  stock-based  compensation  utilizing  the  intrinsic
value  method  prescribed  in  Accounting   Principles  Board  Opinion  No.  25,
"Accounting for Stock Issued to Employees,  and comply with pro forma disclosure
requirements."  Accordingly,  compensation cost for stock options is measured as
the excess,  if any, of the fair market price of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock.


                                      F-13
<PAGE>

LOSS PER SHARE

Statement of Financial  Accounting  Standard No. 128 provides a different method
of calculating  earnings per share than is currently used in accordance with APB
15,  Earnings  per Share.  SFAS 128 provides  for the  calculation  of Basic and
Diluted earnings per share. Basic earnings per share includes no dilution and is
computed by dividing  income  available to common  shareholders  by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share  reflects the  potential  dilution of  securities  that could share in the
earnings of the entity, similar to fully diluted earnings per share. SFAS 128 is
effective  for fiscal years and interim  periods  after  December 15, 1997.  The
Company has adopted this pronouncement during the fiscal year ended December 31,
1997.

For the years ended  December 31,  1998 and 1997,  potential diluted  securities
representing 896,344 and 720,938 outstanding options and 2,724,917 and 2,077,000
outstanding warrants are not included since their effect would be anti-dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards No. 107,  "Disclosures  about Fair
Value of  Financial  Statements",  ("SFAS No.  107")  issued by the FASB  became
effective December 31, 1995. This statement requires the disclosure of estimated
fair  values  for all  financial  instruments  for  which it is  practicable  to
estimate fair value.

The  carrying  amounts  of  financial   instruments   including  cash,  accounts
receivable,   current  maturities  of  long-term  debt,  and  accounts  payable,
approximate fair value because of their short maturity.

The  carrying  amount of  long-term  debt  approximates  fair value  because the
interest  rates on these  instruments  approximate  the rate the  Company  could
borrow at December 31, 1998.

The Company  has notes  receivable  from  officers  of the  Company.  Due to the
related-party nature of these receivables the fair value cannot be determined.

INCOME TAXES

The Company follows Statement of Financial  Accounting  Standards No. 109 ("SFAS
No.  109"),  "Accounting  for Income  Taxes." SFAS No. 109 requires an asset and
liability  approach to providing  deferred  income taxes and specifies  that all
deferred  tax  balances be  determined  by using the tax rate  expected to be in
effect when the taxes will actually be paid or refunds received.

                                      F-14
<PAGE>

CASH EQUIVALENTS

The Company considers all liquid assets with an initial maturity of three months
or less to be cash and/or cash equivalents.

FOREIGN CURRENCY TRANSLATION

Assets and  liabilities  of the Company's  foreign  affiliates are translated at
current  exchange  rates,  while revenue and expenses are  translated at average
rates  prevailing  during the year.  Translation  adjustments  are reported as a
component of other comprehensive income in stockholders' equity.

CONCENTRATION OF CREDIT RISK

The  Company  places  its cash  and  temporary  cash  investments  with  banking
institutions.  At December  31, 1997 and 1998,  the Company had  $2,600,788  and
$252,910  on deposit at one bank.  Account  balances at an  individual  bank are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.

NEW ACCOUNTING STANDARDS

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS  No.  130")  issued  by the  FASB  is  effective  for  financial
statements  with  fiscal  years  beginning  after  December  15,  1997.  Earlier
application is permitted.  SFAS No. 130 establishes  standards for reporting and
display  of   comprehensive   income  and  its  components  in  a  full  set  of
general-purpose  financial  statements.  The Company  adopted SFAS No. 130 as of
January  1, 1998 and it had no effect on its  financial  position  or results of
operations.

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial  statements  with fiscal years  beginning after December
15, 1997.  Earlier  application  is  permitted.  SFAS No. 131 requires  that the
public companies report certain information about operating segments,  products,
services and geographical areas in which they operate and their major customers.
The Company  adopted SFAS No. 131 on January 1, 1998 and it had no effect on its
financial position or results of operations;  however, disclosures on certain of
these items was expanded.

Statement of Position  98-5,  "Reporting  on the Costs of Start-up  Activities,"
("SOP 98-5") issued by the American Institute of Certified Public Accountants is
effective for financial statements  beginning after December 15,  1998. SOP 98-5
requires that the costs of start-up activities, including organization costs, be
expensed as incurred.  Start-up activities are defined broadly as those one-time
activities  related  to opening a new  facility,  introducing  a new  product or
service, conducting business in a new territory,  conducting business with a new


                                      F-15
<PAGE>

class of customers (excluding ongoing customer acquisition costs, such as policy
acquisition costs and loan origination  costs) or beneficiary,  initiating a new
process in an existing facility,  or commencing some new operation.  The Company
does not expect the adoption of SOP 98-5 to have a material  impact,  if any, on
its financial position or results of operations.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities"  effective for financial  statements  with
fiscal  years   beginning   after  June  15,  1999.  SFAS  No.  133  provides  a
comprehensive  and consistent  standards for the  recognition and measurement of
derivatives  and hedging  activities and requires all derivatives to be recorded
on the balance sheet at fair value.  The Company does not expect the adoption of
SFAS No. 133 to have a material  impact,  if any, on its results of  operations,
financial position or cash flows.

RECLASSIFICATIONS

Certain 1997 amounts have been reclassified to conform to the 1998 presentation.

                                      F-16
<PAGE>

                  ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consist of the following:

                                                        December 31,
                                              ------------------------------
                                                  1997             1998
                                              -------------    -------------
     Land...................................  $         -      $ 11,329,376
     Buildings..............................            -         4,389,287
     Stage equipment........................    2,267,456         3,743,769
     Scenery and wardrobe...................    1,047,750         1,286,957
     Furniture and fixtures.................    1,002,674         1,134,555
     Vehicles...............................       12,757            12,757
     Leasehold improvements.................      678,198         2,233,962
                                              -------------    ------------- 
                                                5,008,835        24,130,663
     Less accumulated depreciation 
      and amortization......................   (2,553,347)       (4,396,229)
                                              -------------    ------------- 

Total property, equipment and leasehold 
 improvements, net..........................  $ 2,455,488      $ 19,734,434
                                              ============      ============

The cost of assets held under capital  leases was  $1,008,432  and $2,008,432 at
December 31, 1997 and 1998, respectively.

