SECURITIES AND EXCHANGE COMMISSION

                              REPORT ON FORM 10-KSB

          |X|  Annual  Report  pursuant  to  Section  13 or  15(d)  of
               Securities Exchange Act of 1934

          For the fiscal year ended December 31, 1996

          |_|  Transition  Report  pursuant  to Section 13 or 15(d) of
               The Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 0-23136

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

           Delaware                                             62-1536550
(State of or other jurisdiction of                         (IRS Employer Identi-
incorporation or organization)                             fication No.)

11150 Santa Monica Boulevard
Los Angeles, California                                           90025
(Address of Principal Executive Office)                         (Zip Code)

Registrant's telephone number, including area code: 310/268-2200

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

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $.001 Per Share
                                (Title of Class)

                   Preferred Stock, Par Value $.001 Per Share
                                (Title of Class)

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of the Regulation S-B is not contained in this form, and no disclosure  will
be contained,  to the best of  Registrant's  knowledge,  in definitive  proxy or
information  statements  incorporated  by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.  _X_

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     Issuer's revenues for its most recent fiscal year were $8,059,415.

     On April 7, 1997, the aggregate market value of the voting common stock
held by non-affiliates of the Registrant was $9,340,623 based upon the average
of the closing bid and asked price of such common stock as of April 7, 1997,
which was $.60938.

     The number of shares outstanding of the Registrant's common stock, as of
April 7, 1997 was 15,328,328.

     On April 7, 1997, the aggregate market value of the voting preferred stock
held by non-affiliates of the Registrant was $816,537 based upon the average of
the closing bid and asked price of such preferred stock as of April 7, 1997,
which was $3.4375.

     The number of shares outstanding of the Registrant's preferred stock, as of
April 7, 1997 was 237,538.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated by reference in Part III of
this Form 10-K to the extent stated herein. Except with respect to information
specifically incorporated by reference in this Form 10-K, the Proxy Statement is
not deemed to be filed as a part hereof.


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

     Country Star Restaurants, Inc. (the "Company"), which was formed in May
1993, develops, constructs, owns and operates country music theme restaurants
combining high quality, moderately priced food with a casual, family-oriented
environment. World renowned rodeo personalities including Ty Murray, Charmayne
James and Joe Beaver and country music television personalities Lorianne Crook
and Charlie Chase serve as celebrity representatives and spokespersons for the
Company and endorse the Country Star Restaurants. The Company is also currently
seeking country music recording artists to serve as celebrity representatives.

     The first Country Star(R) Restaurant opened in August 1994 in Hollywood,
California adjacent to Universal Studios Hollywood and the Universal Citywalk
development, a major tourist attraction. Country Star Hollywood features an
exciting, entertaining dining experience, including an extensive display of
country music memorabilia and artifacts, approximately 100 video monitors, 10
audio listening posts, and a number of interactive audio-video kiosks. The menu
features moderately priced American and country-style food such as ribs, chili,
chicken, burgers, salad, pizza, fish and desserts, which was developed to be
consistently reproducible domestically and internationally. Country Star
Hollywood also sells a variety of merchandise with the Country Star logo,
including casual clothing, food products and other related items.

     In recent years theme restaurants have gained increasing popularity, as a
number of such restaurants featuring a variety of different themes have opened.
The two most popular and well known restaurants of this genre are Planet
Hollywood(R) and Hard Rock Cafe(R), both of which combine an entertainment
component with a casual dining atmosphere. Aside from enhancing the dining
experience, the entertainment component also provides an additional revenue
stream, predominantly from merchandise sales. Patrons of theme restaurants have
evidenced a willingness to purchase souvenir T-shirts, hats, mugs, and other
items bearing the logo and reflecting the lifestyle of the particular theme
restaurant. These retail sales are typically at higher profit margins than food
and beverage sales, inclusive of labor costs.

     The Company believes that its country music theme provides a distinctly
American experience which, combined with its casual, high-quality dining in a
state-of-the-art multimedia environment, is a format with wide demographic
appeal. The Company believes that the country music theme is an under-exploited
segment of


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quality dining in the restaurant industry and will fill a niche in the casual
dining segment of the restaurant industry, and therefore represents an
attractive opportunity for the Company.

     Calendar year 1996 was a difficult one for the Company. The Company's
strategy entering 1996 was to develop and operate three flagship Country Star
Restaurants in key locations and then to replicate the Country Star concept in a
limited number of smaller restaurants that would be less expensive to develop
and construct. In accordance with this strategy, the Company opened two
additional flagship restaurants: Country Star Las Vegas commenced operations in
July, 1996 and Country Star Atlanta commenced operations in October, 1996. No
plans for opening any other restaurants have been finalized.

     Unanticipated financial problems have arisen with respect to both the Las
Vegas and Atlanta restaurants. Operating expenses at both sites have
substantially exceeded budget. In addition, the Atlanta restaurant suffered from
substantial construction cost overruns and a delayed opening which prevented the
restaurant from operating during the 1996 Summer Olympics, which were held in
Atlanta. By early 1997, as a result of the mounting losses at the Las Vegas and
Atlanta restaurants, management determined that a major overhaul of corporate
strategy was required.

     The most significant step taken was a change of management effected on
February 12, 1997, in which Dan Rubin, an investor in the Company, became Chief
Executive Officer and President. Immediately prior to Mr. Rubin assuming office,
a new Board of Directors was appointed to manage the Company. (See Management's
Discussion and Analysis of Operations - Capital Resources, February 12, 1997
Financing and Change in Control, for a description of the change in management
and the financial terms under which Mr. Rubin made an additional investment in
the Company.)

     In order to stem the rising operating losses and put the Company on a
financially solvent course, management has taken a number of interim and
permanent measures.

     First, management has temporarily closed the Atlanta restaurant with a
projected re-opening during May, 1997, and a gala re-opening party planned for
the week of July 4, 1997. Although the restaurant was completed and fully
staffed in late 1996, the restaurant has realized extremely limited customer
revenues. Management determined that the continued operation of the restaurant
as an under utilized establishment would only hurt the restaurant's
opportunities for long term success. Management intends that the re-opening be
accompanied by suitable publicity and news coverage in order to attract customer
interest. Management deemed it important to close the restaurant rather than
allow it to develop an unfavorable reputation in Atlanta.


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     Second, the Company has shifted the theme of its restaurants from "country
music" to "country." Although the country music recording stars that previously
endorsed the Company have not renewed their agreements with the Company, the
Company is seeking new country music stars to serve as celebrity representatives
and the Company continues to enjoy the endorsements of country music television
personalities such as Lorianne Crook and Charlie Chase. In addition, the Company
has obtained as celebrity representatives and spokespersons many representatives
of the rodeo circuit, including Ty Murray, the world rodeo champion. The
Company's three restaurants continue to emphasize their country music roots
through extensive displays of country music memorabilia and artifacts, video
monitors, listening posts and interactive audio-video kiosks for use by patrons.
Management plans to increase the use of live entertainment at all of its
restaurants in order to attract additional customers.

     Third, management has determined that the best strategy for expansion will
be through joint ventures and licensing arrangements under which additional
Country Star Restaurants could be opened without the Company being required to
incur expensive construction, development and pre-opening costs. Management has
identified a number of publicly held and private companies that have indicated
strong interest in working with Country Star on a joint venture or licensing
basis.

     Fourth, management has determined that the Company will not be able to pay
existing trade creditors of the Company in full and also realize its strategic
goals. Accordingly, the Company has made a written offer to all creditors to
settle their outstanding claims by accepting 40(cent) for every dollar owed to
such creditors by Country Star. The Company has agreed that it will be bound by
this offer provided that at least 80% (based on the amount of the claims) of the
creditors holding claims agree to this settlement. Management has pointed out to
its creditors that the proposed settlement is far more favorable to them than
the alternative of the Company filing a voluntary bankruptcy proceeding. Based
on conversations with a number of the creditors, management believes that there
is a high likelihood of success of the offer being accepted by the required
creditors holding 80% of the claims against the Company. (See Item 3,
"Litigation.")

     Management believes that if the foregoing strategies can be effectively
implemented, the Company can be made profitable and continue to expand.

Country Star Hollywood

     Country Star Hollywood is approximately 18,000 square feed in size, 4,000
of which is an enclosed outdoor patio, and has approximately 325 seats inside
the restaurant and approximately 200 seats outside on an enclosed patio. One of
Country Star Hollywood's dining areas also doubles as a fully operational


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stage which is prewired for stage monitors and microphones, has theatrical
lighting and two television cameras. Country Star Hollywood offers a wide range
of moderately priced food in the Company's distinctive, exciting, interactive
country music environment. Entrance to Country Star Hollywood is through a
forty-two foot-high computer-driven electronic sign in the form of a jukebox in
front of which the Country Star line dancers regularly perform. Country Star
Hollywood's menu features basic, but varied, American fare, such as ribs, chili,
chicken, burgers, salad, pizza, fish and desserts and has a separate bar area
and a number of separate dining areas, all of which feature full waiter and bar
service and revolve around various country music artifacts and/or artists.
Country Star Hollywood is designed to allow diners to be surrounded by the
various artifacts, memorabilia, photographs and audio-visual materials. Country
Star Hollywood's extensive display of artifacts relating to country music and
its heritage is combined with a state-of-the-art multimedia environment.

     Country Star Hollywood features interactive audio-visual kiosks, which can
be accessed by a touchscreen, offering short biographies, specially recorded
video interviews and fan club information with respect to certain of the
Company's "Country Star Celebrities" and "Country Star Spokespersons" (who are
Lorianne Crook and Charlie Chase). In addition, audio-video kiosks will be
dedicated to country celebrities such as Ty Murray, Charmayne James and Joe
Beaver showcasing recent videos by such Celebrities. Country Star Hollywood also
features approximately 100 video monitors and 10 audio listening posts located
throughout the restaurant. The audio listening posts, which can be accessed by
listening to an attached headset, are dedicated to different record labels and
feature a recently released country music CD by a recording artist who is signed
to the particular label.

     Country Star Hollywood also has a merchandise store that sells a variety of
casual clothing such as T-shirts, sweat shirts, jackets and baseball caps
bearing the Country Star Restaurant logo, other Country Star logo merchandise
such as coffee mugs, belt buckles, tote bags, pins, the Company's food products
and other selected merchandise. The Company is beginning to emphasize the sale
of higher volume and higher gross profit merchandise.

Country Star Las Vegas

     Country Star Las Vegas is one of the largest free standing upscale dining
establishments in Las Vegas. Country Star Las Vegas is an approximately 20,000
square foot, 500 seat, freestanding restaurant located on the "strip" in Las
Vegas near the intersection of Las Vegas Boulevard South and Harman Avenue. The
site is situated between the Boardwalk Hotel and Casino development, and the
Mirage Resorts, Incorporated's proposed


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Bellagio Hotel and Casino development, presently scheduled to open in early
1998. Within the immediate area of Country Star Las Vegas there are over 30,000
hotel rooms. The Company believes that Las Vegas' strong tourist economy and
growing population represents a market that will be particularly receptive to
the Company's country music theme dining concept. See Part II - Item 6
"Management's Discussion and Analysis Liquidity and Capital Resources -
Development Financing."

     Country Star Las Vegas, although based on the Country Star Hollywood model,
has more advanced technology for video and audio presentations and productions.
This location has also enjoyed more appearances by country music and rodeo
celebrities than the Los Angeles restaurant. Since the installation of Dan Rubin
as President on February 12, 1997, Country Star Las Vegas has undergone an
overhaul of restaurant management and operating procedures. All costs,
including, but not limited to event labor, management labor, food and
merchandise purchasing, have been put under strict control, and brought within
acceptable industry standards. The 1996 year end and first quarter 1997
operating losses will not reflect the impact of the changes made by current
management.

Country Star Atlanta

     Country Star Atlanta is a 21,000 square foot freestanding restaurant on two
floors, 2,000 square feet of which are an outdoor patio. Country Star Atlanta is
located in the heart of Buckhead. With approximately 450 seats inside and 100
seats on the patio, Country Star Atlanta is one of the largest restaurants in
the Southeastern United States. Buckhead is an affluent, upscale section of
Atlanta that features numerous dining and retail facilities and is in itself a
destination.

     Country Star Atlanta will be the flagship for future Country Star
Restaurants. It provides all of the entertainment features of the other Country
Star Restaurants along with the technology for video and audio presentations and
productions. This restaurant will emphasize entertainment and "night life"
recreation.

The Company's Strategy

     The Company's business strategy is to expand its operations by replicating
the Company's country music dining and entertainment concept. With the openings
of Country Star Las Vegas and Country Star Atlanta, the Company believes that,
along with Country Star Hollywood, it has established three flagship locations
in major tourist and commercial markets. In replicating the Country Star
concept, the Company intends to establish a limited number of additional
flagship Country Star Restaurants in certain domestic and international cities.
It is anticipated however, that many of the future Country Star


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Restaurants, although modeled after its flagship Country Star Restaurants, will
be smaller and less expensive to construct. The Company will seek to leverage
the recognition and publicity achieved by its flagship Country Star Restaurants
to support its smaller Country Star Restaurants. The Company believes that the
reduced scale of these smaller Country Star Restaurants will result in lower
overall costs to develop, construct and open.

     By expanding its operations and building additional Country Star
Restaurants, the Company is seeking to increase its name brand recognition and
establish a secondary meaning in the marketplace for Country Star Restaurants.
The Company believes that this will have a favorable impact on the Company's
business operations, particularly with respect to merchandise sales. By
emphasizing the high quality of its food and offering an exciting entertainment
dining experience, the Company believes that it will be able to appeal to a
broad consumer base, and specifically those individuals who patronize theme
restaurants.

Restaurant Operating Systems

     To ensure the quality and consistency of the Company's food items, the
Company has an executive chef who has oversight responsibility for the menu and
has taken measures to distinguish and ensure the high quality of the Country
Star Restaurant's food. For example, to ensure the high quality and consistency
of the Company's various barbecued rib entrees, the Company has developed its
own line of barbeque sauces which is produced at a centralized location and
purchases all of its ribs from one quality Midwestern packing house. The Company
negotiates directly with large, centralized suppliers of various food and
beverage products to ensure consistent quality, freshness and to obtain
competitive prices. Kitchens in the Country Star Restaurants are designed for
efficiency of work flow and to minimize the amount of kitchen space required.

