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, 1997
                                             -----------------

[ ]      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.)


4929 Wilshire Boulevard
Los Angeles, California                                     90010
--------------------------------------               ---------------------
(Address of Principal Executive Office)                   (Zip Code)

Registrant's telephone number, including area code: 213/634-5588
                                                    ------------

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 $.01 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]


<PAGE>


         Issuer's revenues for its most recent fiscal year were $6,279,000.

         On April 1, 1998, the aggregate market value of the voting common stock
held by  non-affiliates  of the Registrant was $1,683,500 based upon the average
of the closing  bid and asked  price of such  common  stock as of April 1, 1998,
which was $.195.

         The number of shares of the Registrant's common stock outstanding as of
March 31, 1998 was 8,633,415.

         No shares of the  Registrant's  preferred stock were  outstanding as of
March 31, 1998.



                      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.


                                      -2-
<PAGE>

                                     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  theme  restaurants
combining high quality,  moderately  priced food with a casual,  family-oriented
environment.

         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
sales, inclusive of labor costs.

         The Company  believes  that its  country  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  theme is an  under-exploited
segment of 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.

         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, steaks, 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.

         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.

                                      -3-
<PAGE>

Country  Star  Atlanta is now  permanently  closed and no plans for  opening any
other restaurants have been finalized.

         Unanticipated  financial  problems  arose with  respect to both the Las
Vegas and Atlanta  restaurants.  Operating expenses at both sites  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,  the Company 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,  new  management has taken a number of interim and
permanent measures.

         First, management permanently closed the Atlanta restaurant and removed
some of its furniture and fixtures  during January 1998,  with the balance to be
removed on or about May 1998.  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  and  unprofitable  establishment  would  only  hurt  the
Company's  opportunities  for long term success.  (See  "Description of Business
Country Star Atlanta.")

         Second, the Company sold all of its interest in the restaurant operator
of the Country Star Las Vegas restaurant in December 1997 and entered into a new
lease for the  restaurant  facility  with a reduction in the base rent.  The new
lease  terminates  on September  30,  1998,  unless the landlord and the Company
mutually  agree in writing to extend the lease on a  month-to-month  basis.  The
Company  used the  proceeds of the sale of  $1,550,000  for working  capital and
repayment  of  indebtedness.  (See  "Description  of Business - Country Star Las
Vegas.")

         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 

                                      -4-
<PAGE>

expensive construction, development and pre-opening costs. Management is seeking
to  identify  publicly  held and private  companies  that may be  interested  in
working with the Company on a joint venture or licensing basis.

SETTLEMENT OF TRADE CLAIMS

         Management  determined  that  the  Company  would  not be  able  to pay
existing  trade  creditors of the Company in full and also realize its strategic
goals.  Accordingly,  starting  in March  1997 the  Company  made  offers to all
creditors to settle their outstanding  claims by accepting forty cents for every
dollar owed. Management pointed out to its creditors that the settlement was far
more  favorable to them than the  alternative  of the Company filing a voluntary
bankruptcy proceeding.

         The  Company  was  successful  in  settling  the  majority of the trade
claims,  including the claims of the then landlord of the Las Vegas facility and
the claims of the general contractor and certain subcontractors  relating to the
construction of the Las Vegas facility. In some instances,  the Company paid off
trade debt through the issuance of common stock.

         The only trade creditor  holding a claim in excess of $25,000 with whom
the Company has not reached a settlement is Pacific Southwest Development,  Inc.
("PSD"). (See Item 3, "Litigation.")

         During  1997,  the  Company  recognized  extraordinary  gains  totaling
$1,673,629  on the  settlement of trade claims in exchange for  discounted  cash
payments and common stock issuances.

         The Company's trade claims  settlement has not materially  affected the
Company's  ability to obtain  supplies at  reasonable  prices and on  reasonable
terms.  The Company has selected new suppliers when  appropriate  and has worked
out  acceptable  credit and payment  terms with  existing  suppliers for them to
continue doing business with the Company.

COUNTRY STAR HOLLYWOOD

         Country Star  Hollywood is  approximately  18,000  square feet in size,
4,000 of which is a partially  enclosed outdoor patio, and has approximately 325
seats inside the restaurant and  approximately  150 seats outside on an enclosed
patio.  One of Country  Star  Hollywood's  dining  areas  also  features a fully
operational  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,

                                      -5-
<PAGE>

but varied, American fare, such as ribs, chili, chicken, burgers, steaks, 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.

         The Company has recently  completed the  construction  of a dance floor
and bar in its patio  area.  The  Company  expects  the patio area to serve as a
venue for country  music  promotions,  parties  sponsored by local radio station
KZLA and other events.

         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 country  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 has begun to emphasize
the sale of higher volume and higher gross profit merchandise.

COUNTRY STAR LAS VEGAS

         Country  Star Las  Vegas  opened on the  "Strip"  in Las Vegas in July,
1996, and is one of the largest free standing upscale dining  establishments  in
Las Vegas.  The  restaurant is an  approximately  20,000 square foot,  500 seat,
facility located 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  Bellagio Hotel and Casino
development,  presently under construction and scheduled to open in 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 should 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."]

                                      -6-
<PAGE>

         The Country  Star Las Vegas  restaurant  was owned by a Nevada  limited
liability  company (the limited  liability  company is referred to herein as the
"Restaurant  Operator").  The Company  was the manager of and held the  majority
interest  in the  Restaurant  Operator.  The  other  members  of the  Restaurant
Operator  were  Cirrus,  Cirrus LLC  ("Cirrus"),  a Delaware  limited  liability
company and NevStar LLC ("NevStar"), a Nevada limited liability company. NevStar
was also the landlord of the restaurant's leased facility.