NOTE 2 - GOING CONCERN
   
The accompanying  consolidated  financial statements have been prepared assuming
that the  Company  will  continue  as a going  concern  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  The carrying  amounts of assets and  liabilities  presented in the
financial  statements  do not  purport to  represent  realizable  or  settlement
values.  However,  the Company has suffered recurring operating losses and has a
working  capital  deficit   $16,791,000  that  impairs  its  ability  to  obtain
additional financing.  These factors raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not  include  any  adjustments  that  might  result  from the  outcome  of these
uncertainities
    
The Company has  historically  met its working  capital  requirements  through a
combination  of cash  flow  from  operations,  equity  and  debt  offerings  and
traditional bank and financing.  The Company anticipates,  based on its proposed
plans and  assumptions  relating to its  operations  that the Company's  current
cash,  cash  equivalent  balances,  anticipated  revenues  from  operations  are
insufficient to fund the Company's ongoing operations.

The  Company  intends  to  manage  short-term  liquidity  concerns  through  the
renegotiations of its expired working capital line,  capital leases and mortgage
facilities.  The Company has either closed down or restructed any business units
that are not generating positive cash flow. In addition, the Company has lowered
selling,  general and administrative costs as a percent of net revenues from 32%
in 1997 to 22% in 1998 and  continues to downsize and  restructure  its selling,
general and administrative functions.


                                      F-17
<PAGE>

NOTE 2 - GOING CONCERN (continued)

In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that the Company
will be able to secure additional  capital or that if such capital is available,
whether the terms or conditions would be acceptable to the Company.

NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT

WORKING CAPITAL LINE

In May 1997, First Security Bank of Nevada ("First  Security")  issued a line of
credit to the Company for up to $250,000.  Borrowings  under such  facility bear
variable  interest at 1.5% over the First  Security Bank of Idaho's index (9.25%
at December 31, 1998). On September 28, 1998, First Security  increased the line
of credit from $250,000 to $1,000,000  and extended the  expiration  date of the
line to March  25,  1999.  As of  December  31,  1998,  the  Company  had  drawn
$1,000,000  on the line of credit and the balance  outstanding  at December  31,
1998 is $999,679.  The CEO has personally guaranteed the line of credit.

Long-term debt consists of the following:
                                                        December 31,
                                               --------------------------------
                                                   1997                1998
                                               -------------     --------------
ICCMIC Mortgage Loan (a)..................     $        -        $  14,150,000

Capital lease obligations with 
 interest ranging from 9.7% to 30.7%
 due in monthly installments ranging 
 from $265 to $18,202, including interest, 
 various maturities dates through November
 2001, secured by office communication 
 equipment, and production equipment......          822,250          1,318,714
                                               --------------     --------------
Total long-term debt......................          822,250         15,468,714
Less current maturities...................          271,918         14,682,246
                                               --------------     --------------
                                               $    550,332       $    786,468
                                               ==============     ==============






                                      F-18
<PAGE>

NOTE - 3 WORKING CAPITAL LINE (Continued)

As of December 31, 1998 the future  minimum  principal  debt  payments and lease
payments under capital leases are as follows:

   Year ending                                ICCMIC               Capital
   December 31,                                Loan                Leases
 -----------------                        --------------        ---------------

     1999...............................  $  14,150,000          $    638,227
     2000...............................             -                597,541
     2001...............................             -                250,751
                                          --------------        ---------------
                                          $ 14,150,000
                                          ==============     
 Total..................................                            1,486,519
                                                                ===============
 Less: Amounts representing 
  interest costs........................                              167,805
                                                                ---------------
 Net present values.....................                            1,318,714

 Less:  Capital lease obligations 
   included in short-term debt..........                              532,246
                                                                ---------------

 Long-term capital lease obligations....                         $    786,468
                                                                ===============


                                      F-19
<PAGE>

NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)

WORKING CAPITAL LINE (Continued)

(a) The Company funded the cash portion of the Gedco Acquisition  purchase price
and transaction fees and expenses with $12.5 million of mortgage  financing from
Imperial Credit Commercial  Mortgage  Investment Corp  ("ICCMIC")(see  Note 11).
This mortgage  facility matures on March 13, 2029 and  installments  thereon are
paid monthly at an interest rate of 9.75%. In connection with the financing, the
Company  issued ICCMIC and Imperial  Capital Group LLC (an affiliate of ICCMIC),
an aggregate of 575,000 warrants  immediately  exercisable into shares of Common
Stock at an exercise price of $4.44.  These warrants were valued at $500,000 and
accounted for as an original issue  discount.  Additionally,  the Company funded
the cash portion of the Fox Family  Acquisition (see Note 11) with $1,000,000 of
mortgage  financing from ICCMIC.  The mortgage facility matures on June 30, 2029
and installments thereon are paid monthly at a rate of 10.28%.

On October 7, 1998, ICCMIC loaned the Company an additional $550,000, secured by
a first deed of trust on the  Company's  Legends in Concert  Theater in Surfside
Beach, South Carolina. In connection with this additional financing, the Company
modified the Common Stock purchase  warrant that the Company issued to ICCMIC on
March  13,  1998 (and the  corresponding  warrant  agreement)  by  reducing  the
exercise price of ICCMIC's  325,000 warrants to purchase shares of the Company's
Common  Stock from $4.44 per share to $1.25 per share.  The  re-priced  warrants
were valued at $145,000 and accounted  for as an original  issue  discount.  The
Company  wrote  off the  remaining  unamortized  original  value of the  325,000
warrants of $275,000.

During 1995, the Company conducted a private placement of debentures  originally
due on August 31, 1997, (the "Original  Debentures") with aggregate  proceeds of
$1,989,064 (the "1995 Private  Placement").  In order to (i) extend the maturity
date of the Original  Debentures  and (ii)  eliminate  certain  covenants in the
Original  Debentures  that were  disadvantageous  to the  Company,  the  Company
offered  to  either  (a)  exchange  the  outstanding   original  Debentures  for
Debentures  due January 4, 1999,  or (b) to repurchase  the original  Debentures
upon the terms and subject to the  conditions  set forth in an Offer to Exchange
or Repurchase the original  Debentures (the "Exchange or Repurchase  Offer"). In
connection  with the Exchange or  Repurchase  Offer,  the holders of  $1,714,064
principal amount of the Original  Debentures  tendered their original Debentures
in exchange for Debentures in the same principal  amount and holders of $275,000
principal amount of the Original  Debentures opted to have them repurchased.  On
August 13, 1997, the Company converted the entire $1,714,064 principal amount of
Debentures   into  an  aggregate  of  505,649   shares  of  common  stock.   The
aforementioned  conversion  was based upon a ratio of 295 shares of common stock


                                      F-19
<PAGE>

NOTE 3 - WORKING CAPITAL LINE, NOTES PAYABLE AND LONG-TERM DEBT (Continued)

WORKING CAPITAL LINE (Continued)

per each $1,000 principal amount of Debentures. The conversion resulted in a one
time, non-recurring, interest expense charge in the amount of $194,228 (based on
an imputed value of $ 4.00 per share of common stock).