     The Company's sophisticated, state-of-the-art multimedia systems located
throughout its restaurants are operated by the Company's specialized software,
which can be replicated readily for other Country Star Restaurants.

     The Company has a training program for all Country Star Restaurant
personnel and a uniform standard of operations relating to food and beverage
preparation, maintenance of facilities and conduct of personnel.

Site Selection

     The choice of site location for each Country Star Restaurant is extremely
important to the potential success of the particular establishment. As a
consequence, prior management used to devote a significant amount of time and
capital in analyzing each prospective site. A variety of factors were considered
in the


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site selection process, including, but not limited to, local demographics,
tourism, site visibility and accessibility, pedestrian and vehicular traffic
flow, proximity to significant generators of potential customers, such as retail
centers, convention centers, office complexes, hotels and entertainment
facilities, such as stadiums, arenas and theaters.

     Present management will rely on third parties and commissioned brokers for
site recommendations.

Artifacts and Memorabilia

     The Company independently acquires and/or leases artifacts and memorabilia
relating to country music and its heritage from a variety of sources, such as
country music artists Reba McEntire, Vince Gill, Tracy Lawrence, Travis Tritt,
Roy Rogers and Dale Evans, and clothing designer Nudie and Manuel Cueves, all of
which are currently on display at Country Star Hollywood.

     The Company has been able to readily locate and obtain country music
artifacts and memorabilia at a reasonable expense from a variety of sources,
including recording companies, artists and others involved in country music and
is not dependent on any one source for locating and obtaining country music
artifacts and memorabilia. The Company believes this will continue to be true
for the foreseeable future.

Competition

     The casual dining restaurant industry is intensely competitive with respect
to price, service, location, themes and food quality. There are many casual
theme dining restaurant competitors of the Company, such as Planet Hollywood(R),
Hard Rock Cafe(R) and the Rain Forest Cafe, that are better established and have
substantially greater financial and other resources than the Company. Similarly,
the restaurant field is quite broad and many of the Company's other competitors
have been in existence for a substantially longer period of time and may be
better established in those markets where the Company intends to open
restaurants. Additionally, the restaurant business is often affected by changes
in consumer taste, national, regional and local economic conditions, demographic
trends, traffic patterns, and the number and location of competing restaurants.
In addition, there are factors that are not within the Company's or any
competitor's control, such as inflation and increased food, labor and benefit
costs, which may have an impact on the restaurant industry in general and the
Company in particular. There can be no assurances that the Company will be able
to withstand the competitive and other external pressures of the restaurant
business.

     The Company also competes with a wide range of establishments in attempting
to identify and secure desirable


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locations. The Company presently intends to lease all of its sites. Although the
Company believes that it will be able to locate additional suitable sites, there
can be no assurance that such sites will be available or viable or on economic
terms acceptable to the Company.

Government Regulation

     The Company is subject to various Federal, state and local laws affecting
its business. Each of the Company's restaurants will be subject to licensing
regulation by numerous governmental authorities, which may include alcohol
beverage control, building, health and safety, and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the necessary licenses or approvals could delay or prevent
the development of a new restaurant in an area.

     Alcoholic beverage control regulations in each state require that the
Company's restaurant apply to the specific state authority and, in certain
locations, county and municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Typically, an alcoholic beverage license must be renewed
annually and may be revoked or suspended for cause at any time. Alcohol beverage
control regulations relate to numerous aspects of the daily operations of the
Company's restaurants, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
and storage and dispensing of alcoholic beverages. The failure of a restaurant
to obtain or retain a liquor or food service license would adversely affect that
particular restaurant's operations.

     Restaurants in most states are subject to "dram shop" laws and legislation,
which typically impose liability on licensed alcoholic beverage servers for
injuries or damages caused by their negligent service of alcoholic beverages to
a visibly intoxicated person or to a minor, if such service is the proximate
cause of the injury or damage and such injury or damage is reasonably
foreseeable. The Company maintains liquor liability insurance as part of its
existing comprehensive general liability insurance, which it believes to be
adequate to protect against such liability, although there can be no assurance
that it will not be subject to a judgment in excess of such insurance coverage
or that it will be able to continue to maintain such insurance coverage or that
it will be able to continue to maintain such insurance coverage at reasonable
costs. The imposition of a judgment substantially in excess of the Company's
insurance coverage would have a material adverse effect on the Company. In the
event that such insurance coverage were to become unavailable in the future, it
could materially and adversely affect the Company.


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     Upon the opening of Country Star Las Vegas, the Company presently intends
to lease space for up to 5 slot machines to an independent third party licensed
slot route operator who will install and operate the slot machines in exchange
for a monthly rental fee to the Company. The Company does not presently intend
to install and operate any slot machines for its own account in Country Star Las
Vegas. In the event the Company were to decide in the future to install and
operate any slot machines in Country Star Las Vegas for its own account, it
would first be required to obtain the necessary gaming approvals from the
appropriate regulatory authorities in the State of Nevada. The ownership and
operation of casino gaming facilities and slot machine routes in Nevada and the
manufacture and distribution of gaming devices in Nevada are subject to
licensing and regulatory control by the Nevada State Gaming Control Board (the
"Nevada Board"), the Nevada Gaming Commission (the "Nevada Commission") and
various local, city and county regulatory agencies (collectively, the "Nevada
Gaming Authorities"). Obtaining the necessary approvals, of which there can be
no assurance, is a lengthy and costly process. In the near future, the Company
will seek such approvals.

Intellectual Property Rights

     The Company has made such appropriate filings and registrations that it has
deemed appropriate and sufficient in its business judgment to protect the
Company's name in all appropriate categories, and taken such other actions
necessary to obtain and protect all trademarks, copyrights, tradenames,
tradedress and all other intellectual property rights relating to its Country
Star Restaurants, although there can be no assurance that the Company will be
able to effectively protect its rights. To date, the Company has been issued a
Federal registration for the "Country Star" trademark for clothing and
restaurant services by the United States Patent and Trademark Office. Third
parties may attempt to exercise alleged rights in any of the trademarks,
copyrights or other intellectual property rights, or appropriate any trademarks,
copyrights, or other intellectual property rights established by the Company,
and the Company's failure or inability to establish appropriate copyrights and
trademarks, or to adequately protect any of its intellectual property rights,
may have a material adverse effect on the Company.

Employees

     As of March 31, 1997, the Company had 134 full-time employees, 17 of whom
were employed in executive and management capacities, 4 in sales and marketing,
4 in general and administrative capacities, and 109 as restaurant staff. The
Company also employs an additional 94 part-time employees as restaurant staff.
The Company believes that its relations with its employees are satisfactory.


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ITEM 2. DESCRIPTION OF PROPERTIES

     The Company leases its executive offices, which occupy approximately 4,200
square feet, at 11150 Santa Monica Boulevard, Suite 650, Los Angeles, California
90025. The Company's rent is $9,028 per month through January 31, 2000. The
Company is also responsible for its pro rata share of increased operating
expenses starting in 1996 as predicated upon a 1995 base year.

     The Company presently leases an approximately 18,000 square foot restaurant
(inclusive of an approximately 4,000 square foot enclosed patio that is
contiguous to the restaurant) in Universal City, which is the site of Country
Star Hollywood. Pursuant to this lease, the Company is obligated to pay minimum
rental payments of $250,000 per annum payable in equal monthly installments,
$50,000 per year in parking assessments and $12,000 per year in marketing
expenses and percentage rent ranging from 6% to 10% of the annual sales volume
of Country Star Hollywood; provided, however, that such percentage rent payments
do not commence until such time as the Company has recouped all sums that it has
expended in connection with leasehold improvements made by the Company with
respect to the premises. The lease, which was entered into in January of 1994,
has an initial term of three years and has three five-year options, is subject
to termination by the landlord at any time after May 31, 1997 on nine months'
notice, provided that it may not be terminated any sooner than September 30,
1997; and provided, further, that the lease cannot be terminated by the landlord
if the subsequent tenant is another restaurant or like type user of the
premises. Subject to the foregoing, the Company has the right to extend the
lease beyond May 31, 1997 for three consecutive five-year terms. Country Star
Hollywood seats approximately 525 people, inclusive of the approximately 200
seats on the enclosed patio.

     In February 1995, the Company entered into a ten (10) year lease for an
approximately two (2) acre site located near the intersection of Las Vegas
Boulevard South and Harmon Avenue, for Country Star Las Vegas. The Company's
annual base rent is $1,200,000 per annum. The Company is presently paying rent
of $65,000 per month in cash and the balance in unregistered shares of Common
Stock of the Company. The Common Stock has demand registration rights beginning
six (6) months after issuance. The annual rent shall be increased to $1,400,000
for the third year. For the remaining seven (7) year term of the lease, the
annual rent shall be subject to increases based upon a cost of living increase;
provided, however, that notwithstanding the foregoing, the annual rent shall be
increased during such seven (7) year period by not less than four percent (4%)
and not more than six percent (6%) per year on a compounded basis. The initial
ten (10) year term of the lease may be extended, at the Company's option, for an
additional ten (10) year term, the rent with respect thereto to be increased to
the then prevailing market rate, subject to cost of living increases similar to
the


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provisions of the original term, provided that the Company is not in material
default of the lease.

     In March 1995, the Company entered into a twenty (20) year lease with
respect to a site, which includes parking for 172 cars, located at 3030
Peachtree Road in the Buckhead section of Atlanta, Georgia, for Country Star
Atlanta. In August of 1995, the Company received the landlord's consent to
demolish, at the Company's expense, the existing approximately 50,000 square
foot office building located on the site and replace it with a new, two-story
33,000 square foot structure built to suit Country Star Atlanta. In connection
with receiving the landlord's consent to demolish the existing office building,
the Company agreed to numerous restrictions, including granting certain approval
rights to the landlord, and placing $6,700,000 into an interest bearing escrow
account for the construction of the building and for fixtures, furniture and
related costs. Country Star Atlanta occupies approximately 16,000 square feet on
the first floor of the new structure. The second floor, which is approximately
15,000 square feet, has 5,000 square feet of improved space (the remaining
10,000 square feet on the second floor may also be available for the Company's
use subject to parking restrictions). Country Star Atlanta has a 2,000 square
foot outdoor patio. The Company commenced the payment of an annual base rent of
$750,000 per annum on October 1, 1995. As of August 1, 1996, the Company was
obligated to prepay an additional $375,000 of rent, representing a prepayment of
an additional six months rent. Instead, in a lease modification dated December,
1996, the Company prepaid $630,000 for fourteen (14) months' rent, consisting of
November 1996 through December 1997. The $750,000 base rent is subject to annual
increases of 4%. The Company shall also be obligated to pay (i) percentage rent
in the amount of the greater of $750,000 (plus annual increases) or 6% of
Country Star Atlanta's gross proceeds after the Company has recaptured all
improvement expenses with respect to the site (other than furniture, fixtures
and equipment), and (ii) all operating costs, taxes and utilities with respect
to the site.

ITEM 3. LEGAL PROCEEDINGS.

Atlanta and Las Vegas Lien Matters

     Certain contractors have filed claims of lien against the Company's Atlanta
and Las Vegas restaurants that have not been cleared by the posting of a bond or
any payment. Such claims of lien total approximately $1,200,000. Of that amount,
the Company believes that approximately $600,000 represent invalid lien claims,
either because the contractor has already been paid, or because the contractor
did not perform agreed upon services or provide agreed upon materials or because
the liens have been bonded. The Company is pursuing its rights and remedies
against contractors whom it believes have filed invalid lien claims.
Specifically, the Company intends to file an action against


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Pacific Southwest Design, Inc. ("PSD"), which, on February 7, 1997, filed a
claim of lien against the Atlanta restaurant in the amount of $627,000. The
action seeks vacation of the lien and monetary damages against PSD for filing an
invalid lien and for damages arising out of PSD's defective construction of the
Atlanta restaurant.

Edward Technologies, Inc. v. Country
Star Restaurants, Inc. and Robert Schuster

     On or about March 18, 1997, Edwards Technologies, Inc. filed an action in
Superior Court, Los Angeles County against the Company and Mr. Schuster seeking
monetary damages in the amount of approximately $318,000 in respect of equipment
sold to the Company for which the Company had allegedly not paid. On April 7,
1997, Edwards Technologies, Inc., pursuant to a settlement agreement with the
Company, dismissed the action as against the Company in exchange for payment of
$132,000. Edwards Technologies, Inc. reserved the right to continue to pursue
its claims against Mr. Schuster.

Trade Claim Litigations

     A number of creditors have filed actions against the Company for amounts
allegedly owed for services provided for goods delivered by such creditors. Such
lawsuits seek monetary damages ranging from approximately $1,700 to
approximately $52,000 and approximately $125,000 in the aggregate. The Company
disputes certain of those claims and will contest them. The Company is
attempting to settle those claims it does not dispute.

Atlanta Default

     On April 1, 1997, the Company received written notice from 3030 Peachtree,
LLC, its landlord with respect to the Atlanta restaurant, stating the landlord's
position that the Company was in default of its obligations under the lease.
Specifically, the notice alluded to the following alleged events of default,
among others: (i) the alleged failure to achieve lien-free completion of the
Atlanta restaurant; (ii) the alleged abandonment by the Company of the Atlanta
restaurant; and (iii) the alleged failure of the Company to remedy certain
construction defects.

     The Company has submitted a written response to the landlord stating that
it disputes the landlord's contentions that there have been any defaults and
advising the landlord of the Company's efforts to clear invalid liens, to cure
alleged construction defects cited by the landlord and to reopen the Atlanta
restaurant.

     The landlord has not commenced a notice to quit the premises and has not
commenced an action against the Company with respect to the alleged defaults
under the lease.