         The restaurant suffered operating losses since its opening primarily as
a result of customer  revenues  falling  below  expectations  and  unanticipated
expenses.

         The  Company was in arrears in the  payment of  October,  November  and
December, 1997 rent due under the lease.

         NevStar,  as Landlord of the restaurant  facility served a notice which
purported to  terminate  the lease as of December  22, 1997 for  non-payment  of
rent.  The Landlord  agreed not to take any actions to terminate the lease prior
to December  24,  1997.  Management  of the Company  negotiated  with NevStar as
Landlord for an agreement  under which the Landlord  would buy out the remaining
term of the lease.

         Management  was unable to reach an  agreement  with NevStar as Landlord
regarding  a buy out of the lease and  NevStar  as  Landlord  would not agree to
delay its  termination  of the lease beyond  December 24, 1997. The Company then
commenced a federal  bankruptcy  proceeding  against the Restaurant  Operator in
order to preserve  the  remainder of the lease and the rights  thereunder  as an
asset  of the  Restaurant  Operator.  Such  a  bankruptcy  proceeding  had to be
commenced  before the legal  termination of the lease in order for the lease and
the rights thereunder to remain an asset of the Restaurant Operator.

         The  Company,  NevStar  as  Landlord  and  the  other  members  of  the
Restaurant  Operator  reached a settlement of their  disputes and the bankruptcy
proceeding. Under the terms of the settlement, all of the following transactions
closed simultaneously.

         The Company purchased the interest of Cirrus in the Restaurant Operator
for aggregate consideration of $200,000 cash and 225,000 shares of the Company's
common stock. The Company agreed to file a registration statement permitting the
resale of the shares.

         (Prior to the  settlement,  Mirage  Resorts,  Inc.  ("Mirage") a Nevada
corporation,  through an affiliate, Restaurant Ventures of Nevada, Inc. ("RVNI")
purchased  NevStar from its owners,  thereby  acquiring  NevStar's  interests as
Landlord of the restaurant facility and as a member of the Restaurant Operator.)

                                      -7-
<PAGE>

         The  Company  sold  all of its  interest  in the  Restaurant  Operator,
including the interest  purchased from Cirrus,  to Mirage for  consideration  of
$1,550,000  cash.  Mirage  became  the  holder  of all of the  interests  in the
Restaurant  Operator.  The  Company  agreed  to pay  when  due all of the  trade
payables of the  Restaurant  Operator and resigned as manager of the  Restaurant
Operator.

         RVNI agreed to a new lease of the restaurant  facility  directly to the
Company.  The new lease took effect on February  8, 1998 upon  dismissal  of the
bankruptcy  proceeding  commenced  by the  Restaurant  Operator.  The new  lease
includes the  provisions of the prior lease to Restaurant  Operator with certain
modifications.  The  modifications  include a reduction in the base rent payable
from  $83,334 per month to an amount  equal to one-half  (1/2) of the  Company's
positive  cash flow from  operating  the  restaurant  (with no reduction for the
Company's corporate overhead expenses other than for salary and employee related
expenses for 1/2 of an accounts payable employee,  1/2 of a payroll employee and
1/2 of an executive  chef).  All arrearages  currently due under the prior lease
will be waived. The new lease shall terminate on September 30, 1998, unless RVNI
and  the  Company   mutually   agree  in  writing  to  extend  the  lease  on  a
month-to-month basis.

         The Company,  Mirage and the  Restaurant  Operator  jointly  sought the
dismissal of the Restaurant Operator's bankruptcy proceeding. The proceeding was
dismissed on February 8, 1998.

         The Company used the net proceeds  from the sale of its interest in the
Restaurant Operator to Mirage for working capital and repayment of indebtedness.

         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.

COUNTRY STAR ATLANTA

         The Company's  restaurant in Atlanta was the subject of litigation with
the Landlord of the facility since April 1997. In this litigation,  the Landlord
sought to have the restaurant  turned over to it on the grounds that the Company
was holding over in the premises beyond the term for which they were leased. The
Company defended the action  vigorously.  The Company 

                                      -8-
<PAGE>

contended  that many of the Landlord's  allegations of default were false,  that
others which were not false have been cured and that others were directly caused
by the Landlord's bad faith in performing its obligations  under the lease.  The
Company also  contended  that the Notice which  purported to terminate the Lease
was defective. Rental payments under the lease had been prepaid through December
31,  1997.  Additional  rent in the  amount of  $62,500  per month  were due and
payable  commencing January 1, 1998. The Company did not have the cash available
to make the January rental payment.

         In light of the  defaults  alleged in the  litigation  and the imminent
default of the payment of the January 1998 rent, the Company determined to agree
to a settlement of the dispute with the Landlord of the Atlanta facility.  Under
the terms of the  settlement,  the  Company  removed  some of its  fixtures  and
equipment  from the premises  during January 1998 with the balance to be removed
on or about May 1998.  The  Landlord  forgave all past due rents and  additional
rent.  Under the terms of the  settlement,  the  Landlord  and the Company  will
pursue claims against the architect and  construction  company that designed and
built the restaurant facility for negligent design and construction, and related
causes of action.  The Landlord  will advance the legal fees  required to pursue
these actions.

         In taking these actions,  Management of the Company has recognized that
the development,  completion and opening of the Atlanta restaurant as envisioned
by prior  management was an unsound  business  decision.  The  restaurant  never
realized the revenues  necessary to support its  operations.  Under the terms of
the  settlement,  Management will no longer be required to spend valuable assets
trying  to  establish  a  facility  that has  been  performing  poorly  since it
commenced  operations.  Moreover,  the plan to bring legal  actions  against the
construction  company and the  architect  who  designed  the  facility for major
construction  defects could  eventually  result in a recovery of damages for the
Company. (See "Litigation - Atlanta Default.")