On February 29, 1996, On Stage entered into a loan  agreement  with DYDX Legends
Group, L.P.  ("DYDX")  pursuant to which On Stage borrowed  $1,000,000 from DYDX
(the "DYDX Loan"). The DYDX Loan accrued interest at a rate of 8% per annum, was
to mature on January 1, 1998 and was secured by a security agreement pursuant to
which DYDX had a lien on  substantially  all of the present and future assets of
On Stage.  In  addition,  if On Stage did not file an  initial  public  offering
registration  statement by June 30, 1996,  it would be in default under the DYDX
Loan.

The Company and DYDX  entered into several  extension  agreements,  one of which
included the repayment of $250,000.

In order to effect  the  bridge  financing  (defined  below),  On Stage and DYDX
entered  into an Amended and  Restated  Loan  Agreement  as of March 19, 1997 in
connection  with which the security  agreement  executed in connection  with the
DYDX Loan and DYDX's security  interest in the Company's assets were terminated,
the  maturity  date of the DYDX Loan was  extended to coincide  with that of the
bridge  financing  notes and its interest rate was increased to 9% per annum. On
August 13, 1997,  the Company paid off, in full, all  outstanding  principal and
accrued interest of $773,014, owed by the Company under the DYDX loan.

Bridge Financing

On March 26,  1997,  On Stage  completed a bridge  financing  of  $1,000,000  of
unsecured   non-negotiable   notes,  common  stock  and  warrants  (the  "Bridge
Financing")  through On Stage's  underwriter,  Whale  Securities  Co., L.P. (the
"Placement  Agent").  The  net  proceeds  to the  Company  after  deducting  the
Placement  Agent's  commissions and other offering  expenses were $875,000.  The
common stock was assigned a value of $444,000 less expenses of $77,700 resulting
in a credit to equity of $366,300.  As no consideration  was paid for the common
stock, this amount is considered an original issue discount and interest expense
over the term of the related notes payable. On August 13, 1997, the Company paid
off, in full, all outstanding principal and accrued interest of $1,036,746, owed
by the Company under the Bridge Financing notes.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

Leases

On Stage leases  various  offices,  condominiums,  warehouses and theaters under
operating  leases ranging in monthly  payments from $1,026 to $38,994.  Rent and
lease  expenses  included in cost of revenues  for the years ended  December 31,
1997 and 1998 was $595,425 and $1,301,771, respectively. Rent and lease expenses
included in  selling,  general  and  administrative  expense for the years ended
December 31, 1997 and 1998 was $252,905and $323,048, respectively.

                                      F-20
<PAGE>

NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)

The total minimum rental commitment at December 31, 1998 is as follows:

 Year ending
 December 31,                                               Amount
 --------------------                                    --------------
     1999..............................................  $   1,223,346
     2000..............................................      1,166,987
     2001..............................................      1,048,471
     2002..............................................      1,017,408
     2003..............................................        547,421
     Thereafter........................................      4,496,638
                                                         --------------
                                                         $   9,500,271
                                                         ==============
Employment Contracts

On February 1, 1997, the Company  entered into an employment  agreement with the
principal  stockholder  to  employ  him as its  Chairman  of the Board and Chief
Executive  Officer  until May 31,  2000.  In  accordance  with  this  employment
agreement,  the principal stockholder will receive an annual salary of $250,000.
and may be entitled to receive an annual 10% increase of his base salary amount.
The Company has the right to terminate the principal stockholder's employment at
any time without cause, provided that the Company pays the principal stockholder
a lump sum payment equal to one year's base salary,  car allowance and insurance
allowance.  Also in February 1997, the Company amended the employment agreements
with the CFO and the President which, among other things, extended their current
employment  agreements  through May 31, 2000. In  connection  with each of their
respective employment  agreements,  the CEO, President and CFO also entered into
confidentiality and non-competition agreements with the Company.

The Company has  employment  agreements  with  certain  executive  officers  and
employees,  the terms of which expire at various dates through May,  2000.  Such
agreements  provide for minimum  salary  levels and  incentive  bonuses based on
prescribed formulas over their terms.

Aggregate commitments related to employment contracts are as follows:

 Year ending
 December 31,                                           Amount
 --------------------                                -------------
 
     1999............................................$   668,940
     2000............................................    320,270
     2001............................................     47,482
                                                     -------------
                                                     $ 1,036,692
                                                     =============

Executive Bonus Plan

In  March  1997,  On  Stage  implemented  a  three-year  Executive  Bonus  Plan,
administered  by the  Board of  Director's  Compensation  Committee.  Under  the
Executive  Bonus Plan,  an annual  bonus pool of up to 5% of On Stage's  audited
pre-tax earnings, after non-recurring charges such as original issue discount,


                                      F-21
<PAGE>

NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)

compensation  and interest expense charges,  but excluding  extraordinary  items
("Pre-Tax Earnings"),  may be established for distributions at the discretion of
On Stage's Board of Directors,  to On Stage's executive officers (other than the
Chairman and CEO who is not eligible for bonuses under the Executive Bonus Plan)
in 1998, 1999 and 2000, provided that On Stage achieves minimum Pre-Tax Earnings
for the respective preceding year as follows:

                                                        Minimum
 Year ending                                            Pre-Tax
 December 31,                                           Earnings
 --------------------                               --------------

     1998...........................................$  5,000,000
     1999...........................................   8,700,000
     2000...........................................   8,900,000
                                                    --------------
                                                    $ 22,600,000
                                                    ==============
Legal Proceedings

The Company is a party to various legal proceeding in the ordinary course of its
business.  The Company  believes that the nature of the  proceedings are typical
for a company of its size and scope in the entertainment industry, and that none
of  these  proceedings  are  material  to its  financial  position,  results  of
operations and changes in cash flows.

NOTE 5 - STOCKHOLDER'S EQUITY

Initial Public Offering

On August 13,  1997,  the  Company  completed  an  initial  public  offering  of
1,400,000  shares of Common Stock at $5.00 per share and redeemable  warrants to
purchase  1,610,000 shares of Common Stock at $0.10 per warrant (the "IPO"). The
net proceeds to the Company of the IPO after underwriting discounts, commissions
and expenses was approximately $4,855,975.