                                      -14-

<PAGE>

Creditor Offer

     As of December 31, 1996, the Company had approximately $3,100,000
outstanding of trade payables owed to its creditors. Creditors holding in the
aggregate approximately $200,000 of such trade payables have also commenced
litigation against the Company to recover the debt.

     The Company made a written offer to all its creditors to settle their
outstanding claims by accepting $.40 for every dollar owed to such creditors by
Country Star. The Company has agreed to pay half of the settlement amount on
April 15, 1997 and the balance on May 15, 1997. The Company has agreed that it
will be bound by this offer provided that at least 80% (based on the amount of
the claims) of the creditors holding claims agree to this settlement. Management
has pointed out to its creditors that the settlement is far more favorable to
them than the alternative of the Company filing a voluntary bankruptcy
proceeding. Based on conversations with a number of the creditors, management
believes that there is a high likelihood of success of the offer being accepted
by the required creditors holding 80% of the claims against the Company.

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

     None.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
        RELATED STOCKHOLDER MATTERS.

     Commencing on December 15, 1993, the date of the Company's initial public
offering, through April 21, 1995, the Company's Common Stock, par value $.001
per share (the "Common Stock") and redeemable warrants (the "Redeemable
Warrants") were quoted on the NASDAQ SmallCap Market. On April 21, 1995, the
Redeemable Warrants were redeemed by the Company and delisted from the NASDAQ
SmallCap Market. Since November 10, 1995, the Common Stock, as well as the
Company's 6% Series A Cumulative Convertible Preferred Stock (the "Preferred
Stock"), have been quoted on the NASDAQ National Market. The high and low bid
quotations, on a quarterly basis, for the Common Stock for calendar years 1995
and 1996 and the Preferred Stock from November 10, 1995, the date the Preferred
Stock commenced trading through December 31, 1995, and for calendar year 1996,
is set forth below. All of the prices set forth below reflect inter-dealer
prices, without retail mark up, mark down or commission and may not reflect
actual transactions:

                                      -15-

<PAGE>

1996                Common Stock                Preferred Stock
                    Quoted Bid Price            Quoted Bid Price
                    -----------------           -------------------
                    High         Low             High         Low
                    -----       -----           ------       ------
First Quarter       3 3/4       1 7/8           22 1/4       11 3/8
Second Quarter      5 7/16      3               31           17 5/8
Third Quarter       4 9/16      2 1/8           26 3/4       14
Fourth Quarter      2 9/16        7/32          15 1/2        1 1/4
                                             
1995                Common Stock                Preferred Stock
                    Quoted Bid Price            Quoted Bid Price
                    -----------------           -------------------
                    High         Low             High         Low
                    -----       -----           ------       ------
First Quarter       4 3/4       3 3/4            --            --
Second Quarter      5 1/2       3 5/8            --            --
Third Quarter       4 1/4       3 1/8            --            --
Fourth Quarter      3 7/6       1 7/8            13            11

     On April 7, 1997, the closing bid and asked prices of the Common Stock as
reported on the NASDAQ National Market were 19/32 and 5/8, respectively.

     On April 7, 1997, the closing bid and asked prices of the Preferred Stock
on the NASDAQ National Market were 3 and 3 7/8, respectively.

     On April 9, 1997, there were 255 holders of record of Common Stock and 27
holders of record of the Preferred Stock.

     The National Association of Securities Dealers, Inc. (the "NASD") has
advised the Company that the NASD is reviewing the eligibility of the Company's
Common Stock and Preferred Stock to continue to be included in the NASD National
Market stock listings. The NASD will consider financial and market factors, some
of which may not be fully satisfied by the Company, before reaching a decision
on eligibility. The Company shall take all actions reasonably necessary for
there to be an active trading market for its outstanding Common Stock and
Preferred Stock.

     No cash dividends have been paid on the Common Stock by the Company and
management does not anticipate paying cash dividends in the foreseeable further.
The Preferred Stock pays quarterly dividends payable each March 31, June 30,
July 31 and December 31 at the rate of 6% per annum. Such dividends are payable
either in cash or shares of Common Stock at the sole discretion of the Company.
To date, the Company has paid each of the first five Preferred Stock dividends
in shares of Common Stock.


                                      -16-

<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.

     The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Financial Statements and
the Notes thereto appearing elsewhere in this Annual Report.

Introduction

     The Company was formed in May of 1993 and, prior to the opening of the
initial Country Star Restaurant on April 2, 1994, did not generate any revenue.
The Company had revenues from Country Star Hollywood in 1995, its first full
calendar year of operations, of approximately $5,200,000. During 1996, the
Company had revenues of approximately $4,200,000 from Country Star Hollywood and
approximately $3,850,000 from its other restaurants, for total revenues of
approximately $8,050,000. Total operating expenses increased from approximately
$11,850,000 in 1995 to approximately $27,650,000 in 1996. The increase in
operating expenses during 1996 could not be funded by the increase in revenues.
The Company continued to fund its operations by the private sale of the
Company's equity securities and development financing arrangements with respect
to Country Star Las Vegas. As of December 31, 1996, the Company anticipated that
it would continue to have substantial capital needs that would not be funded
from operations and would continue to need to raise capital through equity or
debt financings.

     New management has been implementing operational changes since February 12,
1997, that it believes will help the Company realize income from operations.
These operational changes include methods of revenue enhancement and reduction
of direct operating costs and corporate overhead. The impact of these changes
will not be realized until the second quarter of calendar year 1997 and
subsequent periods. The Company believes that it will need additional capital to
settle with existing trade creditors and fund operations until it can obtain
profitability.

Results of Operations For the Year Ended December 31, 1996

     For the year ended December 31, 1996, revenues from Country Star Hollywood
decreased from approximately $5,200,000 to $4,200,000. Revenues from the
Company's two other restaurants commenced in 1996 and totaled approximately
$3,850,000.

     For the year ended December 31, 1996, the Company had a net loss of
approximately $16,780,000. Current management, which took over the Company on
February 12, 1997, believes that the net loss is a result of (i) the failure of
the Company to realize opportunities for increasing revenues because of
inadequate ongoing entertainment and attractions and a lack of supervision of
the Company's restaurant sites, (ii) lack of control over selling, general and
administrative expenses in relation to revenues, (iii)


                                      -17-

<PAGE>

lack of control over food and beverage, merchandise and labor costs in relation
to customer volume, (iv) substantial cost overruns in the construction of
Country Star Las Vegas and Country Star Atlanta and (v) pre-opening costs in
Atlanta running substantially over budget because of construction delays. Costs
and expenses for 1996 include a charge of approximately $5,600,000 for
impairment of long-lived assets. This represents primarily a write down of the
book value of leasehold improvements based on construction cost overruns for the
restaurants.

Revenue

     Food and Beverage

     For the year ended December 31, 1996 food and beverage revenues were
$7,048,023 representing approximately 87% of total revenue

     Merchandise

     For the year ended December 31, 1996 merchandise revenues were $1,011,392,
representing approximately 13% of total revenue.

Operating Expenses

     Food and Beverage Cost of Sales

     Food and beverage cost of sales for the year ended December 31, 1996 were
$2,222,506, representing approximately 32% of food and beverage revenue.

     Merchandise Cost of Sales

     Merchandise cost of sales for the year ended December 31, 1996 were
$656,760, which represented 65% of merchandise revenue. Current management is in
the process of reducing sales of low margin merchandise in order to reduce
merchandise costs as a percentage of merchandise sales.

     Payroll and Related Taxes

     Payroll and related taxes at Country Star Hollywood were $3,917,988,
representing approximately 49% of total revenues for the year ended December 31,
1996. Current management believes the levels of labor costs were the result of
inadequate controls and has taken steps to reduce labor costs as a percentage of
total revenues for 1997.

     Rent

     Rent expenses were $1,275,860 for the year ended December 31, 1996,
representing approximately 16% of total revenue for year ended December 31,
1996. Rent expenses include amortization of total base rentals over a
straight-line basis. Consequently,


                                      -18-

<PAGE>

$227,360 of deferred rent expenses are included in 1996 rent expenses.

     Other Operating Costs

     Other operating costs for the year ended December 31, 1996 were $1,967,020,
representing approximately 24% of total revenue for the year ended December 31,
1996. Other operating costs consist primarily of repair and maintenance,
restaurant supplies, restaurant entertainment, insurance, credit card fees,
utilities and management fees.

Interest Expense

     Interest expense was $375,936. Of the amount, $274,239 represents
negotiated interest on Series B Preferred Stock issued and converted in the
fourth quarter of 1996. Interest liability was satisfied by the issuance of
365,652 common shares on February 12, 1997 valued at $0.75 per share.

Selling, General and Administrative

     Selling, general and administrative expenses for the year ended December
31, 1996 were $8,801,764 which exceeds total revenue for the year ended December
31, 1996. Selling, general and administrative expenses consist of corporate
salaries of $1,501,830 including related payroll taxes and employee benefits,
advertising and corporate promotions of $1,781,926, legal and professional fees
of $627,154, insurance expense of $218,586, travel related costs of $119,994,
office rent of $115,795, cost overruns for restaurant construction of $927,790,
and the write off of certain pre-opening costs at Atlanta and Las Vegas that
were in excess of budget of $2,079,749, and $1,428,940 of other costs.

Impairment of Long-Lived Assets

     Statement of Financial Accounting, Standards (SFAS) No. 121, whose
provisions were adopted by the Company in 1996, requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Construction costs overruns
and continuing operating losses were indicators of potential impairment of the
Company's three restaurants.

     The impaired assets, primarily leasehold improvements, were written down by
$5,584,458. This non-cash charge to operations increased the 1996 loss by $0.50
per share.

Settlement of Stockholders' Claims

     See "Management's Discussion and Analysis - Liquidity and Capital
Resources."


                                      -19-

<PAGE>

Results of Operations For the Year Ended December 31, 1995

     For the year ended December 31, 1995, Country Star Hollywood had a gain
from restaurant operations before depreciation and amortization of $232,256.
After taking depreciation and amortizaion into account, the Company had a loss
from restaurant operations of $426,854. For the year ended December 31, 1995 the
Company had a net loss of $7,379,776. Such loss is largely a result of (i)
significant one-time charges incurred in connection with issuing options and
warrants for services, as well as significant one-time charges incurred in
connection with the raising of capital, and (ii) building a management
infrastructure in advance and in anticipation of effecting the Company's
expansion strategy.

Revenue

     Food and Beverage

     For the year ended December 31, 1995 food and beverage revenues were
$4,774,953 representing approximately 92% of total revenue

     Merchandising

     For the year ended December 31, 1995 merchandising revenues were $416,291,
representing approximately 8% of total revenue.

Operating Expenses

     Food and Beverage Cost of Sales

     Food and beverage cost of sales for the year ended December 31, 1995 were
$1,431,160, representing approximately 30% of food and beverage revenue.

     Merchandise Cost of Sales

     Merchandise cost of sales for the year ended December 31, 1995 were
$192,581, which represented 46% of merchandise revenue.

     Payroll and Related Taxes

     Payroll and related taxes at Country Star Hollywood were $1,865,514,
representing approximately 36% of total revenues for the year ended December 31,
1995. The high level of labor costs was primarily related to the intentional
over-staffing of Country Star Hollywood.

     Rent

     Rent expenses for Country Star Hollywood was $312,608 for the year ended
December 31, 1995, representing approximately 6% of total revenue for year ended
December 31, 1995.


                                      -20-

<PAGE>

     Other Operating Costs

     Other operating costs for the year ended December 31, 1995 were $1,157,125,
representing approximately 22% of total revenue for the year ended December 31,
1995. Other operating costs consist primarily of repair and maintenance,
restaurant supplies, insurance, credit card fees, utilities and management fees.

Interest Expense - Net

     Interest expense, net of interest income, was $1,208,068 for the year ended
December 31, 1995, representing approximately 23% of total revenue. The
components of interest expense were primarily (i) interest on capital leases
relating to the signs at Country Star Hollywood, (ii) the mortgage with respect
to property owned by the Company in Las Vegas that was sold in August, 1995,
(iii) the repayment of interest relating to $500,000 of convertible debt issued
to principals of the underwriter of the Company's initial public offering (the
"Convertible Debt"), (iv) the repayment of interest due on a $300,000 principal
debt issued to Leslie Linton Entertainment, Inc. and the repayment of interest
due on a $200,000 principal debt issued to Steel Partners (collectively, the
"Institutional Debt"), and (v) the repayment of interest relating to $1,850,000
of interim bridge financing received by the Company in connection with a private
placement effected by the Company in July, 1995. Interest expenses, net of
interest income, also includes amortization of the discount and offering costs
of $866,666 related to the Bridge Financing. See Part II - Item 6 "Management's
Discussion and Analysis - Liquidity and Capital Resources - Bridge Financing."

Selling, General and Administrative

     Selling, general and administrative expenses for the year ended December
31, 1995 were $3,397,084 representing approximately 65% of total revenue for the
year ended December 31, 1995. Selling, general and administrative expenses
consist of corporate salaries of $1,019,194 including related payroll taxes and
employee benefits, advertising and corporate promotions of $617,802, legal and
professional fees of $808,753, insurance expense of $170,816, travel related
costs of $112,251, office rent of $116,659, and $551,609 of other costs. The
Company incurred a substantial increase in selling, general and administrative
expenses during the year ended December 31, 1995 in connection with various
activities in advance of effecting the Company's expansion strategy including
extensive trademark registration filings in the United States and
internationally to protect the Company's intellectual property, hiring of
management personnel to support planned expansion, costs related to site
selection for additional Country Star Restaurants, and increased executive
compensation.


                                      -21-


<PAGE>

Liquidity and Capital Resources

     Going Concern

     The Company's independent certified public accountants included an
explanatory paragraph in their report for the year ended December 31, 1996 which
indicated a substantial doubt as to the ability of the Company to continue as a
going concern due to significant losses in 1995 and 1996 and cash flow shortages
(See Independent Certified Public Accountants' Reports, pages F-2 and F-3, and
Note 9 of the Notes to Financial Statements.)