THE COMPANY'S STRATEGY

         The Company has no present  expansion  plans,  although the Company may
explore non-capital intensive ways of promoting the Company's business,  such as
licensing  agreements,  joint ventures and other opportunities.  Such expansions
may  include   off-site   catering  of  parties  and  at  music  venues  or  the
establishment of limited menu restaurants in food courts located  throughout the
United  States and in foreign  locations.  The  Company  may seek to pay for its
portion of any such  expansion  by issuing  shares of its  Common  Stock.  It is
anticipated  that any of the future Country Star  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 

                                      -9-
<PAGE>

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.

         One of the Company's  key  priorities in the near term is to inject new
excitement into the Company's  restaurant business in order to stimulate greater
customer  traffic.  The Company  plans to increase  the  frequency  of celebrity
events and promotions and broaden the number of celebrities  associated with the
Company, with an emphasis on new,  up-and-coming stars. In addition, the Company
is taking steps to broaden the appeal of its restaurants through menu revisions,
the acceptance of reservations in certain markets and greater promotion of group
sales,  in order to  attract  more local  residents  to  augment  the  Company's
primarily tourist customer base.

         The Company is presently exploring a number of potential  opportunities
to increase revenues at the Las Vegas restaurant, including targeted advertising
and promotions  directed to guests staying in hotels without significant on-site
restaurant  capacity,  the  possibility  of serving as a venue for a dinner show
and/or cocktail show, and the development of more  substantial  business through
the Company's existing contacts in the tour and travel industry.

         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 and may open
up the  opportunity  for sale of  certain  food  products  for  distribution  to
customers through retail channels as well as at restaurant sites. 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.

         In light of the  Company's  personnel  reduction,  particularly  in its
corporate  office,   the  elimination  of  costs  associated  with  the  Atlanta
restaurant,  and management's  belief that the marketing  initiatives  described
above represent the best way to increase customer traffic at the lowest possible
cost, management believes that the Company can attain profitable operations.


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 food served
at the Company's

                                      -10-
<PAGE>

restaurants.  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  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 may 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  and  clothing  designers,  which are
currently on display at the Company's restaurants.

         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.

                                      -11-
<PAGE>

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  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,

                                      -12-
<PAGE>

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.

         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.

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.  

                                      -13-
<PAGE>

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,  1998,  the Company had 83 full-time  employees,  13 of
whom were  employed  in  executive  and  management  capacities,  2 in sales and
marketing,  8 in general and  administrative  capacities,  and 60 as  restaurant
staff.  The  Company  also  employs an  additional  61  part-time  employees  as
restaurant staff. The Company believes that its relations with its employees are
satisfactory.

INDUSTRY SEGMENT INFORMATION

         The Company is engaged in one industry segment.  Financial  information
concerning the Company's  business is included and  incorporated by reference in
Part II and Part IV of this Form 10-KSB.


                                      -14-
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTIES

         The Company leases its executive offices of approximately  3,833 square
feet at 4929 Wilshire Boulevard, Suite 428, Los Angeles,  California 90010 for a
five year term  commencing  July 1, 1997. The Company's rent is $5,175 per month
for the first  three  years of the lease and  $5,558  per month for the last two
years of the lease.

         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,
had an initial term of three years and three five-year  options,  and is subject
to  termination  by the  landlord at any time after May 31, 1997 on nine months'
notice,  provided  that the lease  cannot be  terminated  by the landlord if the
subsequent tenant is another  restaurant or like type user of the premises.  The
Company has exercised the first five-year  option  extending the term trough May
31, 2002, and subject to the foregoing  termination  right,  the Company has the
right to extend the lease  beyond  May 31,  2002 for two  consecutive  five-year
terms.  Country Star Hollywood seats approximately 475 people,  inclusive of the
approximately 150 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 was to be  $1,200,000  per annum.  The  annual  rent was to be
increased to $1,400,000  for the third year.  For the  remaining  seven (7) year
term of the lease,  the annual rent was to be subject to increases  based upon a
cost of living increase;  PROVIDED, HOWEVER, that notwithstanding the foregoing,
the annual  rent was to 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.

         During  December,  1997 the  Company  sold its  interest  in the Nevada
limited liability company (the "Restaurant Operator") which owned the restaurant
and entered into a new lease directly with the new owner of the restaurant. (See
"Description of Business-Country  Star Las Vegas"). The new lease took effect on
February 8, 1998 upon dismissal of the bankruptcy proceeding

                                      -15-
<PAGE>

commenced by the Restaurant  Operator.  The new lease includes the provisions of
the  prior  lease  to  Restaurant  Operator  with  certain  modifications.   The
modifications  include a reduction  in the base rent  payable  from  $83,334 per
month to an amount equal to one-half  (1/2) of the company's  positive cash flow
from  operating the  restaurant  (with no reduction for the Company's  corporate
overhead expenses other than for salary and employee related expenses for 1/2 of
an accounts payable employee,  1/2 of a payroll employee and 1/2 of an executive
chef).  All arrearages  currently due under the prior lease will be waived.  The
new lease shall  terminate  on September  30, 1998,  unless the landlord and the
Company mutually agree in writing to extend the lease on a month-to-month basis.
The  Company  agreed to  continue to manage the  restaurant  under the  existing
management agreement until the effective date of the new lease.

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.  The
Company  believes  that all of the  $1,200,000  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.

CONTRACTOR LITIGATION IN ATLANTA

         On February 3, 1998,  Pacific  Southwest  Design,  Inc. ("PSD") filed a
suit in Atlanta against the Company  claiming damages of $597,659 for failure to
pay amounts due for services rendered.  The Company intends to vigorously defend
against this action and has counterclaimed for damages in an undetermined amount
for the contractor's  breach of contract and failure to perform workmanlike work
which caused the Company to lose its Atlanta lease.