Stock Split

On March 18, 1997, On Stage  effectuated a 1 for 1.814967 reverse stock split of
On Stage's common stock ("Reverse Split"). Accordingly,  $29,828 was transferred
from accumulated  deficit to common stock and On Stage has retired 26,422 of the
principal  stockholder's  shares of common stock. All common stock, common stock
warrants,  options and grants and income (loss) per share information  disclosed
in the financial  statements  and notes have been adjusted to give effect to the
Reverse Split and the retirement of the principal stockholder common stock.

DY/DX Corp. Common Stock Purchase Agreement

On October 2, 1998, the Company  entered into a common stock purchase  agreement
with DY/DX Corp.,  an Illinois  corporation,  to sell up to 500,000 shares of On
Stage's common stock at an aggregate purchase price of $500,000.  As of December
31, 1998,  DY/DX Corp.  had purchased  55,000 shares of On Stage's  common stock
pursuant to this agreement.

                                      F-22

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Warrants Converted to Common Stock

In connection  with the closing of the DYDX Loan and subsequent  extensions (see
Note 3), the  lender  was issued  warrants  to  purchase  550,974  shares of the
Company's common stock in February 1996 at an original  exercise price per share
equal to the initial public  offering  price of the Company's  common stock (the
"DYDX  Warrant").  In connection  with the Third Extension of the DYDX Loan, the
Company  split the DYDX Warrant into two  warrants,  one in the name of DYDX for
the  purchase of 440,779  shares of Common Stock and the other in the name of an
affiliate  of DYDX,  for the  purchase of 110,195  shares of Common  Stock,  and
reduced  the  exercise  price  of  both  warrants  to  $3.99  per  share,  which
approximates fair market value at the date of the reduction.

On March 17, 1997,  the Company  exchanged all of its  outstanding  warrants for
shares of its common stock (the "Warrant  Exchange  Shares") on a cashless basis
(the "Warrant  Exchange").  The number of Warrant Exchange Shares issued to each
warrant holder in the Warrant  Exchange was equal to the number of warrants held
by such holder divided by the exercise price of the holder's warrants,  based on
the number and price of the warrants prior to the Reverse Split.  As a result of
the Warrant Exchange,  all of the Company's currently  outstanding warrants were
canceled  and  exchanged  for a total of 799,956  Warrant  Exchange  Shares on a
pre-Reverse  Split  basis,  which  amount  was  reduced  to  440,755  shares  in
connection with the Reverse Split.  The Warrant  Exchange had no effect upon the
Company's earnings.

1996 Stock Option Plan

The Board of Directors  and the  Company's  then sole  stockholder  approved the
Company's  Incentive  Stock Option Plan on August 7, 1996 (the  "Option  Plan").
Pursuant to an  amendment to the Option  Plan,  effected on March 19,  1997,  an
aggregate  of 785,000  shares of common  stock have been  reserved  for issuance
pursuant to options  granted and available for grant under the Option Plan.  The
Option Plan is designed to further the interests of the Company by incentivizing
their  employees to continue to work for the betterment of the Company in return
for sharing in the success of the Company through the Option Plan.

Under the Option Plan, a committee (the  "Committee")  has been appointed by the
Board of  Directors to  administer  the Option Plan and is  authorized  to grant
options thereunder to all eligible  employees of the Company,  including certain
officers and directors of the Company as well as to others providing services to
the Company.  The Option Plan provides for the granting of both:  (i) "incentive
stock  options" as defined in Section 422 of the Internal  Revenue Code of 1986,
as  amended,  which are  intended  to qualify  for  special  federal  income tax
treatment ("ISOs") to employees  (including officers and employee directors) and
(ii)  "non-qualified  stock options" ("NQSOs") to employees  (including officers
and employee directors) non-employee directors, and consultants.  Options can be
granted  under the Option Plan on such terms and at such prices as determined by
the Committee,  except that in the case of ISOs, the per share exercise price of
such  options  cannot be less than the fair market  value of the Common Stock on
the date of grant.  In the case of an ISO granted to a 10%  stockholder  (a "10%
Stockholder"),  the per share  exercise  price  cannot be less than 110% of such
fair  market  value.  To the extent  that the grant of an option  results in the
aggregate fair market value of the shares with respect to which  incentive stock
options are  exercisable  by a grantee for the first time in any  calendar  year
exceed $100,000, such option will be treated under the Option Plan as an NQSO.

Options granted under the Option Plan will become  exercisable  after successful
completion of the vesting period or periods  specified in each option agreement.
Except as otherwise  determined by the Committee,  options become exercisable as
to  one-third of the shares  subject to the option on each of the first,  second
and third  anniversaries  of the date of grant of the  option.  Options  are not
exercisable,  however,  after the expiration of ten years from the date of grant
(or  five  years  from  such  date  in  the  case  of an  ISO  granted  to a 10%
Stockholder)  and  are not  transferable  other  than by will or by the  laws of
descent and distribution.

                                      F-23
<PAGE>

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Except as the Committee may determine with respect to NQSOs, if the holder of an
option granted under the Option Plan ceases to be an employee,  options  granted
to such holder shall  terminate  three months (12 months if the termination is a
result of the death or disability of the employee)  from the date of termination
of employment and shall be  exercisable as to only those options  exercisable as
of the date of termination.

In March 1996, On Stage hired a new President and Chief  Operating  Officer (the
"President").  As part of the President's employment agreement, On Stage granted
him  options to purchase  311,300  shares of the  Company's  common  stock.  The
President  has elected to  classify  75,132 of the options as ISOs which vest in
three  equal  annual  installments  commencing  on the  date of the  grant.  The
remaining  236,168  are to be  classified  as  NQSOs,  of  which  one-half  vest
immediately,  one-quarter  vest on the first  anniversary of the grant date, and
the balance vest on the second  anniversary of such grant. The exercise price of
all of the  President's  stock  options is $3.99 per  share,  which was the fair
value at the date of grant.

In August and December 1996, the Company  granted options to purchase a total of
120,359 shares of the Company's  common stock to certain other  employees of the
Company.  These options were granted under the Company's  1996 Stock Option Plan
and have an exercise price of $5.00 per share.  Unless  otherwise  determined by
the  Committee,  the options have a term of ten years from the date of grant and
are subject to earlier  termination in certain events related to the termination
of employment. The options vest in three equal annual installments commencing on
the first anniversary of the date of the grant.

In February 1997,  the CFO entered into an amended  employment  agreement  under
which he was granted 85,000 additional stock options (see Note 4).