     At December 31, 1996 the Company had cash on hand of approximately
$949,205. For the year ended December 31, 1996, the Company has primarily funded
its capital requirements from proceeds from the issuance of debt and equity
securities, and development financing arrangements with respect to Country Star
Las Vegas, as more fully described below.

     Convertible Debt and Institutional Debt

     In the fourth quarter of 1994 and the first and second quarters of 1995,
the Company issued an aggregate of $1,000,000 of debt in private transactions,
$500,000 of which represented the Convertible Debt which bore interest at the
rate of eight percent (8%) per annum, and the balance of which represented the
Institutional Debt borrowed from Steel Partners and Leslie Linton Entertainment,
Inc. which bore interest at the rate of nine percent (9%) per annum. Mr. Robert
E. Linton, a principal of Leslie Linton Entertainment, Inc., became a member of
the Company's Board of Directors in March, 1996. The proceeds from the
Convertible Debt and Institutional Debt were used for entering into the leases
for, and commencing the development of, Country Star Las Vegas and Country Star
Atlanta. The Convertible Debt, which was initially due on February 21, 1995, and
was convertible at any time, in whole or in part, into shares of Common Stock at
$4.00 per share, was extended a number of times. On August 1, 1995 the Company
repaid $250,000 of principal of the Convertible Debt and the balance of the
principal, an additional $250,000, plus all accrued interest, was repaid on
November 14, 1995, the closing of the Company's secondary offering of 1,200,000
shares of Preferred Stock (the "Secondary Offering"). Similarly, all principal
and accrued interest with respect to the Institutional Debt was repaid on the
closing of the Company's Secondary Offering. The Institutional Debt was due upon
the earlier of (i) March 1996, one (1) year from issuance, and (ii) the
Company's raising of at least $5,000,000 in equity capital.

     The Bridge Financing

     On July 28, 1995, the Company completed an interim bridge financing
arranged by and sold through the representative of the underwriters of the
Company's Secondary Offering (the "Bridge


                                      -22-

<PAGE>

Financing"). Pursuant to the Bridge Financing, the Company sold 37 units (the
"Units") to non-affiliated, accredited investors, each Unit consisting of (i) a
$50,000, 6% promissory note due the earlier of twelve (12) months from the date
of issuance or the Company's receipt of at least $5,000,000 in gross proceeds
from a public or private sale of its securities, a joint venture or licensing
agreement (collectively, the "Notes"), (ii) 5,000 shares of Common Stock, and
(iii) 3,000 warrants, each to purchase one share of Common Stock, exercisable at
a price per share equal to the Conversion Price of the Company's Preferred
Stock, which was $2.00. The net proceeds from the Bridge Financing were
approximately $1,650,000 (after commissions and expenses) and in connection
therewith the Company issued an aggregate of 185,000 shares of Common Stock and
111,000 warrants. In connection with the Bridge Financing pursuant to which the
Company issued 6% promissory notes in the aggregate principal amount of
$1,850,000, 185,000 shares of common Stock and 111,000 warrants, the Company
recorded an original issue discount of $665,518 based on the relative fair
market value of the Notes, the Common Stock and the warrants on the date of
issuance. The Company also incurred approximately $200,000 of offering costs
related to the Bridge Financing, of which $129,015 was recorded as a discount to
the Notes with the remainder recorded as a reduction to the paid-in capital of
the Common Stock and warrants issued in connection therewith. The original issue
discount was amortized over the term of the Notes as an interest expense. After
the Secondary Offering, at which time all of the Institutional Debt and the
Notes were repaid with a portion of the net proceeds, the Company took a
non-recurring charge to interest expense in an amount equal to the then
remaining unamortized portion of the original issue discount and offering costs
of $866,666, which was charged to interest expense for the year ended December
31, 1995. Under the terms of the Bridge Financing, all 185,000 shares of Common
Stock issued in the Bridge Financing were automatically exchanged for an
aggregate of 77,089 shares of Preferred Stock upon the effective date of the
Secondary Offering. The Company used the net proceeds of the Bridge Financing to
continue the development of Country Star Las Vegas and Country Star Atlanta, to
repay certain indebtedness, and for working capital purposes.

     Development Financing

     On September 6, 1995, the Company entered into a definitive agreement for
the financing of future Country Star Restaurants with NevStar Restaurants, LLC
("NevStar") a newly formed Nevada limited liability corporation that was
established in August 1995 and is controlled by Mr. Melvin Wolzinger and his
wife Mrs. Ruth Wolzinger (the "Development Financing"). Such agreement (the
"Development Financing Agreement") provides that NevStar shall (i) invest $4.5
million of equity in Country Star Las Vegas, and (ii) have the right, under
certain circumstances, to invest up to an additional $12.5 million in equity in
future domestic Country


                                      -23-

<PAGE>

Star Restaurants, including Country Star Atlanta. To secure its investment in
Country Star Las Vegas, NevStar deposited into escrow $5 million in marketable
securities upon the execution of the Development Financing Agreement. Pursuant
to the terms and condition of the Development Financing Agreement, a limited
liability corporation was established to effect each of NevStar's and the
Company's investment in Country Star Las Vegas (the "Country Star Las Vegas
LLC"). NevStar will provide $4.5 million of equity financing for Country Star
Las Vegas LLC and the Company will provide the remaining funds necessary for
Country Star Las Vegas LLC, or approximately $3 million. Thereafter, Cirrus,
Cirrus ("Cirrus"), a newly formed private limited partnership, comprised of
principals of the representative of the underwriters of the Company's Secondary
Offering loaned Country Star Las Vegas, LLC $495,000 at the rate of 6% per
annum, which loan was converted into $495,000 of equity in Country Star Las
Vegas, LLC on the same terms as NevStar's equity investment in Country Star Las
Vegas, LLC on April 1, 1996. (NevStar, Cirrus and the Company, in their capacity
as investors in the Country Star Las Vegas LLC, are sometimes referred to herein
as the "Equity Investors").

     In connection with NevStar's $4.5 million investment in Country Star Las
Vegas LLC, the Company shall be responsible for legal fees of $225,000 in
connection therewith and with respect to any additional investments made in any
future domestic Country Star Restaurants by NevStar, additional legal fees in
the same proportion as the $225,000 bears to NevStar's initial $4.5 million
investment. Upon commencement of operations of Country Star Las Vegas, prior to
any cash distributions, the Company, which will be responsible for managing the
day-to-day operations of Country Star Las Vegas subject to NevStar's approval
for various matters, will receive a management fee in the amount of $333,333 per
annum, payable in equal monthly installments. In connection with the Company's
management of Country Star Las Vegas, the Company has agreed with NevStar that
labor costs will be a predetermined percentage of Country Star Las Vegas'
revenues, which percentage shall vary based upon the actual revenues. In the
event that actual labor costs for Country Star Las Vegas exceed such percentage
of revenues during a twelve (12) month period, the Company will be obligated to
fund any such excess. After the Equity Investors (of which the Company is a
35.1% participant) shall receive a rate of return of 6% per annum on their
unrecouped investment, all available cash shall be distributed 25% to the
Company and 75% to the Equity Investors until such time as the Equity Investors
shall have received cash contributions equal to 100% of their investment.
Thereafter, all available cash shall be distributed 65% to the Company and 35%
to the Equity Investors.

     The Development Financing Agreement also provides that NevStar, at its
option, may also invest up to an additional $12.5 million in other domestic
Country Star Restaurants, under certain


                                      -24-

<PAGE>

circumstances. Specifically, NevStar's ability to invest in a particular future
domestic Country Star Restaurant will be curtailed in the event that the
landlord or any other party that controls the property on which any such future
domestic Country Star Restaurant may be located shall receive an equity interest
in such property of 35% or more. Nevertheless, NevStar shall have the right to
make an investment in any such future domestic Country Star Restaurant in the
event that the landlord or any other party that controls the relevant property
receives an equity interest of less than 35%, provided that NevStar's equity
interest, when added to the equity interest of the landlord or other third party
does not exceed 35%. NevStar is not obligated to, and there can be no assurance
that NevStar will, provide financing for any future domestic Country Star
Restaurant and the Company does not know whether NevStar intends or has the
wherewithal to do so. NevStar's right to provide financing for any future
Country Star Restaurant expires on the later of September 1, 1998 or such time
as the Company obtains a line of credit pursuant to which the lender or any
affiliate of the lender receives an equity interest of 5% or less. Any
additional investment by NevStar in a future domestic Country Star Restaurant
cannot be less than $2.5 million per restaurant, and must be on the same terms
and conditions as the Country Star Las Vegas LLC. In the event that the Company
were to open a take-out style Country Star Restaurant in Clark County, Nevada,
NevStar would have the right to invest in such other restaurant on the same
terms and conditions as the Country Star Las Vegas LLC. In connection with
entering into the Development Financing Agreement, NevStar received 100,000
warrants with an exercise price of $3.62 per share. Finally, in the event that
there is a takeover of the Company, the Development Financing Agreement provides
that NevStar shall have the right to cause the potential acquirer to purchase
its equity interest in some or all of the Country Star Restaurants that it has
financed at a predetermined formula relative to such Country Star Restaurant.

     Secondary Offering

     On November 10, 1995, the Company completed its Secondary Offering of
1,200,000 shares of 6% Cumulative Convertible Series A Preferred Stock. The net
proceeds to the Company from the Secondary Offering, after deducting commissions
and expenses, were approximately $11,200,000. The Company applied such net
proceeds towards the continued development of Country Star Las Vegas and Country
Star Atlanta, repayment of certain indebtedness, and working capital. The
Company's Preferred Stock pays a cumulative, quarterly dividend at the rate of
6% per annum of the Preferred Stock's liquidation value, which is $12.00 per
share, on each of December 31, March 31, June 30 and September 30 of each year
commencing December 31, 1995, when, as and if declared by the Board of Directors
out of funds legally available therefor. Dividends are payable in cash or Common
Stock at the Company's election. The Preferred Stock is convertible into


                                      -25-

<PAGE>

Common Stock commencing on February 8, 1996 at a conversion rate of 6 shares of
Common Stock for each share of Preferred Stock, subject to adjustment in certain
events (a "Conversion Price" of $2.00 per share). Unless previously converted or
redeemed, the Preferred Stock will be automatically converted into Common Stock
upon the earlier of (i) May 10, 1997 and (ii) five (5) business days after the
Company publicly announces a calendar quarter with gross revenues from
operations in excess of $7,000,000. Each holder of shares of Preferred Stock
will be entitled to vote together with, and on all matters submitted to, the
holders of Common Stock on an as-converted basis. Further, on or after May 8,
1996, in the event that the Common Stock shall have a closing bid price that is
at least 170% of the Conversion Price for 20 out of 30 consecutive trading days
ending within five (5) days of the date of the notice of redemption, the
Preferred Stock may be redeemed at the Company's option, in whole or in part, at
$12.00 per share, plus any declared but unpaid dividends to the date fixed for
redemption. In addition, on or after May 8, 1996, the Preferred Stock may be
redeemed at the Company's option, in whole or in part, at the following per
share prices, plus any declared but unpaid dividends:

         Period                                      Redemption Price
         ------                                      ----------------

May 8, 1996 - July 9, 1996                                $13.08
July 10, 1996 - January 9, 1997                            12.72
January 10, 1997 - May 9, 1997                             12.36

     The liquidation preference of the Preferred Stock is $12.00 per share, plus
any declared but unpaid dividends and in the event of liquidation, dissolution
or winding up of the Company is to be paid to holders of the Preferred Stock
before any distribution to holders of Common Stock or any other class of capital
stock junior to the Preferred Stock.

     Private Placements During 1996

     On February 12, 1996, the Company sold 241,905 shares of Common Stock to
Dan Rubin, an individual, and Roy B. Rubin, M.D., P.C., M.P.P.P., a pension fund
(the "Pension Fund") for an aggregate purchase price of $635,000. Mr. Rubin and
the Pension Fund, both of whom are affiliates of the Rubin Investment Group,
also received certain piggyback and demand registration rights with respect to
the shares it acquired.

     On April 10, 1996, the Company sold 100,000 shares of Common Stock and
50,000 Warrants to Mr. Rex Licklider for an aggregate purchase price of
$300,000. On April 10, 1996, the Company sold 166,667 shares of Common Stock and
83,334 Warrants to the Licklider Living Trust Dated 5/2/86 (the "Trust") for an
aggregate purchase price of $500,000. Each Warrant entitles the holder to
acquire one (1) share of Common Stock of the Company at an exercise price of $3
per share. Mr. Rex Licklider, a trustee


                                      -26-

<PAGE>

of the Trust, had initially intended to become a member of the Company's Board
of Directors subsequent to the closing of the Secondary Offering, but
thereafter, did not do so for personal reasons. See Part III, "Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act." Mr. Licklider Trust received certain demand and piggyback
registration rights with respect to the securities which they acquired.

     On April 10, 1996, the Company also sold (i) 100,000 shares of Common Stock
and 50,000 Warrants to Bruce Sokoloff for an aggregate purchase price of
$300,000, (ii) 133,334 shares of Common Stock and 66,667 Warrants to Wisdom Tree
Associates for an aggregate purchase price of $400,000 and (iii) 250,000 shares
of Common Stock and 125,000 Warrants to Dan Rubin for an aggregate purchase
price of $750,000. Each Warrant entitles the holder to acquire one (1) share of
Common Stock of the Company at an exercise price of $3 per share. The purchasers
received certain demand and piggyback registration rights with respect to the
securities they acquired.

     On July 10, 1996, the Company sold 114,286 shares of Common Stock and
85,715 Warrants to Bruce Sokoloff for an aggregate purchase price of $400,000.
Each Warrant entitles the holder to acquire one (1) share of Common Stock of the
Company at an exercise price of $3.50 per share.

     On August 28, 1996, the Company sold 170,371 shares of Series A Preferred
Stock to Dan Rubin, an individual, Robert Lyszczarz, an individual and Roy B.
Rubin, M.D., P.C., M.P.P.P., a pension fund (the "Pension Fund") for an
aggregate purchase price of $2,280,000. In connection with the transaction, the
Company issued an aggregate of 306,667 warrants. Each warrant entitles the
holder to acquire one (1) share of Common Stock of the Company at a purchase
price of $2.25 per share. Mr. Rubin and the Pension Fund, both of whom are
affiliates of the Rubin Investment Group, and Mr. Lyszczarz, also received
certain demand registration rights with respect to the Shares they acquired.