ATLANTA LEASE DEFAULT

         The Company's  restaurant in Atlanta was the subject of litigation with
the Landlord of the facility since April 1997. In this litigation,  the Landlord
sought to have the restaurant  turned over to it on the grounds that the Company
was holding over in the premises beyond the term for which they were leased. The
Company defended the action  vigorously.  The Company contended that many of the
Landlord's  allegations of default were false,  that others which were not false
have been cured and that others were directly caused by the Landlord's bad faith


                                      -16-
<PAGE>

in performing its obligations  under the lease.  The Company also contended that
the Notice which purported to terminate the Lease was defective. Rental payments
under the lease had been prepaid through  December 31, 1997.  Additional rent in
the amount of $62,500 per month were due and payable commencing January 1, 1998.
The Company did not have the cash available to make this January rental payment.

         In light of the  defaults  alleged in the  litigation  and the imminent
default of the payment of the January 1998 rent, the Company determined to agree
to a settlement of the dispute with the Landlord of the Atlanta facility.  Under
the terms of the  settlement,  the  Company  removed  some of its  fixtures  and
equipment from the premises during January 1998 with he balance to be removed on
or about May 1998. The Landlord  forgave all past due rents and additional rent.
Under the terms of the  settlement,  the  Landlord  and the Company  will pursue
claims  against the architect and  construction  company that designed and built
the  restaurant  facility for  negligent  design and  construction,  and related
causes of action.  The Landlord  will advance the legal fees  required to pursue
these actions.

TRADE CLAIM LITIGATIONS

         A number of  creditors  have filed  actions  against  the  Company  for
amounts  allegedly  owed for  services  provided or 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.

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.  The Company  may be  obligated  to
indemnify Mr. Schuster  against any judgment  obtained by Edwards  Technologies,
Inc.

COUNTERCLAIM OF JOE BULAT

         The Company  commenced  an action  against Joe Bulat to  terminate  its
agreement  with Mr. Bulat under which he was to provide  parking for the Atlanta
restaurant and to recover damages


                                      -17-
<PAGE>

for  breaches.  Mr. Bulat has  counterclaimed  for damages of $110,000  based on
alleged  breaches of the  agreement  by the  Company.  The Company  believes Mr.
Bulat's counterclaim is meritless.

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
$.01 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.  From November 10, 1995 through May 10, 1997, the Company's 6%
Series A Cumulative  Convertible  Preferred Stock (the "Preferred  Stock"),  was
quoted on the NASDAQ National Market. On May 10, 1997 the Convertible  Preferred
Stock was automatically  converted into Common Stock. This automatic  conversion
occurred  pursuant to the terms and privileges of the Preferred Stock as adopted
by the Board of Directors of the Company.  From  November 10, 1995 through March
10, 1998 the Common Stock was quoted on the NASDAQ National  Market.  From March
11, 1998 to date the Common Stock was quoted on the OTC Bulletin Board. The high
and low bid quotations,  on a quarterly basis, for the Common Stock for calendar
years 1996 and 1997 is set forth  below.  The  prices  for the Common  Stock are
adjusted to reflect a one-for-ten  reverse split which became effective February
12,  1998 and 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:

1997                                       Common Stock
                                         Quoted Bid Price
                                     High                Low
                                    ------             -------

First Quarter                       15 5/8              4 11/16
Second Quarter                       7 3/16             3 3/4
Third Quarter                        5 5/8              1 1/4
Fourth Quarter                       1 9/16               5/32

1996                                       Common Stock
                                         Quoted Bid Price
                                     High                Low
                                    ------             -------

First Quarter                       37 1/2             18 3/4
Second Quarter                      54 3/8             30
Third Quarter                       45 5/8             21 1/4
Fourth Quarter                      25 5/8              2 3/16


                                      -18-
<PAGE>

         On April 1, 1998,  the closing bid and asked prices of the Common Stock
as reported on the OTC Bulletin Board were $.19 and $.20, respectively.

         On April 1, 1998,  there were 280 holders of record of Common Stock and
approximately 6,650 beneficial owners of Common Stock.

         On March 10, 1998, the National Association of Securities Dealers, Inc.
(the "NASD")  delisted the Company's  securities from the NASDAQ National Market
because of the Company's failure to meet listing requirements concerning minimum
bid  price  and  market  value of  public  float and  advised  the  Company  its
securities may be eligible to trade on the OTC Bulletin Board.  The Company will
take all actions  reasonably  necessary for there to be an active trading market
for its outstanding Common 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.


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. During 1997, the Company had revenues of approximately
$3,318,000  from Country Star Hollywood,  approximately  $2,686,000 from Country
Star Las Vegas, and total revenues of approximately $6,279,000.  Total operating
expenses  increased from  approximately  $11,850,000  in 1995, to  approximately
$27,637,000  in 1996 and to  approximately  $24,574,000 in 1997. The increase in
operating  expenses  during 1996 and 1997 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.   As  of  December  31,  1997,  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.

                                      -19-
<PAGE>

         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  1998 and
subsequent periods. The Company believes that it will need additional capital to
fund operations until it can obtain profitability.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997

         For the year ended December 31, 1997, revenues of the Company decreased
from  approximately  $8,059,000 to  approximately  $6,279,000.  The decrease was
attributable  primarily to two factors: the closing of the Atlanta restaurant in
early 1997 and decreased revenues from the Hollywood restaurant. The decrease in
revenue of the Hollywood  restaurant  was  attributable  primarily the Company's
inability during 1997 to expend  significant sums on advertising and promotional
activities.