Non-employee Directors' Options

In March  1997,  the  Company  provided  for each  non-employee  director of the
Company to  receive,  in  addition  to  reimbursement  of  expenses  incurred in
attending  Board  meetings,  an option to purchase 10,000 shares of Common Stock
each year that he or she  serves as such a director  (each  such year,  a "Grant
Year"),  partially  contingent  upon the director's  attendance at the Company's
four scheduled Board of Director meetings during the Grant Year.  One-quarter of
the annual  option  grant shall vest as of each of the Grant  Year's first three
scheduled Board of Director  meetings and the remainder of such option will vest
as of the fourth  scheduled  meeting,  provided,  in the latter  case,  that the
director has attended all four of that Grant Year's scheduled Board meetings.

In June 1998,  the  Company  increased  its number of shares of common  stock
reserved for issuance  pursuant to the exercise of options under the option Plan
from 765,000 to 1,400,000 options.

                                      F-24
<PAGE>

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Non-employee Directors' Options (Continued)

The option and warrant  activity  during the years ended  December  31, 1997 and
1998 is as follows:
  
                                                                     Weighted
                                                Number of             Average
                                                 Options              Exercise
                                               and Warrants            Price
                                              --------------       -------------

 Outstanding at December 31, 1996............  $    456,453         $     4.31
 Cancelled...................................        (8,000)             (5.00)
 Granted.....................................     2,790,240               5.63
 Exercised...................................      (440,755)             (5.00)
                                              --------------       -------------
Options and warrants outstanding 
  at December 31, 1997.......................     2,797,938               5.52
Granted......................................     1,399,511               2.33
Canceled.....................................      (576,188)             (4.31)
                                              --------------       -------------

Options and warrants outstanding 
  at December 31, 1998.......................  $  3,621,261         $     3.90
                                              --------------       -------------
                                                                   
Options and warrants exercisable 
  at December 31, 1998.......................  $  3,480,845         $     4.06
                                              --------------       -------------

Information  relating  to stock  options  and  warrants  at  December  31,  1998
summarized by exercise price are as follows:

                          Outstanding                         Exercisable
Exercise                Weighed Average                     Weighed Average
 Price      ----------------------------------------   -----------------------  
 Share       Shares     Life (Year)   Exercise Price    Shares   Exercise Price
----------  --------    -----------   --------------   --------  --------------
 $1.25      325,000        4.3            $1.25         325,000      $1.25
 $1.50      664,094        9.7            $1.50         664,094      $1.50
 $4.38       75,000        9.5            $4.38               -      $4.38
 $4.44      250,000        4.3            $4.44         250,000      $4.44
 $5.00      230,167        8.8            $5.00         164,751      $5.00
 $5.50    1,822,500        3.5            $5.50       1,822,500      $5.50
 $8.25      114,500        3.5            $8.25         114,500      $8.25
 $9.08      140,000        3.5            $9.08         140,000      $9.08
           ---------    ----------   --------------   ----------  --------------
          3,621,261        5.2            $3.90       3,480,845      $4.06
          ==========    ==========   ==============   ==========  ==============


                                      F-25
<PAGE>


NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Non-employee Directors' Options (Continued)

All stock options  issued to employees  have an exercise price not less than the
fair market value of the  Company's  common  stock on the date of grant,  and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related  compensation  expense  recorded in the Company's  financial
statements.  Had compensation cost for stock-based  compensation been determined
based on the fair value at the grant  dates  consistent  with the method of SFAS
123,  the  Company's  net  income  and  earnings  per share for the years  ended
December  31,  1997 and 1998  would have been  reduced to the pro forma  amounts
presented below:

                                                   1997              1998
                                             ---------------    ---------------

  Net loss
    As reported............................. $ (2,946,056)      $ (4,870,989)
    Pro forma............................... $ (3,335,419)        (5,374,773)

  Basic and diluted loss per share
    As reported............................. $      (0.55)             (0.68)
    Pro forma............................... $      (0.62)             (0.75)

The fair value of option grants is estimated on the date of grants utilizing the
Black-Scholes option-pricing with the following weighted average assumptions for
in 1997,  expected life of 10 years:  expected  volatility of 38.06%,  risk-free
interest rates of 6.0%, and a 0% dividend  yield.  The fair value was calculated
in 1998 using the following  assumptions:  expected  life of 10 years,  expected
volatility of 17.59%,  risk-free  interest rates of 6%, and a 0% dividend yield.
The weighted average fair value at date of grant for options granted during 1997
and 1998 approximated $1.71 and $0.87 per option, respectively.

Due to the fact that the  Company's  stock option  programs vest over many years
and  additional  awards are made each year,  the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of FASB No. 123
been applicable to all years of previous option grants.

                                      F-26
<PAGE>


NOTE 6 - SIGNIFICANT VENUES AND CONCENTRATION OF CREDIT RISK

Revenues  from  certain  venues  comprised  10% or more of total  revenues.  The
following  table  shows the  percentage  of  revenues  of these  venues to total
revenues.

                                               Years ended December 31,
                                           -------------------------------
                                              1997                1998
                                           ------------        -----------

     Venue A..............................      25 %               12 %
     Venue B..............................      28                 15
     Venue C..............................      10                  6
     Venue D..............................       -                 11
                                           ------------        -----------
                                           $    63 %           $   44 %
                                           ============        ===========

NOTE 7 - NOTES RECEIVABLE FROM OFFICERS

In March 1997,  the Company agreed with its  Underwriter,  that it would neither
loan nor  advance any sums to or on behalf of Mr.  Stuart  other than those sums
advanced to Mr.  Stuart  from  December  31,  1996  through the date of the IPO,
without the Underwriter's  prior written consent.  The Company also received the
authorization  from the  Underwriter,  to  advance  John  Stuart  up to  another
$150,000 for settlement of certain litigation pending against Mr. Stuart for his
involvement in the Legends in Concert, Hawaii show.

On October 23, 1997 and  November  17,  1997,  the Company  obtained the written
consent of the Underwriter to advance the CEO the amounts totaling $100,000 (the
"Advances"),  which  advances bear  interest at a rate of 10% per annum,  mature
December 31, 1998 and are evidenced by promissory  notes  executed by the CEO in
favor of the Company.