     On September 16, 1996, the Company sold an aggregate of 100,000 shares of
Common Stock and 100,000 Warrants to the Alan & Coralie Goldsmith Trust and the
Alan J. Goldsmith Accountancy Corp. Defined Benefit Pension Trust for an
aggregate purchase price of $200,000. Each Warrant entitles the holder to
acquire one (1) share of Common Stock of the Company at a purchase price of
$2.00 for 75,000 warrants and $2.25 for 25,000 warrants.

     On October 10, 1996 the Company sold 4,000 shares of newly issued 7%
Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock"). The sale was made to Cameron Capital Ltd., a foreign institutional
investor, for an aggregate purchase price of $4,000,000, or $1,000 per share. On
February 12, 1997, all of the outstanding shares of Series B Convertible


                                      -27-

<PAGE>

Preferred Stock was exchanged by the holder with the Company for a Convertible
Term Note in the principal amount of $4,000,000 (see "Management's Discussion
and Analysis of Operations Capital Resources, February 12, 1997 Financing and
Change in Control" for a description of the terms of the Note).

     All of the proceeds received by the Company from each of the aforementioned
private placements is for further development of the Company's Country Star
Restaurants and for working capital purposes.

February 12, 1997 Financing and Change in Control

     On February 12, 1997, the Company entered into a secured loan agreement
with Dan Rubin ("Rubin") and Cameron Capital Ltd., an institutional investor
("Cameron").

     The secured loan agreement provides that Cameron has the fully assignable
right to name three (3) members of the Board of Directors of the Company and
that the Board of Directors shall not consist of more than five (5) members.
Cameron assigned this right to Rubin as its agent. Immediately after the closing
of the secured financing, Rubin's nominees, Darren Rice, William Wei and Robert
Nardone were elected to the Board of Directors of the Company. The Board then
elected Rubin to fill the last seat on the Board of Directors.

     The Board then elected Dan Rubin as Chief Executive Officer and President,
and Robert L. Davidson as Secretary of the Company. Mr. Rubin assumed control of
day-to-day operations of the Company. Mr. Rubin is being compensated at the rate
of $20,000 per month, payable in cash or common stock of the Company, valued at
market value at the time of issuance. Mr. Rubin's employment is terminable at
will.

     Rubin now owns warrants to acquire and convertible debt which if converted
would allow him to acquire an aggregate of 846,176 shares of the Company's
common stock. Upon exercise of such warrants and conversion of the convertible
debt, Rubin would own 5.3% of the common stock of the Company then outstanding.
None of the other newly elected directors own any shares or warrants or other
rights to acquire any shares of the Company's common stock.

     Under the secured financing agreement, Rubin has made a $3,500,000 line of
credit loan available to the Company, of which an initial advance of $500,000
was committed at closing. Rubin, in his sole discretion, may make additional
advances to the Company under this line of credit, but is not required to make
any such additional advances. All advances under the line of credit loan bear
interest at the rate of prime plus four percent (4%), payable semi-annually
commencing December 31, 1997. The principal balance of all line of credit
advances are due and


                                      -28-

<PAGE>

payable on October 9, 1999. In consideration for the initial line of credit
advance of $500,000, the Company issued a warrant to acquire 166,667 shares of
its common stock at an exercise price of $.625 per share.

     All additional line of credit advances shall have the same terms and
conditions as the initial line of credit advance. For each such additional
advance, Rubin shall receive one (1) common stock purchase warrant for every $3
advanced. The exercise price for these warrants shall be $.625 per share. All of
the warrants issued or to be issued to Rubin shall be subject to adjustment in
the event of stock splits, stock dividends, mergers, consolidations, or similar
corporate events.

     Cameron exchanged its 4,000 shares of Series B Convertible Preferred Stock
of the Company, with an aggregate liquidation preference of $4,000,000, for a
convertible term note in the principal amount of $4,000,000. The convertible
term note bears interest at the rate of seven percent (7%) per annum, payable
semi-annually commencing December 31, 1997. The principal balance is due and
payable on October 9, 1999. Any portion or all of the principal amount of the
note outstanding may be converted into common stock of the Company commencing
ninety (90) days after the date of closing of the financing. Upon conversion,
the Company shall issue that number of shares of its common stock obtained by
dividing the principal amount of the loan converted by the lesser of (i) $1.33,
or (ii) 80% of the average closing bid price of the common stock for the five
(5) consecutive trading days preceding the date of conversion. The maximum
number of shares into which the convertible note may be converted shall not
exceed 3,000,000. The conversion formula is subject to adjustment in the event
of stock splits, stock dividends, mergers, consolidations, or similar
transactions.

     In connection with the commitment to make the line of credit loan, Rubin
and other investors in the Company have agreed to settle certain claims against
the Company for the amount of $1,950,000, plus $50,000 in fees and expenses. The
Company has issued its convertible term notes in the aggregate amount of
$1,950,000 and agreed to pay $50,000 to Rubin and these investors, in settlement
of their claims. These convertible term notes contain the same terms and
conditions as the convertible term note issued to Cameron, except that the
holders of these convertible term notes may exercise their conversion feature at
any time following the closing.

     The line of credit advances by Rubin, Cameron's convertible term note and
the convertible term notes issued in settlement of claims are all secured by a
lien on substantially all of the tangible and intangible assets of the Company.
In the event of default, the secured parties shall participate in the proceeds
of the collateral in proportion to their outstanding debt.


                                      -29-

<PAGE>

Seasonality

     The Company does not believe that seasonality will have a material impact
on the Company's overall operations once it has fully established Country Star
Las Vegas and Country Star Atlanta. Country Star Hollywood is in a location that
experiences significantly higher traffic during the summer months due to its
popularity as a tourist destination.

Net Operating Loss Carryforwards

     As of December 31, 1996, the Company had net operating loss carryforwards
under Section 172 of the Internal Revenue Code, as amended (the "Code"), of
approximately $18.2 million, of which $7.7 million was generated prior to 1996,
for Federal tax purposes, which may be used to offset future taxable income. The
Federal income tax carryforward will expire beginning in the year 2008. The net
operating loss carryforwards generated deferred tax assets amounting to
approximately $6,721,000, for which the Company has provided a 100% valuation
reserve.

     Under Section 382 of the Code ("Section 382"), the utilization of net
operating loss carryforwards is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the market value of the loss
corporation's outstanding stock immediately before the date of the ownership
change multiplied by the highest Federal long-term tax exempt rate in effect for
any month in the three (3) calendar month period ending with the calendar month
in which the ownership change occurred. Due to the ownership change as a result
of the secondary offering completed in November, 1995, the Company is subject to
an annual limitation on the use of its pre-1996 net operating losses of
approximately $1,000,000 per year. Therefore, in the event that the Company
achieves profitability in excess of the annual limitation amount, such
limitation would have the effect of increasing the Company's tax liability and
reducing the net income and available cash resources of the Company in such
year.

Impact of Inflation

     Increases in food and labor costs and interest rates directly affect the
Company. Many of the Company's employees at Country Star Hollywood are paid, and
many of the Company's employees at Country Star Las Vegas and Country Star
Atlanta will be paid at hourly rates related to the Federal minimum wage. Any
increases in the Federal minimum wage in the future would further increase the
Company's operating expenses. In addition, the Company's leases at Country Star
Hollywood, Country Star Las Vegas and Country Star Atlanta require the Company,
among other things, to pay taxes, maintenance, insurance, repairs and utility
costs, all of which are subject to inflation, as well as percentage rent and
periodic escalations of annual rents. Any


                                      -30-

<PAGE>

future leases that the Company may enter into with respect to any future Country
Star Restaurants may also contain similar provisions.

Forward Looking Statements

     Any statements that are not historical facts contained in this Report are
forward looking statements that involve risks and uncertainties, including but
not limited to those relating to demand for the Company's services, pricing,
market acceptance, competition, the effect of economic conditions, the results
of financing efforts, the Company's ability to complete proposed transactions
and negotiate terms with its creditors, and other risks.

ITEM 7. FINANCIAL STATEMENTS.

     See financial statements following Part IV - Item 13 of this Annual Report
on Form 10-KSB.

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

     On January 5, 1996, the Company was informed by its independent auditor,
Ernst & Young, LLP ("E&Y") that E&Y had resigned as the Company's independent
auditor, effective immediately. Contemporaneously, the Company filed a Current
Report on Form 8-K relating to the resignation of E&Y. The Company had retained
E&Y to act as its independent auditor on March 2, 1994. For the period beginning
with the retention of E&Y and ending with the resignation of E&Y, the reports of
E&Y on the financial statements of the Company did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. Since initially retaining
E&Y, the Company has not had any disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

     On March 18, 1996, the Company engaged BDO Seidman, LLP to replace E&Y as
the Company's independent auditor, effective immediately, and contemporaneously
filed a Current Report on Form 8-K relating thereto. On November 12, 1996, the
Company terminated the firm of BDO Seidman, LLP as independent auditor, and
contemporneously filed a Current Report on Form 8-K relating thereto. For the
period beginning with the retention of BDO Seidman, LLP and ending with its
termination, its reports on the financial statements of the Company did not
contain any adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. Since
retaining BDO Seidman, LLP, the Company has not had any disagreeents with it on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure.


                                      -31-

<PAGE>

     On January 16, 1997, the Company engaged the services of Deloitte & Touche
LLP to serve as the Company's independent auditor, and contemporaneously filed a
Current Report on Form 8-K relating thereto. On March 29, 1997, the Company
terminated the firm of Deloitte & Touche LLP as its independent auditor. For the
period beginning with the retention of Deloitte & Touche LLP and ending with its
termination, Deloitte & Touche LLP did not prepare any reports or render any
adverse opinion or disclaimer of opinion on the financial statements of the
Company. Since initially retaining Deloitte & Touche LLP the Registrant has not
had any disagreements with it on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.

     On March 29, 1997, the Company engaged the services of Cacciamatta
Accountancy Corporation to serve as the Company's independent auditor.
Contemporaneously with the dismissal of Deloitte & Touche LLP and the retention
of Cacciamatta Accountancy Corporation the Company filed a Current Report on
Form 8-K relating thereto. See Part IV - Item 13 "Exhibits and Reports on Form
8-K.

                                    PART III

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

     The information required by Item 9 of Form 10-KSB is incorporated by
reference to the information contained in the section captioned "Election of
Directors" in Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders (the "Proxy Statement"), a copy of which will be filed with the
Securities and Exchange Commission.

ITEM 10. EXECUTIVE COMPENSATION

     The information required by Item 10 of Form 10-KSB is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

     The information required by Item 11 of Form 10-KSB is incorporated by
reference to the information contained in the section captioned "Stock Ownership
of Certain Beneficial Holders and Management" in the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the


                                      -32-

<PAGE>

section captioned "Executive Compensation and Other Matters - Certain
Relationships and Related Transactions" in the Proxy Statement.

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits.

     (b)  Reports on Form 8-K.

     On October 10, 1996, the Company filed a Current Report on Form 8-K in
connection with a private placement of Preferred Stock in the amount of
$4,000,000 to an institutional investor. See "Management's Discussion and
Analysis of Operations - Capital Resources, Item 6 of this Annual Report on Form
10-KSB.

     On November 14, 1996, the Company filed a Current Report on Form 8-K in
connection with the Company's termination of the firm of BDO Seidman, LLP as
independent auditor (See Item 8, "Changes in and Disagreement with Accountants
in Accounting and Financial Disclosures.")

     On January 16, 1997, the Company filed a Current Report on Form 8-K in
connection with the engagement of Deloitte & Touche LLP as Registrant's
independent auditor (See Item 8, "Changes in and Disagreement with Accountants
in Accounting and Financial Disclosures.")

     On February 12, 1997 the Company filed a current report on Form 8-K in
connection with the February 12, 1997 Financing and Change in Control. (See Item
6, "Management's Discussion and Analysis.")

     On March 29, 1997, the Company filed a current report on Form 8-K in
connection with the termination of Deloitte & Touche LLP as the Company's
independent auditor and the retention of Cacciamatta Accountancy Corporation as
the Company's independent auditors. (See Item 8, "Changes in and Disagreement
with Accountants in Accounting and Financial Disclosures.")


                                      -33-

<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report - Cacciamatta Accountancy Corporation .....    F-2

Independent Auditors' Report - BDO Seidman, LLP ........................    F-3

Consolidated Balance Sheet as of December 31, 1996 .....................    F-4

Consolidated Statements of Operations for the Years Ended
         December 31, 1995 and 1996 ....................................    F-6

Consolidated Statements of Stockholders' Equity for the Years Ended
         December 31, 1995 and 1996 ....................................    F-7

Consolidated Statements of Cash Flows for the Years Ended
         December 31, 1995 and 1996 ....................................    F-8

Notes to Consolidated Financial Statements .............................   F-10


                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Stockholders
Country Star Restaurants, Inc.

We have  audited the  accompanying  consolidated  balance  sheet of Country Star
Restaurants,  Inc.  and  Subsidiary  as of  December  31,  1996 and the  related
consolidated statements of operations,  stockholders' deficit and cash flows for
the year 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Country
Star  Restaurants,  Inc. and Subsidiary as of December 31, 1996, and the results
of their  operations  and their cash flows for the year then ended in conformity
with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 to the
consolidated  financial  statements,  the  Company has  experienced  significant
losses in 1995 and 1996, and is experiencing cash flow shortages.  These factors
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 9. The accompanying  consolidated  financial  statements do not include any
adjustments  relating  to the  recoverability  and  classification  of  recorded
assets,  or the  amounts  and  classifications  of  liabilities  that  might  be
necessary should the Company be unable to continue as a going concern.

As discussed in Note 1 to the  consolidated  financial  statements,  in 1996 the
Company  adopted the provisions of SFAS 121,  "Accounting  for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."