         For the year ended  December  31,  1997,  the Company had a net loss of
approximately  $17,246,000.  The Company believes that the loss was attributable
to the  Company's  inability  to  overcome  the  factors  that  resulted  in the
Company's  1996  loss of  approximately  $16,780,000.  During  1997 the  Company
expended  substantial sums on activities  relating to the possible  reopening of
the Atlanta restaurant.  Ultimately, the Company determined that it would not be
possible to reopen the  Atlanta  restaurant  on a  profitable  basis.  Costs and
expenses  for  1997  include  a loss on  disposal  of  assets  of  approximately
$10,179,000 related to the closure of Atlanta and the sale of Las Vegas.

REVENUE

         FOOD AND BEVERAGE

         For the year ended  December 31, 1997 food and beverage  revenues  were
$5,745,000 representing approximately 91% of total revenue.

         MERCHANDISE

         For  the  year  ended  December  31,  1997  merchandise  revenues  were
$534,000, representing approximately 9% of total revenue.

OPERATING EXPENSES

         FOOD AND BEVERAGE COST OF SALES

         Food and  beverage  cost of sales for the year ended  December 31, 1997
were $1,924,000, representing approximately 33% of food and beverage revenue.


                                      -20-
<PAGE>

         MERCHANDISE COST OF SALES

         Merchandise  cost of sales for the year ended  December  31,  1997 were
$452,000,  which  represented 85% of merchandise  revenue.  Management is in the
process  of  reducing  sales  of low  margin  merchandise  in  order  to  reduce
merchandise costs as a percentage of merchandise sales. In addition, the Company
has introduced merchandise in the Las Vegas restaurant that emphasizes Las Vegas
oriented themes in addition to the country theme.

         PAYROLL AND RELATED TAXES

         Payroll and related taxes at Country Star  Hollywood  were  $2,651,000,
representing approximately 42% of total revenues for the year ended December 31,
1997.  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 1998.  Such steps have included the  termination  of certain
personnel and the reassignment of other personnel.

         RENT

         Rent expenses  were  $2,465,000  for the year ended  December 31, 1997,
representing  approximately  39% of total  revenue for year ended  December  31,
1997.  Rent  expenses  include   amortization  of  total  base  rentals  over  a
straight-line  basis.  Consequently,  $798,000 of  deferred  rent  expenses  are
included in 1997 rent expenses.

         OTHER OPERATING COSTS

         Other  operating  costs  for the year  ended  December  31,  1997  were
$1,274,000,  representing  approximately 20% of total revenue for the year ended
December  31,  1997.  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  $410,000,  and  embedded  interest  expense was
$2,346,000.  Embedded  interest  expense arises from the discount feature of the
convertible debt instruments and line of credit advances issued by the Company.

SELLING, GENERAL AND ADMINISTRATIVE

         Selling,  general  and  administrative  expenses  for  the  year  ended
December 31, 1997 were $3,590,000.  Selling, general and administrative expenses
include  corporate  salaries of $786,000  including  related  payroll  taxes and
employee benefits,  advertising and corporate promotions of $402,000,  legal and
professional fees of $1,124,000,  insurance expense of $118,000,


                                      -21-
<PAGE>

travel related costs of $63,000 and office rent of $80,000. The Company believes
that it has taken sufficient steps to reduce selling, general and administrative
expenses to a level commensurate with current sales levels.

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) 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
$7,048,000 representing approximately 87% of total revenue

         MERCHANDISE

         For  the  year  ended  December  31,  1996  merchandise  revenues  were
$1,011,000, 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 $2,223,000, representing approximately 32% of food and beverage revenue.


                                      -22-
<PAGE>

         MERCHANDISE COST OF SALES

         Merchandise  cost of sales for the year ended  December  31,  1996 were
$657,000, 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 were $3,918,000,  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  $1,276,000  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,  $227,000 of  deferred  rent  expenses  are
included in 1996 rent expenses.

         OTHER OPERATING COSTS

         Other  operating  costs  for the year  ended  December  31,  1996  were
$1,967,000,  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  $376,000.  Of this amount,  $274,000  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
36,565 common shares on February 12, 1997 valued at $7.50 per share.

SELLING, GENERAL AND ADMINISTRATIVE

         Selling,  general  and  administrative  expenses  for  the  year  ended
December 31, 1996 were $8,802,000 which exceeds total revenue for the year ended
December  31,  1996.  Selling,   general  and  administrative  expenses  include
corporate  salaries of $1,502,000  including  related payroll taxes and employee
benefits,   advertising  and  corporate  promotions  of  $1,782,000,  legal  and
professional  fees of $627,000,  insurance  expense of $219,000,  travel related
costs of  $120,000,  office  rent of  $116,000,  cost  overruns  for  restaurant
construction  of  $928,000,  and the write off of certain  pre-opening


                                      -23-
<PAGE>

costs at Atlanta and Las Vegas that were in excess of budget of $2,080,000,  and
$1,429,000 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 $5.04 per share.

SETTLEMENT OF STOCKHOLDERS' CLAIMS

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

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 and
December  31,1997,  which indicated a substantial doubt as to the ability of the
Company to continue as a going  concern  due to  significant  losses in 1996 and
1997 and cash flow  shortages (See  Independent  Certified  Public  Accountants'
Reports, pages F-2, and Note 6 of the Notes to Financial Statements.)

         At  March  31,  1998  the  Company  had  cash on hand of  approximately
$10,000.  For the year ended December 31, 1997, the Company has primarily funded
its capital  requirements  from  proceeds  from the  issuance of debt and equity
securities.

         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

                                      -24-
<PAGE>

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  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  

                                      -25-
<PAGE>

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.