At December  31,  1997,  the notes  receivable  balance was  $136,194  including
accrued interest income of $1,041. The difference ($35,153) between the December
31, 1997 ending balance ($136,194) and the note receivable were personal charges
($17,007)  to the  corporate  credit card and  $18,146 in show fees  received by
Stuart on behalf of the Company.  Mr. Stuart has since repaid the $35,153 to the
Company.  The Company has agreed with its Underwriter not to loan or advance any
further sums to Mr. Stuart, without the prior consent of the Underwriter.  As of
December 31, 1998, the amount due from the Chief Executive Officer was $8,306.

During 1998,  the Company  advanced  $63,213 to an officer of the Company.  This
advance is payable  April 12, 1999 and bears  interest at 8%. For the year ended
December 31,  1998,  $3,803 of interest  was accrued and added to the balance of
the advance. The note is secured by the officer's 40,532 shares of common stock.
In April 1999,  the Company  extended the maturity  date of the note to December
31, 1999.

On April 16, 1999,  the officer sold to the CEO 40,532  shares of the  Company's
common stock. In exchange,  the CEO agreed to assume the officer's  $60,798 note
in favor of the Company, with recourse only to the 40,532 shares of common stock
purchased from the officer.  The officer  executed a new promissory  note in the
principal  amount of  $7,472,  which was  subsequently  forgiven  as part of the
officer's employment restructuring.

                                      F-27
<PAGE>

NOTE 8 - EXPENSES AT DISCONTINUED LOCATION

The Company decided to close its Legends production in Daytona Beach, Florida on
December  31,  1997.  As part of the closing,  the Company  incurred  additional
expenses of $489,285 during 1997.  Additionally,  in 1998 the Company  wrote-off
$443,096 in net assets.  The  Company  has plans to transfer  all the  remaining
furniture and equipment at the Daytona Beach facility to other  locations  which
have performances in 1999.

NOTE 9 - INTEREST EXPENSE

As more fully discussed in Note 3, the conversion of the Debentures  resulted in
a one time,  non-recurring,  interest  expense charge of $194,228 and the Bridge
Financing  resulted $366,000 original issue discount and interest expense during
1997.

NOTE 10 - INCOME TAXES

Income taxes in the statement of operations consists of the following:

                                                1997            1998
                                           -------------   -------------

   Current
      Federal..............................$          -    $
      State................................       6,673
                                           -------------   --------------
                                           $      6,673    $
                                           =============   ============== 

Deferred taxes are as follows:

                                               Years ended December 31,
                                           ------------------------------
                                                 1997           1998
                                           -------------   --------------
    Deferred tax assets
      Litigation accrual.................. $     21,080    $     74,480
      Allowance for doubtful accounts.....            -          94,872
      Impairment loss.....................            -         155,464
      Start-up costs......................            -         222,938
      Net operating loss carryforward.....      848,426       2,399,773
                                           -------------   --------------
   Total deferred tax assets.............       869,506       2,947,527
   Less: Valuation allowance.............      (869,506)     (2,947,527)
                                           -------------   --------------
                                           $           -              -
                                           =============   ==============
                                         

The net deferred tax assets have a 100% valuation allowance as management cannot
determine  if it is more  likely than not that the  deferred  tax assets will be
realized.


                                      F-28
<PAGE>

NOTE 10 - INCOME TAXES (Continued)

Income taxes in the statement of operations  differs from the amount computed by
applying  the U.S.  Federal  income tax rate (34%)  because of the effect of the
following items:

     Years ended December 31,                    1997           1998
  ------------------------------              ---------       ----------    
U.S. Federal statutory rate 
 applied to pretax income (loss).............$(999,390)     $(1,641,139)
Permanent differences........................    5,663          144,149
State income taxes, net of Federal benefit...    2,269                -
Tax effect of unrecognized net 
 operating loss carry forward................  998,131        1,496,990
                                             ----------       ----------
                                             $   6,673        $   0
                                             ==========       ==========

At December  31,  1998,  the Company  had Federal and state net  operating  loss
carryforwards of approximately  $3,138,544 and $6,315,193,  respectively,  which
expires in 2018.  Under  Federal Tax Law IRC Section  382,  certain  significant
changes in ownership that the Company is currently  undertaking may restrict the
future utilization of these tax loss carryforwards.

NOTE 11 - BUSINESS ACQUISITIONS

Interactive Purchase and Disposition

On November 1, 1996,  On Stage entered into a Common Stock  Purchase  Agreements
with Interactive  Events,  Inc.  ("Interactive"),  which created and implemented
interactive  events for  parties and  conventions.  On Stage  issued  19,284 and
11,020  shares of its common  stock on  November  1, 1996 and  November 1, 1997,
respectively,  as  payment.  On Stage  recorded  $129,180  as the  excess of the
purchase price over the net assets acquired,  which was being amortized over ten
years. At December 31, 1998, On Stage  determined there was an impairment in the
value of the  excess of the  purchase  price  over the net  assets  acquired  in
connection with the Interactive purchase and wrote off the remaining unamortized
balance of $102,131.

On February 23, 1999, the Company entered into a Common Stock Purchase Agreement
with Richard S. Kanfer,  the Company's former Vice President of Sales and former
owner of  Interactive  Events,  Inc.  ("Kanfer"),  pursuant to which the Company
agreed to reconvey all of the assets of Interactive  Events,  Inc. to Kanfer, in
exchange for 30,304 shares of the Company's  Common Stock, a non-plan  option to
purchase 15,000 shares of the Company's  Common Stock and 19,835 incentive stock
options to purchase  shares of the  Company's  Common  Stock.  In addition,  the
Company and Kanfer  agreed to  mutually  release  each other from any  liability
arising out of the original purchase of Interactive  Events, Inc. by the Company
from Kanfer and any claim relating to Kanfer's  subsequent  employment  with the
Company.  Contemporaneous therewith, the Company and Kanfer entered into a right
of representation agreement, pursuant to which the Company granted to Kanfer the
right to exclusively  represent its "Legends"  production in designated areas in
return  for a  division  of the gross  proceeds  generated  from any  production
thereof.

                                      F-29
<PAGE>

NOTE 11 -  BUSINESS ACQUISITION (continued)

Gedco USA, Inc. Acquisition

On March 13, 1998, the Company  completed its acquisition of certain assets from
Gedco USA, and its affiliates for a purchase price of $14,000,000, consisting of
$11,500,000 in cash and 595,238 shares of common stock valued at $2,500,000 (the
"Gedco Acquisition").