                                       CACCIAMATTA ACCOUNTANCY CORPORATION

Irvine, California
April 11, 1997


                                      F-2
<PAGE>

                          Independent Auditors' Report

The Board of Directors and Stockholders of
   Country Star Restaurants, Inc.

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity, and cash flows of Country Star Restaurants,  Inc. for the
year ended December 31, 1995. 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 audit.

We conducted our audit 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  presentation  of the financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

In our opinion,  the  financial  statements  of Country Star  Restaurants,  Inc.
referred to above  present  fairly,  in all  material  respects,  its results of
operations and its cash flows for the year ended December 31, 1995 in conformity
with generally accepted acounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 9 to the
financial statements, the Company has experienced significant losses in 1995 and
1996, and is experiencing  cash flow shortages.  These factors raise substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans in regard to these matters are also described in Note 9. The  accompanying
financial   statements   do  not  include  any   adjustments   relating  to  the
recoverability  and  classification  of  recorded  assets,  or the  amounts  and
classifications  of  liabilities  that might be necessary  should the Company be
unable to continue as a going concern.

                                   `                   BDO SEIDMAN, LLP

Los  Angeles,  California  
April 11, 1996 except for Note 9 
which is as of April 11, 1997


                                      F-3
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1996

                                     ASSETS

Current assets
     Cash and cash equivalents                                       $   949,205
     Inventories                                                         744,607
     Preopening costs, net                                               150,000
     Prepaid rent                                                        540,000
     Other                                                               354,791
                                                                     -----------
       Total current assets                                            2,738,603
                                                                     -----------
Property and equipment at cost, net of accumulated depreciation
 and amortization of $128,861
     Leasehold improvements                                           14,490,000
     Furniture and equipment                                           2,065,892
     Memorabilia                                                         496,715
     Capital leases                                                      798,261
                                                                     -----------
         Total property and equipment                                 17,850,868

Other                                                                    313,324
                                                                     -----------
                                                                     $20,902,795
                                                                     ===========

                                                                     (continued)

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


                                      F-4
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                     CONSOLIDATED BALANCE SHEET (continued)
                                DECEMBER 31, 1996

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

   Capital lease obligations - current                             $    224,652
   Accounts payable                                                   3,110,747
   Accrued expenses                                                     540,192
                                                                   ------------
   Total current liabilities                                          3,875,591

Deferred rentals                                                        227,360

Capital lease obligations                                               315,585

Convertible debt                                                      5,950,000
                                                                   ------------
   Total liabilities                                                 10,368,536
                                                                   ------------

Commitments and contingencies                                              --

Minority interests                                                    2,124,446
                                                                   ------------

Stockholders' Equity

   Preferred stock, $0.001 par value, 2,000,000
    shares authorized - 6% Cumulative Convertible
    Series A - 400,445 shares issued and outstanding                        400
   Common stock, $0.001 par value, 25,000,000 shares authorized,
     14,287,524 shares issued and outstanding                            14,288
   Additional paid-in capital                                        36,173,935
   Unamortized stock options cost                                      (145,207)
   Accumulated deficit                                              (27,633,603)
                                                                   ------------

   Total stockholders' equity                                         8,409,813
                                                                   ------------

                                                                   $ 20,902,795
                                                                   ============

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


                                      F-5
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                        ----------------------------
                                                            1996            1995
                                                        ----------------------------
<S>                                                     <C>             <C>         
Revenues
   Food and beverage                                    $  7,048,023    $  4,774,953
   Merchandise                                             1,011,392         416,291
                                                        ------------    ------------
                                                           8,059,415       5,191,244
                                                        ------------    ------------
Costs and expenses
   Cost of revenues
      Food and beverage                                    2,222,506       1,431,160
      Merchandise                                            656,760         192,581
   Labor                                                   3,917,988       1,865,514
   Rent                                                    1,275,860         312,608
   Other restaurant operating                              1,967,020       1,157,125
   Selling, general and administrative                     8,801,764       3,397,084
   Depreciation and amortization                           1,210,685         659,110
   Impairment of long-lived assets                         5,584,458
   Settlement of stockholders' claims                      2,000,000            --
   Compensatory common stock                                    --         2,850,000
                                                        ------------    ------------
                                                          27,637,041      11,865,182
                                                        ------------    ------------
   Loss from operations                                  (19,577,626)     (6,673,938)
                                                        ------------    ------------
Other income (expense):
   Gain on sale of land                                         --           502,230
   Interest income                                           302,626          52,847
   Interest expense                                         (375,936)     (1,260,915)
                                                        ------------    ------------
                                                             (73,310)       (705,838)
                                                        ------------    ------------
Loss before minority interests                           (19,650,936)     (7,379,776)

Minority interests in loss of consolidated subsidiary      2,870,554            --
                                                        ------------    ------------
   Net loss                                             $(16,780,382)   $ (7,379,776)
                                                        ============    ============
   Net loss per share                                   $      (1.52)   $      (1.45)
                                                        ============    ============
   Weighted average number of shares outstanding          11,074,810       5,088,549
                                                        ============    ============
</TABLE>

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


                                      F-6
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                          Series A                    Series B
                                                            Common Stock               Preferred Stock             Preferred Stock  
                                                     ---------------------------  -------------------------    ---------------------
                                                      Number of                      Number of                 Number of            
                                                       Shares         Amount          Shares        Amount       Shares      Amount 
                                                     ------------ --------------  -------------   ---------    ------------ --------
<S>                                                  <C>             <C>                             <C>                        <C> 
Balance at December 31, 1994                         4,572,598       $  4,453             --         $  --           --         $-- 

Issuance of common stock in a private
      placement                                        185,000            185             --            --           --          -- 
Common stock converted to preferred stock             (185,000)          (185)          77,089            77         --          -- 
Release of compensatory escrowed
      common stock                                        --             --               --            --           --          -- 
Issuance of preferred stock                               --             --          1,200,000         1,200         --          -- 
Warrants exercised for
      shares of common stock                           275,889            276             --            --           --          -- 
Issuance of common stock in a private
      placement                                        367,857            368             --            --           --          -- 
Payment on receivable for common stock                    --              119             --            --           --          -- 
Warrants redeemed for common stock                     731,233            732             --            --           --          -- 
Amortization of stock option cost                         --             --               --            --           --          -- 
Issuance of warrants                                      --             --               --            --           --          -- 
Net loss                                                  --             --               --            --           --          -- 
                                                   -----------       --------       ----------       -------       ------       ---
Balance at December 31, 1995                         5,947,577          5,948        1,277,089         1,277         --          -- 

Issuance of common stock
      in settlement of legal claim                      43,194             43             --            --           --          -- 
Issuance of common stock in private
      placements                                     1,206,193          1,206             --            --           --          -- 
Preferred stock converted to common                  6,282,090          6,282       (1,047,015)       (1,047)        --          -- 
Common stock issued for
      dividends on preferred stock                     200,818            201             --            --           --          -- 
Common stock issued for the
      exercise of warrants                             242,000            242             --            --           --          -- 
Common stock issued for payment of
      financing charges                                365,652            366             --            --           --          -- 
Issuance of preferred stock
      in a private placement                              --             --            170,371           170         --          -- 
Issuance of preferred stock in a
      private placement                                   --             --               --            --          4,000         4
Preferred stock converted to
      convertible debt                                    --             --               --            --         (4,000)       (4)
Unamortized stock option cost                             --             --               --            --           --          -- 
Amortization of stock option cost                         --             --               --            --           --          -- 
Net loss                                                  --             --               --            --           --          -- 
                                                   -----------       --------       ----------       -------       ------       ---
Balance at December 31, 1996                        14,287,524       $ 14,288          400,445       $   400         --         $-- 
                                                   ===========       ========       ==========       =======       ======       ===
<CAPTION>


                                                    Additional    Unamortized                    Total          
                                                     Paid-in     Stock Option  Accumulated     Stockholders'      
                                                     Capital         Cost        Deficit         Equity         
                                                   ------------  ------------ -------------   ------------   
<S>                                               <C>            <C>           <C>              <C>       
Balance at December 31, 1994                      $11,379,294    $(507,000)    $(3,473,472)     $7,403,275

Issuance of common stock in a private
      placement                                       584,455         --              --           584,640
Common stock converted to preferred stock                 108         --              --              --   
Release of compensatory escrowed
      common stock                                  2,850,000         --              --         2,850,000
Issuance of preferred stock                        12,371,261         --              --        12,372,461
Warrants exercised for
      shares of common stock                        1,103,399         --              --         1,103,675
Issuance of common stock in a private
      placement                                       699,632         --              --           700,000
Payment on receivable for common stock                364,602         --              --           364,721
Warrants redeemed for common stock                       (732)        --              --              --   
Amortization of stock option cost                        --        274,108            --           274,108
Issuance of warrants                                  102,133         --              --           102,133
Net loss                                                 --           --        (7,379,749)     (7,379,749)
                                                 ------------    ---------    ------------    ------------
Balance at December 31, 1995                       29,454,152     (232,892)    (10,853,221)     18,375,264

Issuance of common stock
      in settlement of legal claim                     79,957         --              --            80,000
Issuance of common stock in private
      placements                                    3,406,051         --              --         3,407,257
Preferred stock converted to common                    (5,235)        --              --              --   
Common stock issued for
      dividends on preferred stock                       (201)        --              --              --   
Common stock issued for the
      exercise of warrants                            506,258         --              --           506,500
Common stock issued for payment of
      financing charges                               273,873         --              --           274,239
Issuance of preferred stock
      in a private placement                        2,209,830         --              --         2,210,000
Issuance of preferred stock in a
      private placement                             3,667,496         --              --         3,667,500
Preferred stock converted to
      convertible debt                             (3,667,496)        --              --        (3,667,500)
Unamortized stock option cost                         249,250     (249,250)           --              --   
Amortization of stock option cost                        --        336,935            --           336,935
Net loss                                                 --           --       (16,780,382)    (16,780,382)
                                                 ------------    ---------    ------------    ------------
Balance at December 31, 1996                     $ 36,173,935    $(145,207)   $(27,633,603)   $  8,409,813
                                                 ============    =========    ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements


                                      F-7

<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                              ----------------------------
                                                                 1996             1995
                                                              ----------------------------
<S>                                                           <C>             <C>   
Cash flows from operating activities:                
   Net loss                                                   $(16,780,382)   $ (7,379,749)
                                                              ------------    ------------
   Adjustments to reconcile net loss to net cash
      used in operating activities:
      Depreciation and amortization                              1,210,685         665,221
      Stock issued in settlement of legal claim                     80,000            --
      Settlement of stockholders' claims                         2,000,000            --
      Stock issued for financing charges                           274,239            --
      Amortization of stock option cost                            336,935         274,108
      Impairment of long-lived assets                            5,584,458            --
      Gain on sale of land                                            --          (502,230)
      Compensatory stock                                              --         2,850,000
      Minority interests                                        (2,870,554)           --
   Changes in assets and liabilities:
      Increase in inventories                                     (363,999)        (61,962)
      Increase in preopening costs                                (300,000)       (538,169)
      (Increase) decrease in prepaid expenses and other           (467,830)         38,564
      Increase in other non-current assets                        (104,899)        (39,206)
      Increase (decrease) in accounts payable                    2,955,362        (292,943)
      Increase (decrease) in accrued expenses                      563,990         (80,935)
                                                              ------------    ------------
         Total adjustments                                       8,898,387       2,312,448
                                                              ------------    ------------
         Net cash used in operating activities                  (7,881,995)     (5,067,301)
                                                              ------------    ------------
Cash flows from investing activities:
   Investment in and advances to Las Vegas, LLC                       --          (852,488)
   Purchase of fixed assets                                    (15,109,955)       (814,237)
   Proceeds from sale of land                                         --         2,155,136
   Proceeds received from minority interests                     4,500,000            --
                                                              ------------    ------------
         Net cash provided (used) in investing activities      (10,609,955)        488,411
                                                              ------------    ------------
Cash flows from financing activities:
   Net proceeds from issuance of common and preferred stock      9,791,257      14,862,909
   Repayment of leasehold improvements payable                        --          (400,000)
   Proceeds received on stock note                                    --           364,721
   Proceeds from note payable                                         --           495,000
   Repayment of long term debt                                        --          (823,284)
   Repayment of convertible subordinated notes payable                --          (500,000)
   Capital lease payments                                         (110,777)       (203,475)
                                                              ------------    ------------
         Net cash provided by financing activities            $  9,680,480    $ 13,795,871
                                                              ------------    ------------
</TABLE>
                                                                    (continued)

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


                                      F-8
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

<TABLE>
<CAPTION>

                                                               Year ended December 31,
                                                              -------------------------
                                                                 1996          1995
                                                              -------------------------
<S>                                                           <C>            <C>       
Net (Decrease) Increase in Cash                               $(8,811,470)   $9,216,981

Cash and cash equivalents, beginning of period                  9,760,675       543,694
                                                              -----------    ----------
Cash and cash equivalents, end of period                      $   949,205    $9,760,675
                                                              ===========    ==========

Supplemental disclosure of noncash investing and
 financing activities:

   Officer compensation relating to 737,000 shares
   which were released from escrow                            $      --      $2,850,000

   Equipment acquired with capital leases                         288,474          --

   Pre-development costs transferred to
   leasehold improvements                                       1,142,012          --

   Investments in and advances to Las Vegas, LLC
   transferred to leasehold improvements                          852,488          --

   Note payable transferred to the equity in
   Las Vegas, LLC                                                 495,000          --

   Warrants given for promotional services to be provided
   in the future                                                  249,250          --

   Conversion of preferred stock to convertible debt net of
      $332,500 of debt issuance costs                           3,667,500          --

Supplemental disclosure:

   Cash paid during the year for interest                     $    44,810    $   80,998
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                      F-9
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 1 - Nature of Business and Summary of Significant Accounting Policies

Basis of Presentation

The  accompanying  consolidated  financial  statements  include the  accounts of
Country Star Restaurants,  Inc. and its majority owned subsidiary,  Country Star
Las Vegas, LLC (CSLV) (collectively,  the "Company").  All material intercompany
transactions and accounts have been eliminated in consolidation.