         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 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 was automatically  converted into Common Stock May
10,  1997.  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

                                      -26-
<PAGE>

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.

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
stockholders  of the  Company  did not  approve  the  granting  of the  security
interests to Rubin or Cameron or the grant of the right to approve three members
of the Board.

         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.

         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  payable  on October 9,  1999.  In  consideration  for the
initial  line of credit  advance of  $500,000,  the Company  issued a warrant to
acquire  16,667  shares of its common  stock at an  exercise  price of $6.25 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 $30
advanced. The exercise price for these warrants shall be $6.25 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.


                                      -27-
<PAGE>


         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) $13.30; 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  2,000,000.  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 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 issuance was in settlement of claims arising
out of the sale by the  Company  to Dan  Rubin and other  investors  of  170,371
shares of Series A Preferred  Stock and 30,667  shares of Common Stock  Purchase
Warrants  for  aggregate  consideration  of  $2,300,000.  The claims  related to
alleged misrepresentations of the financial condition of the Company and alleged
misrepresentations concerning the Company's proposed future sales of equity. The
amount of  damages  was  determined  as the  difference  between  the  aggregate
purchase  price of the  securities  paid by Mr. Rubin and the  investors and the
aggregate consideration of $350,000 received upon the sale of the securities.

         The line of credit advances by Rubin,  Cameron's  convertible term note
and the  convertible  term notes issued in settlement of claims were 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.


                                      -28-
<PAGE>


FEBRUARY 18, 1998 FINANCIAL RESTRUCTURING

         Cameron  Capital,  Ltd.  ("Cameron"),  an institutional  investor,  had
originally held $4,000,000 of convertible  long term debt due on October 9, 1999
and bearing  interest at the rate of seven  percent (7%) per annum.  Cameron had
converted  approximately  $1,000,000  principal  amount of the debt into  Common
Stock of the  Company,  leaving a balance  due of  approximately  $3,000,000.  A
dispute  between the Company and Cameron had arisen  regarding the proper use of
the proceeds  realized by the Company  from the  agreements  dated  December 30,
1997,  it had entered into  regarding the  modification  of the lease of its Las
Vegas  facility.  Cameron  contended  that the Company was  obligated to use the
proceeds to prepay its debt; the Company  believed that the proceeds were needed
for working capital and the repayment of other debt. Cameron had commenced legal
action against the Company on February 13, 1998 in United States  District Court
for the  Northern  District of Illinois in which it sought  recovery of the full
$1,550,000  received by the Company in connection  with the lease  modification.
Cameron had obtained a temporary  restraining order which prohibited the Company
from using any of the proceeds of the lease modification until the dispute could
be resolved.  The Company and Cameron agreed to settle Cameron's legal action in
order to avoid the  uncertainty  of  litigation  and the  expense of  proceeding
through discovery and trial.

         Under the terms of the  Settlement  Agreement  dated  February 18, 1998
(the "Settlement Agreement"), Cameron agreed to dismiss its legal action against
the Company and to accept as a full  settlement of its long term debt  aggregate
consideration  consisting of a cash payment of $1,300,000 payable at closing and
the issuance of 670,000 shares of the Company's Common Stock, par value $.01 per
share.  Cameron does not have any registration rights with respect to the Common
Stock but is  eligible to resell  certain  amounts  immediately  pursuant to the
provisions  of Rule 144  under  the  Securities  Act of 1933,  as  amended.  The
Settlement  Agreement  provides  for mutual  releases  of all claims held by the
Company against  Cameron and by Cameron  against the Company and Dan Rubin,  its
Chief Executive Officer and President.

         The Company  was able to fund the cash  payment of the  Agreement  with
Cameron with the proceeds it received  from a $1,300,000  line of credit loan to
the Company made by an institutional investor (the "Lender").  The institutional
investor is a pension trust controlled by Dan Rubin's father.  This sum was lent
to the Company  pursuant to the terms and  conditions  of the Loan and  Security
Agreement  dated  February  12, 1997  between the  Company,  Cameron and various
lenders.  This loan is due on October 9, 1999 and bears  interest at the rate of
prime plus four  percent  (4%).  The Lender  also  received  warrants to acquire
43,333  shares of the Company's  Common Stock at an exercise  price of $6.25 per
share.  Any portion or all of the principal amount of the line of credit advance
made by Lender


                                      -29-
<PAGE>


outstanding may be converted into Common Stock of the Company.  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) $13.30,
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 conversion
formula is subject to adjustment in the event of stock splits,  stock dividends,
mergers,  consolidations,   or  similar  transactions.  The  Loan  and  Security
Agreement was also amended to provide for immediate repayment of the loan in the
event of any change in control of the Company.

PRIVATE PLACEMENTS DURING 1997 AND 1998

         On May 7, 1997,  the Company  sold  pursuant to  Regulation S under the
Securities  Act of 1933, as amended (the "Act") 5%  Convertible  Debentures  for
$700,000 to institutional investors abroad, convertible 41 days after closing at
a  price  equal  to 70% of the  average  closing  bid  price  during  the 5 days
preceding the conversion date.

         On May 28, 1997,  the Company sold  pursuant to  Regulation S under the
Act 5% Convertible  Debentures for $500,000 to institutional  investors  abroad,
convertible 41 days after closing at a price equal to 70% of the average closing
bid price during the 5 days preceding the conversion date.

         On June 30, 1997, the Company issued warrants to acquire 150,000 shares
of its  Common  Stock  at an  exercise  price of $2.10  per  share to a  private
investor. The warrants were exercised immediately and the Company issued 150,000
shares of its Common Stock to the private  investors.  The Company  received net
proceeds from the exercise of the warrants of $315,000.  No  commissions or fees
were paid by the Company.