Included in the Gedco Acquisition were substantially all of the income producing
assets and  associated  real property of Orlando  Entertains  and LA Entertains,
consisting  of King Henry's  Feast,  Blazing  Pianos piano bar, the Fort Liberty
shopping  complex that includes a Wild Bill's Dinner  Theater,  each of which is
located in greater  Orlando,  Florida,  and a second Wild Bill's Dinner  Theater
located in Buena Park,  California.  Gerard  O'Riordan,  President of Gedco USA,
Inc., joined the Company as President of On Stage Theaters, Inc., a wholly owned
subsidiary  of the Company that manages the acquired  dinner  theaters and piano
bar as well as other selected theaters.

The Company funded the cash portion of the purchase price and  transaction  fees
and expenses  with $12.5  million of mortgage  financing  from  Imperial  Credit
Commercial Mortgage Investment Corp. ("ICCMIC") (see Note 3).

The  components  of the  purchase  price and its  allocation  to the  assets and
liabilities are as follows:

                                                         Amount
                                                      -------------
Purchase price:
  Liabilities assumed............................... $    986,044
  Issuance of 595,238 restricted shares 
  of common stock...................................    2,500,000
                                                      -------------
                                                        3,486,044
                                                      -------------
Cost of acquisition incurred........................    1,645,874
 Cash paid..........................................   11,500,000
                                                      -------------
                                                     $ 16,631,918
                                                      =============

                                      F-30
<PAGE>

NOTE 11 -  BUSINESS ACQUISITION (continued)

Cash paid for the  purchase  of Gedco,  USA,  Inc.  net of cash  received  is as
follows:

                                                          Amount
                                                      -------------

Cash paid to sellers................................ $ 11,500,000
Acquisition costs...................................    1,645,874
                                                     --------------
                                                       13,145,874
Less cash received..................................     (383,444)
                                                     --------------
                                                     $ 12,762,430
                                                     --------------

The costs of acquisition  increase primarily relates to the lenders  origination
fee of $750,000, legal fees of $240,000,  financing fees of $100,000,  recording
fees of $100,000, and accounting fees of $125,000.

The  acquisition  was accounted  for as a purchase and the assets  acquired were
recorded  at  a  fair  market  value.  The  building  and  equipment  are  being
depreciated over twenty and three years,  respectively,  under the straight-line
method.  The costs of  acquisition  incurred  primarily  relates to the  lenders
origination fee of $750,000, legal fees of $240,000, financing fees of $100,000,
recording fees of $100,000,  and accounting fees of $125,000.  The allocation of
the purchase price was as follows:

                                                         Amount
                                                    ---------------
 Cash.............................................. $    383,444
 Inventory.........................................      120,084
 Prepaid expenses..................................      157,516
 Land..............................................   11,275,507
 Building..........................................    3,214,740
 Equipment.........................................      730,627
 Deferred financing acquisition expenses...........      750,000
                                                    ---------------
 Deferred financing acquisition expenses........... $ 16,631,918
                                                    ---------------
NOTE 11 - BUSINESS ACQUISITIONS (Continued)

The assets  acquired  and  liabilities  assumed were  transferred  to either the
Company's  wholly-owned  subsidiary,  On Stage  Theaters,  Inc., or wholly owned
subsidiaries of On Stage Theaters, Inc., concurrent with the acquisition.

The Gedco  acquisition  was  accounted  for as a purchase and the  operations of
Gedco  are  included  in  the  Company's  operations  as  of  the  date  of  the
acquisition.

The  unaudited  pro forma  results of  operations  presented  below  reflect the
Company's  operations as though the acquisition had taken place at the beginning
of  each  period  presented.  The pro  forma  results  have  been  prepared  for
comparative purposes only, and are not necessarily indicative of what the actual
result of  operations  would  have been had such  acquisitions  occurred  at the

                                      F-31
<PAGE>

NOTE 11 -  BUSINESS ACQUISITION (continued)

beginning of the periods presented, or what results of operations will be in the
future.

                                              Years ended December 31,
                                          -------------------------------
                                               1997              1998
                                          -------------     -------------

     Revenues............................ $  29,601,646     $  30,328,361
     Operating income (loss).............       618,756        (3,003,214)
     Net loss............................    (1,922,522)       (4,758,688)
     Basic and diluted loss per share....          (.30)            (0.65)
     Basic and diluted average number 
      of common shares outstanding.......     6,396,079         7,307,062

Calvin Gilmore Productions, Inc. Acquisition

On June 30, 1998, the Company  completed its  acquisition of certain assets from
Calvin Gilmore Productions,  Inc. ("CGP"), an affiliate of Fox Family Worldwide,
Inc. for a purchase  price of  $1,000,000  in cash and 206,612  shares of common
stock valued at $723,142 (the "Fox Acquisition").

Included in the Fox Acquisition were substantially all of CGP's income producing
assets and  associated  real and personal  property in the greater Myrtle Beach,
South Carolina area, consisting of the fee simple purchase of The Surfside Beach
Theater,  which the  Company  had leased  from CGP for its  presentation  of its
flagship Legends in Concert  production since 1995, and a leasehold  interest in
The Eddie Miles Theater.

The Company funded the cash portion of the purchase price and  transaction  fees
and expenses with $1,100,000 million of mortgage financing from ICCMIC (see Note
3).


NOTE 12 - IMPAIRMENT OF TORONTO ASSETS

The Company decided to restructure its Legend's Production in Toronto, Canada on
December 31, 1998. As part of the  restructuring,  the Company had an impairment
of net assets and wrote off net assets of $409,000.

                                      F-32
<PAGE>

NOTE 13 - SEGMENT INFORMATION

The following  information is presented in accordance  with SFAS No. 131,  which
was adopted by the Company in the fourth quarter of 1998.


The Company  derives its net revenues from six reportable  segments.  The Casino
Segment  ("Casinos")  primarily  sells live  theatrical  productions  to Casinos
worldwide for a fixed fee. In addition, this segment also operates the Company's
Legends show at the Imperial Palace.  The Theaters Segment  ("Theaters") owns or
rents live theaters and dinner  theaters in urban and resort  tourist  locations
primarily in the United States.  This segment derives its revenues from the sale
of  tickets  and food  and  beverage  to  patrons  who  attend  live  theatrical
performances  at  these  venues.   The  Events  Segment  ("Events")  sells  live
theatrical productions to commercial clients, which include corporations,  theme
and amusement  parks and cruise lines for a fixed fee. The  Merchandise  Segment
("Merchandise")  sells merchandise and souvenir  photography products to patrons
who  attend  On   Stage's   productions.   The   Production   Services   Segment
("Production")  sells  technical  equipment and services to commercial  clients,
however, this segment's primary focus is to technically support all of the other
divisions.  The On Stage Entertainment  segment is responsible for the corporate
and finance portion of the Company's ("OSE")operations.