In 1996, as described in Note 4, the Company  gained voting control over CSLV as
a result of the  execution  of certain  financing  arrangements  which led to an
increased  ownership  position  in CSLV of 50.05  percent.  Prior  to 1996,  the
Company's investment in CSLV was accounted for under the cost method.

Description of Business

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

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, demand deposits, and short-term
investments  with original  maturities of three months or less. Cash equivalents
consist of certificates of deposit maintained with major financial institutions.

At December 31, 1996, the Company had approximately $687,000 of cash equivalents
restricted as to use.

Inventories

Inventories,  consisting  primarily of  merchandise,  are stated at the lower of
cost (first-in, first-out) or market.

Preopening Costs

The Company  capitalizes  certain costs relating to opening of  restaurants  and
amortizes  such costs using the  straight-line  method during the year following
the restaurant opening.

                                                                     (continued)

                                      F-10
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 1 - Nature of Business and Summary of Significant Accounting Policies
(continued)

Property and Equipment

SFAS 121,  whose  provisions  were  adopted  by the  Company  in 1996,  requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be  generated  by those  assets are less than the  assets'  carrying  amount.
Construction  costs overruns and continuing  operating losses were indicators of
potential impairment of the Company's three restaurants.

The impaired  assets were written down by  $5,584,458.  This non-cash  charge to
operations increased the 1996 loss by $0.50 per share.

Property  and  equipment  are  stated at cost,  less  accumulated  depreciation.
Amortization  of leasehold  improvements  is provided over the estimated  useful
life of the asset or the lease term,  including  option  periods,  whichever  is
shorter. Depreciation of memorabilia commences when it is placed in service upon
its  installation at a unit location.  Depreciation is provided for by using the
straight-line method over the following useful lives:

                                                                 Years
                                                                 -----
                  Furniture and equipment                        5 - 8
                  Memorabilia                                       20
                  Leasehold improvements                         18-20

Expenditures for additions and improvements  which extend the life of the assets
are capitalized.  Expenditures for normal repairs and maintenance are charged to
expense as incurred.

Leases

The Company has various  non-cancelable  operating and capital lease agreements,
primarily unit sites.  Unit leases are established  using a base amount and/or a
percentage  of sales.  Certain of these  leases  provide  for  escalating  lease
payments over the terms of the leases.  For financial  statement  purposes,  the
total  amount of base rentals over the terms of the leases is charged to expense
on the  straight-line  method over the lease terms.  Rental expense in excess of
lease payments is recorded as a deferred rental liability.

                                                                     (continued)

                                      F-11
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 1 - Nature of Business and Summary of Significant Accounting Policies
(continued)

Income Taxes

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards (SFAS) 109, "Accounting for Income Taxes." Under the asset
and liability  method of SFAS 109,  deferred income taxes are recognized for the
tax consequences of temporary  differences by applying  enacted  statutory rates
applicable to future years to the  difference  between the  financial  statement
carrying amounts and the tax bases of existing assets and liabilities.

Minority Interests

Minority interests represent the minorities' equity in the earnings or losses in
the entity which is majority owned by the Company.

Food, Beverage and Merchandise Revenues

Food, beverage and merchandise  revenues are recognized as the products are sold
to customers.

Stock-Based Compensation

The Company  accounts for  compensation  costs related to employee stock options
and other forms of employee  stock-based  compensation  plans in accordance with
the  requirements of Accounting  Principles  Board Opinion 25 ("APB 25"). APB 25
requires compensation costs for stock-based  compensation plans to be recognized
based on the difference,  if any,  between the fair market value of the stock on
the date of grant and the option  exercise price. In October 1995, the Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
123, Accounting for Stock-Based  Compensation ("SFAS 123"). SFAS 123 established
a fair value-based  method of accounting for compensation costs related to stock
options and other forms of stock-based  compensation  plans.  However,  SFAS 123
allows an entity to continue to measure  compensation costs using the principles
of APB 25 if certain pro forma  disclosures  are made. SFAS 123 is effective for
fiscal  years  beginning  after  December  15,  1995.  The  Company  adopted the
provisions  for pro forma  disclosure  requirements  of SFAS 123 in fiscal 1996.
Options granted to non-employees are recognized at their estimated fair value at
the date of grant.

                                                                     (continued)

                                      F-12
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 1 - Nature of Business and Summary of Significant Accounting Policies
(continued)

Advertising and Promotional Costs

Expenses associated with advertising and promoting the Company's restaurants not
capitalized  as  preopening   costs,   are  expensed  in  the  period  incurred.
Advertising  expense for fiscal 1995 and 1996 totaled  $671,802 and  $1,781,926,
respectively.

Net Loss per Share

Loss per share is computed based upon the weighted  average  shares  outstanding
for the period.  Loss per share excludes the effect of outstanding  warrants and
stock options and the conversion of the convertible  subordinated  note payable,
because the effect of such inclusion would be antidilutive.

Use of Estimates

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

Fair Value of Financial Instruments

The  fair  value  of  financial  instruments,  consisting  principally  of  cash
equivalents,  convertible debt and obligations under capital leases, is based on
interest rates  available to the Company and  comparison to quoted  prices.  The
fair value of these financial instruments approximates carrying value.

Reclassifications

Certain  reclassifications  have  been  made in the  prior  years'  consolidated
financial statements to conform with the fiscal 1996 presentation.

                                                                     (continued)

                                      F-13
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 2 - Capital and Financing Transactions

In  connection  with the Company's IPO in 1993,  certain  founding  stockholders
entered  into  an  agreement  with  the  underwriter  of the  IPO  (the  "Escrow
agreement") to place all of their common stock,  consisting of 1,737,000 shares,
into escrow. The Escrow agreement had two aspects. First, the underwriter of the
IPO  required  the  placement  of  1,000,000  shares  into escrow to enhance the
marketability  of the IPO. This aspect of the Escrow agreement did not represent
a  contingency  for which  shares  would be issued.  The  1,000,000  shares were
released  upon the opening of Country Star  Hollywood  on August 22,  1994.  The
release of the shares had no effect on the Company's financial  statements.  The
second aspect of the Escrow agreement  initially provided for the release of the
remaining  737,000 shares upon the Company  achieving  after-tax net income,  as
defined,  of $153,750 for any quarter.  If for any quarter the Company  achieved
after-tax  net  income  greater  than  $125,125,   but  less  than  $153,750,  a
proportionate amount of shares would be released. On August 21, 1995, the Escrow
agreement  was  amended to provide  that the  737,000  shares be released on the
second  anniversary  of the effective  date of the Company's  IPO,  December 15,
1995. As a result of the amendment, the Company recorded a charge to earnings of
approximately  $2,850,000  for the period  August 22, 1995 through  December 31,
1995, based on the market price of the common stock on August 22, 1995.

On July 28, 1995, the Company completed a private placement pursuant to which it
sold 37 units (the "Units") to nonaffiliated, accredited investors (the "Private
Placement"),  each Unit  consisting of (i) a $50,000 6% promissory  note due the
sooner of twelve (12) months from the date of issuance or the Company's  receipt
of at least  $5,000,000  in gross  proceeds from a public or private sale of its
securities,  (ii)  5,000  shares  of common  stock,  and  (iii)  3,000  warrants
exercisable  at a price of $5.00 per share to  purchase  3,000  shares of common
stock. The net proceeds from the Private Placement were approximately $1,650,000
(after commissions and expenses) and in connection  therewith the Company issued
an aggregate of 185,000 shares of common stock and 111,000 warrants and recorded
a discount aggregating $655,518 based upon the relative fair market value of the
Notes, the common stock and the warrants,  on the date of issuance.  The Company
incurred  approximately  $200,000  of  offering  costs  related  to the  private
placement,  of which  $129,015  was recorded as a discount to the Notes with the
remainder recorded as a reduction to the paid-in capital of the common stock and
warrants issued therewith.  The discount is to be amortized over the term of the
Notes as interest  expense.  On November 10,  1995,  the  effective  date of the
Company's  Secondary  Offering,  the common  shares were  converted  into 77,089
shares of 6% Cumulative  Convertible Series A Preferred Stock and the promissory
notes were repaid.  The  accompanying  statement of operations for 1995 includes
amortization  of the discount and offering costs in the amount of $886,666 which
is included in interest expense.

                                                                     (continued)

                                      F-14
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 2 - Capital and Financing Transactions (continued)

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

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

In 1996,  the  Company  sold  shares  of its  common  stock in  various  private
placement transactions. The following table shows the dates, number of shares of
common stock, per share price, net proceeds, and the warrants, if any, issued in
such transactions:

<TABLE>
<CAPTION>

       Date of                                                             Common Stock
  Private Placement                    Common Stock                      Purchase Warrants
----------------------   ------------------------------------    --------------------------------
                                                      Net                   Exercise    Term in                       
                           Shares       Price       Proceeds      Number     Price       Years
                         ------------------------------------    --------------------------------
<S>                        <C>          <C>       <C>             <C>        <C>          <C>                            
Feb. 12, 1996              241,905      $2.625    $  635,000        --         N/A        N/A
Mar. 28, 1996              750,000       3.00      2,192,257      375,000    $3.00          5
July 10, 1996              114,288       3.50        380,000       85,715     3.50          5
Sept. 10, 1996             100,000       2.00        200,000      100,000     2.00          5
                         ---------                ----------
                         1,206,193                $3,407,257
                         =========                ==========
</TABLE>

On August 28, 1996,  the Company  sold 170,371  shares of its Series A Preferred
Stock at  $13.50  per  share  for  aggregate  net  proceeds  of  $2,210,000.  In
connection with this transaction,  the purchasers  received 306,667 common stock
purchase  warrants  exercisable at $2.25 per share,  expiring in 5 years.  These
warrants were  surrendered in conjunction  with the February 12, 1997 settlement
outlined below.

                                                                     (continued)

                                      F-15
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 2 - Capital and Financing Transactions (continued)

On October 10, 1996 the Company sold 4,000 shares of newly issued 7% Convertible
Preferred  Stock,  par value $.001 per share at $1,000 per share (the  "Series B
Preferred  Stock").  The  sale was  made to  Cameron  Capital  Ltd.,  a  foreign
institutional  investor,  for aggregate net proceeds of $3,667,500.  On February
12, 1997, all of the outstanding shares of Series B Convertible  Preferred Stock
were exchanged by the holder with the Company for a Convertible Term Note in the
principal amount of $4,000,000,  as outlined below.  The company's  recording of
this exchange transaction included a charge to debt issuance costs of $332,500.

On February 12, 1997, the Company  entered into secured loan agreements with Dan
Rubin ("Rubin") and Cameron Capital Ltd.  ("Cameron") as described below.  These
agreements  have  been  accounted  for  effective   December  31,  1996  because
substantially   all  the  conditions   precedent  to  the  occurrence  of  these
transactions had taken place as of that date.

Under the Rubin secured financing agreement, Rubin has made a $3,500,000 line of
credit loan  available to the Company,  of which an initial  advance of $500,000
was made in early  1997.  Rubin,  in his sole  discretion,  may make  additional
advances to the Company under this  arrangement.  All advances are at prime plus
4%, payable  semi-annually,  commencing on December 31, 1997. The note is due on
October 9, 1999.

In connection with this line of credit commitment,  Rubin and other investors in
the  Company  have  agreed to settle  certain  claims  against  the  Company for
$2,000,000.  Accordingly,  the Company has issued its convertible  term notes in
the  aggregate  amount of  $1,950,000,  agreed to pay $50,000 to Rubin and these
investors,  and isssued a warrant to purchase 166,667 shares of its common stock
at $0.625 per share.  These  convertible  term notes  contain the same terms and
conditions as the convertible  term note issued to Cameron,  as described below,
except that the holders of the Rubin  convertible  term notes may exercise their
conversion feature at any time following the closing.

Cameron  exchanged its 4,000 shares of Series B Convertible  Preferred  Stock of
the Company,  with an aggregate  liquidation  preference  of  $4,000,000,  for a
convertible  term note in the principal  amount of $4,000,000.  The  convertible
term note bears  interest at the rate of seven  percent (7%) per annum,  payable
semi-annually  commencing  December 31, 1997.  The principal  balance is due and
payable on October 9, 1999.  Any portion or all of the  principal  amount of the
note  outstanding  may be converted into common stock of the Company  commencing
ninety (90) days after the date of closing of the  financing.  Upon  conversion,
the Company  shall issue that number of shares of its common  stock  obtained by
dividing the principal  amount of the loan converted by the lesser of (i) $1.33,
or (ii) 80% of the average  closing  bid price of the common  stock for the five
(5)

                                                                     (continued)

                                      F-16
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 2 - Capital and Financing Transactions (continued)

consecutive trading days preceding the date of conversion. The maximum number of
shares  into  which the  convertible  note may be  converted  shall  not  exceed
3,000,000. The conversion formula is subject to adjustment in the event of stock
splits, stock dividends, mergers,  consolidations,  or similar transactions. The
line of  credit  advances  by  Rubin,  Cameron's  convertible  term note and the
convertible  term notes issued in settlement of claims are all secured by a lien
on substantially  all of the tangible and intangible  assets of the Company.  In
the event of default,  the secured parties shall  participate in the proceeds of
the collateral in proportion to their outstanding debt. Cameron has the right to
name  three of the five  members of the board.  Cameron  assigned  this right to
Rubin, as its agent, and immediately after the closing, Dan Rubin was elected as
Chief Executive Officer and President of the Company.

Note 3 - Common Stock Options and Warrants

Incentive Stock Option Plan

In July 1993,  the Company  adopted an Incentive  Stock  Option Plan.  The total
number of shares with respect to which  incentive  stock  options  (ISOs) may be
granted is 100,000.  In 1994,  90,000  options  have been granted at an exercise
price of $6.88 per share.  In August,  1995, the Board of Directors  approved an
amendment to the Incentive  Stock Option Plan  amending the exercise  price from
$6.88 per share to $4.00 per share.

Nonqualified Stock Option Plan

In January 1994,  the Company  adopted the 1994  Nonqualified  Stock Option Plan
(the "Plan").  The Plan provides for the grant of nonqualified  stock options to
purchase up to  1,000,000  shares of the common  stock.  The  exercise  price of
options  granted  under this plan shall not be less than 100% of the fair market
value of the common stock on the date of the grant.  In April 1994,  the Company
granted options to purchase  521,000 shares at a price equal to the market price
on the date of grant.  In December  1994, the exercise price was adjusted to the
then market price of $4.00.

Other

In 1994,  the  Company  granted  options to purchase  467,000  shares to certain
non-employees for services to be performed. Of this amount, 350,000 options were
granted  to  certain  celebrities  pursuant  to  license  agreements  with  such
celebrities.  The Company  will  recognize a charge to earnings  over the period
services are rendered by the non-employees based on the fair market value of the
options at the date granted.

There were no transactions  regarding stock options in the two year period ended
December 31, 1996. 

                                                                     (continued)

                                      F-17
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 3 - Common Stock Options and Warrants (continued)

Warrants

In September 1995, the Company issued 100,000 common stock purchase  warrants in
connection  with its  financing  agreement  with its  partner  in the Las  Vegas
Country Star Restaurant.  During 1996, the Company issued an aggregate of 50,000
warrants  to  purchase  common  stock to  non-employee  members  of the Board of
Directors,  1,519,000 warrants to employees, and 508,500 warrants to celebrities
and other vendors.  An additional  1,439,049 warrants were issued in conjunction
with various private placement  transactions.  The price range of these warrants
is between  $2.00 and $4.00,  and as of the end of 1996,  none of these had been
exercised.  Additionally,  as of December 31, 1996, 1,245,000 warrants issued to
the Company's  underwriters in 1994 remain outstanding,  and 1,080,000 issued in
connection with the underwriters' over-allotment have expired.

Combined transactions in employee warrants for 1995 and 1996 are as follows:

                              1996                             1995
                --------------------------------  ------------------------------
                 Number of     Weighted Average     Number of   Weighted Average
                  Shares        Exercise Price        Shares     Exercise Price
                -----------   ------------------  ------------  ----------------
Warrants
  outstanding 
  January 1           --              --              --                --  
Granted          1,519,000          $ 3.39            --                --  
Canceled              --               --             --                --  
Exercised             --               --             --                --  
                ----------         -------         -------            ------
Warrants                                                            
  outstanding                                                       
  December 31    1,519,000          $ 3.39            --                --  
                ==========         =======         =======            ======
                                                                  
The following information applies to warrants outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                 Warrants Outstanding                    Warrants Exercisable
                     ------------------------------------------   -----------------------------------
                                       Weighted   
                                       average      Weighted 
                                      remaining      average                               Weighted
                         Number      contractual    exercise           Number             average
                      outstanding    life (years)    price          exercisable        exercise price
                     -------------   ------------ -------------   ---------------      --------------
Range of exercise
prices
<S>                    <C>             <C>           <C>             <C>                   <C>  
$2.00-$3.00              494,000         5            $2.21            494,000              $2.21
$3.01-$4.00            1,025,000         7            $3.97          1,025,000              $3.97
                       ---------                      -----          ---------              -----
                       1,519,000                      $3.40          1,519,000              $3.40
                       =========                      =====          =========              =====
</TABLE>                                           

                                                                     (continued)

                                      F-18
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 3 - Common Stock Options and Warrants (continued)

Statement of Financial  Accounting  Standards 123,  "Accounting  for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee  compensation plans at fair value. The Company has
chosen to continue to account for stock-based  compensation  using the intrinsic
value method prescribed in Accounting  Principles Board Opinion 25,  "Accounting
for Stock  Issued  to  Employees,"  and  related  interpretations.  Accordingly,
compensation  cost for stock  options is measured as the excess,  if any, of the
quoted market price of the Company's  stock at the date of grant over the amount
an employee must pay to acquire the stock.

Had  compensation  cost for the plan been determined  based on the fair value of
the  warrants at the grant  dates  consistent  with the method of SFAS 123,  the
Company's net loss and loss per share would have been:

                                           1996                     1995
                                  -----------------------   -------------------
Net loss
   As reported                    $     (16,780,381)         $   (7,379,776)
   Pro forma                            (22,227,381)             (7,379,776)

Primary earnings per share
   As reported                    $           (1.52)         $        (1.45)
   Pro forma                                  (1.76)                  (1.45)

These pro forma amounts may not be representative of future disclosures  because
they do not take into effect pro forma  compensation  expense  related to grants
made before 1995. In addition,  potential deferred tax benefits of approximately
$1,852,000  in 1996 have not been  reflected in the pro forma amounts due to the
uncertainty  of  realizing  any  benefit.  The fair value of these  options  was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1996:

                 Expected life (years)                          5
                 Risk-free interest rate                    6.00%
                 Volatility                                  120%

The weighted fair value of warrants  granted  during the year ended December 31,
1996 for which the  exercise  price  approximated  the market price on the grant
date was $3.59.

Note 4 - Country Star Las Vegas, LLC

On September 6, 1995,  the Company  entered into a definitive  agreement for the
financing of future  Country Star  Restaurants  with  NevStar  Restaurants,  LLC
("NevStar") a newly

                                                                     (continued)

                                      F-19
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 4 - Country Star Las Vegas, LLC (continued)

formed Nevada limited  liability  corporation.  Such agreement (the "Development
Financing  Agreement")  provides  that NevStar  shall (i) invest $4.5 million of
equity in  Country  Star Las  Vegas,  and (ii)  have the  right,  under  certain
circumstances,  to invest up to an additional  $12.5 million in equity in future
domestic Country Star  Restaurants,  including  Country Star Atlanta.  A limited
liability  corporation has been  established to effect each of NevStar's and the
Company's  investment  in Country Star Las Vegas (the  "Country  Star Las Vegas,
LLC").  NevStar  provided $4.5 million of equity  financing for Country Star Las
Vegas,  LLC and the Company  committed to provide the remaining  funds necessary
for Country Star Las Vegas, LLC, estimated at the time to be $3.0 million.

Upon  commencement  of operations  of Country Star Las Vegas,  prior to any cash
distributions,  the Company,  which is  responsible  for managing the day-to-day
operations of Country Star Las Vegas,  subject to NevStar's approval for various
matters,  will  receive a  management  fee in the amount of $333,333  per annum,
payable in equal monthly installments.  After the Equity Investors (of which the
Company is a 40% participant)  shall receive a rate of return of 6% per annum on
their unrecouped investment,  all available cash shall be distributed 25% to the
Company and 75% to the Equity  Investors until such time as the Equity Investors
shall  have  received  cash  contributions  equal to 100% of  their  investment.
Thereafter,  all available cash shall be distributed  65% to the Company and 35%
to the  Equity  Investors.  On April 1,  1996,  a limited  partnership  invested
$495,000 in Country Star Las Vegas, LLC. Concurrently,  the Company was assigned
27.75% of NevStar's  interest,  or 16.05%, and thereby achieved ownership rights
of 50.05%.

Note 5  - Income Taxes

A reconciliation between the actual income tax benefit and the federal statutory
rate follows:

                                   1996                           1995
                         -------------------------     -----------------------
                           Amount             %          Amount             %
                           ------            ---         ------            ---
Computed income tax
benefit at statutory
rate                     $ 5,705,000          34      $ 2,509,000           34
Operating loss with no 
current tax benefit       (5,705,000)        (34)      (2,509,000)         (34)
                         -----------        ----      -----------         ----
 Income tax benefit      $      --            --      $      --             --
                         ===========        ====      ===========         ====


                                                                     (continued)

                                      F-20
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 5 - Income Taxes (continued)

At December 31, 1996,  the Company had a net  operating  loss  carryforward  for
federal tax purposes of  approximately  $18,165,000  which,  if unused to offset
future taxable  income,  will expire  between 2008 and 2011,  and  approximately
$9,082,000  for state tax purposes  which will expire if unused between 1998 and
2001.

A  valuation  allowance  has been  recognized  for 1996 and 1995 to  offset  the
related  deferred tax assets due to the  uncertainty  of  realizing  any benefit
therefrom.  During 1996, no changes  occurred in the  conclusions  regarding the
need for a 100% valuation allowance in all tax jurisdictions.

Significant  components of the Company's  deferred tax assets as of December 31,
1996 and 1995 are as follows:

                                                     1996               1995
                                                 -----------        -----------
Net operating loss carryforwards                 $ 6,721,000        $ 2,849,000
Impairment of long-lived assets                    2,066,000               --
Other                                                  5,000               --
                                                 -----------        -----------
                                                   8,792,000          2,849,000

Depreciation                                         152,000             56,000
Valuation allowance                               (8,944,000)        (2,905,000)
                                                 -----------        -----------
Net deferred tax assets                          $      --          $      --
                                                 ===========        ===========

Note 6 - Related Party Transactions

On  December  14,  1993,  the  Company  entered  into a two (2) year  consulting
agreement  with a  founding  stockholder  in  exchange  for  certain  consulting
services relative to the operation of the Company's restaurant  operations.  The
Company  paid the  consultant  a fee of  $60,000  per  annum  plus out of pocket
expenses for his services until December 31, 1995 when the consulting  agreement
expired.

See also Note 2 for a description of capital and financing  transactions between
the Company and its new CEO as of February 12, 1997, Mr. Dan Rubin,  and certain
of his affiliates.

                                                                     (continued)

                                      F-21
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 7 - Commitments

The Company has lease agreements to operate its three  restaurant  facilities in
Hollywood,  California;  Las Vegas,  Nevada; and Atlanta,  Georgia;  and for its
corporate offices and warehouse facilities in Santa Monica, California and North
Hollywood, California, respectively.

The Hollywood restaurant's initial lease term expires on May 31, 1997, and under
certain  conditions is subject to three extensions of five years each. The lease
requires  annual  minimum  payments of $312,000,  subject to annual  adjustment.
Additionally, the lease requires percentage rent to be paid, ranging from 6%-10%
of annual sales volume,  although such  percentage rent payments will be forgone
by the landlord  until such time as the Company  recoups its  investment  in the
leasehold  improvements  from  amounts  that would  otherwise  be payable to the
landlord as percentage rent.

The Company has also entered into lease agreements in Las Vegas and Atlanta. The
Atlanta  lease  requires  the  Company to pay base rent of  $750,000,  operating
expenses,  and a percentage  rent of 6% of gross sales after the Company recoups
its investment in the leasehold  improvements  from amounts that would otherwise
be payable to the landlord as percentage  rent. The Las Vegas lease requires the
Company to pay  $1,200,000  base rent plus  operating  expenses,  increasing  to
$1,400,000 base in the third year.

The Atlanta lease has a 20-year term,  which will expire in 2015.  The Las Vegas
lease has a 10-year term,  which will expire in 2005,  with a 10-year  option to
renew.

The leases on warehouse and corporate  facilities  expire in March 1997 and June
2000, respectively.

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

         Year Ending
         December 31,                                         Amount
         ------------                                         ------

           1997                                            $ 2,555,424
           1998                                              2,546,676
           1999                                              2,525,449
           2000                                              2,510,144
           2001                                              2,588,480
           Thereafter                                       32,792,145


                                                                     (continued)

                                      F-22
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 7 - Commitments (continued)

The Company has executed certain leases for signage and computer equipment which
are accounted  for as capital  leases.  At the  termination  of each lease,  the
Company has the option to purchase the equipment at a bargain  purchase  amount.
There are three separate leases, expiring in various years through 1999.

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

Year Ending                                           
December 31,                                                      Amount
------------                                                      ------

1997                                                            $ 275,548
1998                                                              254,573
1999                                                              108,174
                                                                ---------
Total minimum lease payments                                      638,295
Less amount representing interest                                 (98,058)
                                                                ---------
Present value of net minimum lease payments                     $ 540,237
                                                                =========
Current portion                                                 $ 224,652
Long-term portion                                                 315,585
                                                                ---------
                                                                $ 540,237
                                                                =========

Note 8 - Litigation

The Company has certain  contingent  liabilities  resulting from  litigation and
claims incident to the ordinary course of business. Management believes that the
probable  resolution  of such  contingencies  will  not  materially  affect  the
financial position or results of operations of the Company.

Note 9 - Going Concern

New management  took over the Company on February 12, 1997 and determined that a
major  overhaul of corporate  strategy  was required to deal with the  Company's
financial  problems.  Measures taken by new management include (i) the temporary
closing and planned  reopening of Country Star  Atlanta in May,  1997,  (ii) the
expansion of the "country" theme, (iii) planned expansion through joint ventures
and licensing rather than expensive  construction,  and (iv) settlement with the
trade creditors at 40% of the amounts owed.

                                                                     (continued)

                                      F-23
<PAGE>

                  COUNTRY STAR RESTAURANTS, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 9 - Going Concern (continued)

Management  has also made  operational  changes  to  improve  revenues,  control
operating costs, and limit corporate overhead.  The impact of these measures and
changes will not be realized  until the second  quarter of calendar  1997 and in
subsequent periods.  The Company will need to raise additional capital before it
can obtain profitability from operations.  Management believes it can raise this
capital  through  private  placements  of equity and the  granting by lenders of
discretionary advances under outstanding lines of credit.


                                      F-24


<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
executed this 15 day of April, 1997.

                                       COUNTRY STAR RESTAURANTS, INC.

                                       By: /s/ Dan J. Rubin
                                          --------------------------------
                                          Dan J. Rubin, President
                                          and Chief Executive Officer

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

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

                            President, Chief
                            Executive Officer
/s/ Dan J. Rubin            and Director                    April 15, 1997
--------------------- 
Dan J. Rubin

/s/ William Wei               Director                      April 15, 1997
--------------------- 
William Wei

/s/ Robert A. Nardone         Director                      April 15, 1997
--------------------- 
Robert A. Nardone

/s/ Darren Rice               Director                      April 15, 1997
--------------------- 
Darren Rice