The  accounting  policies of the reportable  operating  segments are the same as
those described in the Summary of Accounting Policies.  The Company's management
evaluates the  performance  of its operating  segments  based upon the profit or
loss from operations.

The  Company's  reportable  segments are strategic  business  units because each
business unit services a different market or performs a specialized  function in
support of a given market.

                                      F-33
<PAGE>

NOTE 13 - SEGMENT INFORMATION (Continued)

The following table sets forth the segment profit/(loss) and asset information:

                             Year Ended December 31, 1998
                  -------------------------------------------------
                                                                           
                       Casinos       Events      Merchandise      Theaters  
                       ---------    ----------   -----------    -----------

Revenues from 
 external customer... $6,977,020     $2,554,942  $1,243,451     $17,064,071

Interest expense..... $    4,712     $    1,292  $      193     $ 1,354,370
 
Depreciation
  and amortization... $  268,780     $  140,455  $    5,055     $ 1,086,822

Segment profit (loss) $1,763,584     $ (223,386) $  252,561     $(2,463,460)

Segment assets....... $  828,652     $  439,549  $   53,606     $20,238,655

Additions to
 long-lived assets... $  327,365     $  178,341  $   43,318     $   643,860



                          Year Ended December 31, 1998
                                  (continued)
                -------------------------------------------------
                                                        Total      
                        Production        OSE         Consolidated 
                        ----------     ----------     ------------ 
Revenues from 
 external customer... $    7,992     $        -       $ 27,847,476

Interest expense..... $        -     $   194,310      $  1,554,877
 
Depreciation
  and amortization... $   47,705     $   260,709      $  1,806,526

Segment profit (loss) $ (558,204)    $(3,642,084)     $ (4,870,989)

Segment assets....... $  571,692     $ 1,957,065      $ 24,089,219   

Additions to
 long-lived assets... $   60,001     $   840,450      $  2,093,335

                                      F-34
<PAGE>

NOTE 13 - SEGMENT INFORMATION (Continued)

                             Year Ended December 31, 1997
                  -------------------------------------------------
                                                                           
                       Casinos       Events      Merchandise      Theaters  
                       ---------    ----------   -----------    -----------

Revenues from 
 external customer... $6,326,952     $2,552,440  $  454,842     $ 6,391,840

Interest expense..... $        -     $     (297) $        -     $         -
 
Depreciation
  and amortization... $  141,275     $    6,221  $        -     $   323,336

Segment profit (loss) $2,048,288     $  196,550  $  315,153     $  (281,821)

Segment assets....... $  642,428     $  196,388  $        -     $   865,202

Additions to
 long-lived assets... $  248,688     $   45,093  $        -     $  724,232


                          Year Ended December 31, 1997
                                  (continued)
                -------------------------------------------------
                                                        Total 
                        Production        OSE         Consolidated 
                        ----------     ----------     ------------ 

Revenues from 
 external customer... $        -     $        -       $ 15,726,074

Interest expense..... $        -     $   834,630      $    834,333
 
Depreciation
  and amortization... $        -     $   511,348      $    982,180

Segment profit (loss) $ (194,694)    $(4,188,526)     $ (2,105,050)

Segment assets....... $  494,949     $ 4,278,296      $  6,477,263 

Additions to
 long-lived assets... $  120,868     $   156,058      $  1,294,939


                                      F-35
<PAGE>
                       

NOTE 14 - SUBSEQUENT EVENTS

Note Payable to Principal Stockholder

On March 4, 1999,  the Board of Directors  approved the acceptance of a $100,000
loan from John W. Stuart,  the Company's  Chairman,  Chief Executive Officer and
Principal  Stockholder  (the "Stuart  Loan").  The Stuart Loan is evidenced by a
promissory  note bearing twelve percent (12%)  interest,  which matures one year
from the date of issuance,  or on March 3, 2000. In consideration for the Stuart
Loan,  the Board of  Directors  approved  the  issuance  of 100,000  warrants to
purchase shares of the Company's common stock at a strike price of $1.00,  which
was market  price on the  closing  date of the Stuart  Loan.  Additionally,  the
Company agreed to pay Mr. Stuart's legal fees associated with this transaction.

On April 5, 1999, the Company entered into an agreement with John W. Stuart, the
Company's  Chairman,  Chief Executive  Officer and Principal  Stockholder  ("Mr.
Stuart"),  pursuant  to which  Company  agreed to accept a bridge  loan from Mr.
Stuart in an amount up to  $500,000  in return  for a one year  promissory  note
bearing 12% interest, a 5% origination fee and one warrant to purchase shares of
the Company's  Common Stock for each $1.00  invested.  To date,  the Company has
accepted $200,000 of the potential $500,000 from Mr. Stuart.

On April 16,  1999,  Mr.  Sidhu  agreed to  restructure  his current  employment
agreement with the Company in an attempt to assist the Company with facilitating
its restructuring plan.  Pursuant to the terms of his employment  restructuring,
Mr. Sidhu agreed to forego any rights he has to his current employment,  option,
and  confidentiality  agreements,  in  return  for  the  following:  (1)  a  new
employment  agreement with the Company which he will be an "at-will"  consultant
at a flat rate of $50.00 per hour; (2) a new option  agreement which affords him
the right to  purchase  140,000  shares of On Stage's  common  stock at a strike
price of $1.50 per share; (3) a reimbursement  of $25,000 for unpaid  insurance,
car  allowances and expenses;  (4)  $17,887.25  for all his accrued,  but unused
vacation  pay;  (5) all  earned,  but  unpaid  salary  under his old  employment
agreement; and (6) forgiveness of a promissory note in the amount of $7,472 held
in favor of the  Company.  Additionally,  the  Company  agreed to pay Mr.  Sidhu
$25,000 within ninety (90) days of this restructuring,  in consideration for Mr.
Sidhu's execution of a new confidentiality  and  non-competition  agreement with
the Company.

On April 16, 1999,  Mr. Sidhu sold Mr.  Stuart  40,532  shares of the  Company's
common stock. In exchange,  Mr. Stuart agreed to assume Mr. Sidhu's $60,798 note
in favor of On Stage,  with  recourse  only to the 40,532 shares of common stock
purchased  from Mr.  Sidhu.  Mr.  Sidhu  executed a new  promissory  note in the
prinicipal  amount of $7,472,  which was  subsequently  forgiven  as part of Mr.
Sidhu's employment restructuring.


                                      F-36

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