         During  July/August  1997,  the Company  sold in a private  offering an
aggregate  of 357,857  shares of its Common Stock at a price of $2.80 per share,
for a total offering price of $1,002,000.  Josephthal  Lyon & Ross Inc. acted as
placement  agent and received  commissions of  approximately  $107,000.  The net
proceeds received by the Company were approximately $895,000.

         During  October,  1997 the Company  issued  1,045,743  shares of Common
Stock to investors in consideration for a full release of alleged claims arising
out of  securities  sold to them by the Company from May,  1997 through  August,
1997. These claims alleged that the securities sold had been unfairly priced and
the  additional  shares were issued to give the  investors an overall price that
reflected the market value of the Common Stock at the time of settlement.

         During  December,  1997,  the Company  issued  225,000 shares of Common
Stock to Cirrus LLC in  partial  consideration  for the  


                                      -30-
<PAGE>


Company's  purchase of Cirrus' interest in the limited  liability  company which
owned the Company's restaurant in Las Vegas.

         During  February,  1998,  the Company  issued  670,000 shares of Common
Stock to Cameron  under a Settlement  Agreement  relating to  settlement  of the
Company's long term debt obligation to Cameron.

         On  February  12,  1997,  all of the  outstanding  shares  of  Series B
Convertible  Preferred Stock were exchanged by the holder,  Cameron Capital Ltd.
for a Convertible Term Note ("Note") in the principal amount of $4,000,000.  The
Note may be converted  into common stock  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) $13.30,  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.  According to the Note Agreement,  the maximum
number of shares into which the Note may be converted  shall not exceed 300,000.
The  maximum  number of shares  into  which  the note was  convertible  has been
amended without obtaining shareholder approval to a maximum of 2,000,000 shares.
As of December 31, 1997,  Cameron had converted  $1,004,643  principal amount of
its note into  1,505,000  shares.  As of November  4, 1997,  Rubin and the other
investors who received  convertible  notes in the aggregate  principal amount of
$1,950,000 had converted the entire  $1,950,000  principal amount into 1,780,000
shares of Common  Stock plus an  additional  300,000  shares of common stock for
interest and penalty.

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.  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

         At December 31, 1997, the Company had a net operating loss carryforward
for Federal tax purposes of approximately $35,500,000 which, if unused to offset
future taxable  income,  will expire  between 2008 and 2012,  and  approximately
$12,000,000  for state  purposes  which will expire if unused  between  1998 and
2002. A valuation  allowance has been recognized for 1997 and 1996 to offset the
related  deferred tax assets due to the  uncertainty  of  realizing  any benefit
therefrom.  During 1997, no changes  occurred in the  conclusions  regarding the
need for a 100% valuation allowance in all tax jurisdictions.


                                      -31-
<PAGE>


         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.  The  determination  of whether a change in control has  occurred can be a
very  complex and time  consuming  process.  The Company is not  currently  in a
position to determine whether  additional changes in control might have occurred
since November 1995.

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 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  and
Country Star Las Vegas 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 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.


                                      -32-
<PAGE>


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  contemporaneously  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
disagreements  with it on any  matter of  accounting  principles  or  practices,
financial statement disclosure or auditing scope or procedure.

         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


                                      -33-
<PAGE>


Form 8-K relating  thereto.  (See Part IV Item 13 "Exhibits  and Reports on Form
8-K.)

                                    PART III

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

         Set forth below is  biographical  information  for each director of the
Company.

         DAN RUBIN,  age 26,  became Chief  Executive  Officer,  President and a
director of the Company on February  12,  1997.  He has been a private  investor
during the past five years. He is the President and Chief  Executive  Officer of
Rubin Investment Group, a private investment company which makes equity and debt
investments  in private  and  publicly  held  companies.  Prior to  joining  the
Company,  Mr. Rubin had no experience in managing or supervising  the operations
of a business comparable to the Company.

         ROBERT A.  NARDONE,  JR.,  age 31,  became a Director of the Company on
February  12,  1997.  He has been a senior  loan  officer  of Summit  Bank since
November, 1992.

         DARREN C. RICE,  age 28,  became a Director  of the Company on February
12, 1997.  He has been  President  of  Cornerstone  Financial,  Inc., a mortgage
banking company since October, 1995. From November, 1992 to October, 1995 he was
a mortgage sales representative for Norwest Mortgage, Inc.

         DIRECTORS AND EXECUTIVE OFFICERS

         The names  and ages of the  directors  and  executive  officers  of the
Company  continuing in office,  and of executive officers who held office during
1997 are set forth below.

     NAME                           AGE               POSITION HELD
     ----                           ---               -------------

Dan J. Rubin                        26           President, Chief Executive
                                                   Officer and Director
Robert A. Nardone, Jr.              31           Director

Darren C. Rice                      28           Director

Robert L. Davidson                  46           Secretary

Robert J. Schuster(1)               53           Formerly Chairman of the Board
                                                   of Directors, Chief Executive
                                                     Officer and Secretary

----------------------------
(1)      ROBERT J. SCHUSTER was Chairman of the Board,  Chief Executive  Officer
         and Secretary of the Company from its inception to February, 1997.


                                      -34-
<PAGE>

         Mr. Nardone and Mr. Rice serve on the Audit Committee and  Compensation
Committee of the Company's Board of Directors.

         SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:  Section 16(a)
of the Exchange Act requires the Company's executive officers and directors, and
persons  who own more than 10% of a  registered  class of the  Company's  equity
securities  ("Reporting  Persons"),  to file reports of ownership and changes in
ownership with the SEC and with The NASDAQ Stock Market.  Reporting  Persons are
required by SEC regulations to furnish the Company with copies of all forms they
file pursuant to Section 16(a). Based solely on its review of the copies of such
reports  received  by it, or  written  representations  from  certain  Reporting
Persons that no other  reports  were  required  for those  persons,  the Company
believes that,  during the year ended  December 31, 1997, the Reporting  Persons
complied with all Section 16(a) filing requirements applicable to them.

ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth the compensation  paid by the Company to
the Chief  Executive  Officer and executive  officers of the Company whose total
annual salary and bonus exceeded $100,000 for the years ended December 31, 1995,
1996 and 1997.


                                      -35-
<PAGE>


<TABLE>
<CAPTION>
                                                           SUMMARY COMPENSATION TABLE

                                                                                         LONG-TERM COMPENSATION
                                                                                         ----------------------
                                  ANNUAL COMPENSATION                               AWARDS                    PAYOUTS
                                  -------------------                               ------                    -------
                                                                                          SECURITIES
                                                           OTHER ANNUAL     RESTRICTED    UNDERLYING    ALL OTHER
     NAME AND                YEAR    SALARY($)     BONUS     COMPEN-          STOCK        OPTIONS/      LTIP       COMPEN-
PRINCIPAL POSITION                                           SATION($)       AWARDS($)      SARS(#)     PAYOUTS($)  SATION($)
------------------                                           ---------       ---------      -------     ----------  ---------
<S>                          <C>     <C>          <C>        <C>              <C>             <C>        <C>         <C>
Dan Rubin                    1997    $  42,769(1)  35,000(2)   ---              ---           ---          ---         ---
  President and              1996          ---        ---      ---              ---           ---          ---         ---
  Director                   1995          ---        ---      ---              ---           ---          ---         ---
Robert J. Schuster           1997    $  31,250        ---      ---              ---           ---          ---         ---
  Former Chief Executive     1996    $ 250,000   $ 40,000    $   0            $   0           ---        $   0       $   0
  Officer, Secretary and     1995    $ 250,000   $      0    $   0            $   0           ---        $   0       $   0
  Director
</TABLE>



----------------------------
(1)      Mr. Rubin's  compensation  is payable at the rate of $20,000 per month.
         To date,  Mr.  Rubin has  received  $42,769 of his 1997 salary from the
         Company and the balance of $170,000 has been accrued.

(2)      Mr.  Rubin's bonus was paid by this issuance of 37,000 shares of Common
         Stock of the Company, valued at $35,000.


                                      -36-
<PAGE>


1997 OPTION GRANTS

         The following table shows information regarding grants of stock options
in 1997 to the executive officers named in the Summary Compensation Table.


                                 INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
     (a)                    (b)          (c)             (d)            (e)
                          Number of   % of Total
                         Securities    Options
                         Underlying   Granted to       Exercise
                          Options      Employees       or Base
Executive Officer         Granted   in Fiscal Year    Price ($/Sh)    Exp. Date
-----------------         -------   --------------    ------------    ---------



Dan Rubin                   ---           ---              ---           ---

Robert J. Schuster          ---           ---              ---           ---



                                      -37-
<PAGE>


1997 OPTION EXERCISES AND YEAR-END VALUES

         The following table shows  information  regarding the exercise of stock
options during 1997 by the executive officers named in the Summary  Compensation
Table and the number and value of any  unexercised  stock options as of December
31, 1997.

       (a)                 (b)             (c)             (d)              (e)

<TABLE>
<CAPTION>
                                                       Number of
                                                       Securities      Value of
                                                       Underlying      Unexercised
                                                       Unexercised     In-The-Money
                          Shares                       Options at      Options at
                         Acquired                      FY-End (#)      FY-End ($)
                           on              Value       Exercisable/    Exercisable/
Executive Officer       Exercise (#)     Realized ($)  Unexercisable   Unexercisable
-----------------       ------------     ------------  -------------   -------------
<S>                         <C>              <C>           <C>              <C>
Dan Rubin                   ---              ---           ---              ---

Robert J. Schuster          ---              ---           ---              ---
</TABLE>


                                      -38-
<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF MANAGEMENT

         The following table shows as of April 9, 1998 the beneficial  ownership
of Common Stock by any holder of more than five percent (5%) of the  outstanding
shares, each nominee, by each of the incumbent executive officers and directors,
and such directors and executive officers as a group.

                                                     COMMON STOCK
                                                     ------------

                                                 AMOUNT AND NATURE OF
                                                 BENEFICIAL OWNERSHIP(1)

                                                     EXERCISABLE         PERCENT
         NAME AND ADDRESS OF              DIRECTLY     OPTIONS             OF
         BENEFICIAL OWNER                  OWNED      AND NOTES           TOTAL
         ----------------                  -----      ---------           -----

Dan J. Rubin                                ---       5,041,667           36.9%
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010

Robert A. Nardone, Jr.                      ---             ---            ---
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010

Darren C. Rice                              ---             ---            ---
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010

Cameron Capital Ltd.                    749,589             ---            9.1%
10 Cavendish Road
Hamilton HM 19, Bermuda

All incumbent officers, directors           ---             ---           36.9%
  and director nominees as a
  group

----------------------------
(1)      The shares of Common  Stock owned by each  person or by the group,  and
         the  shares  included  in the total  number  of shares of Common  Stock
         outstanding, have been adjusted in accordance with Rule 13d-3 under the
         Securities Act of 1934, as amended,  to reflect the ownership of shares
         issuable upon exercise of outstanding  options,  warrants,  convertible
         debt or other common stock equivalents which are exercisable  within 60
         days. As provided in such Rule,  such shares issuable to any holder are
         deemed  outstanding  for  the  purpose  of  calculating  such  holder's
         beneficial ownership but not any other holder's beneficial ownership.


                                      -39-
<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         See  "Management's  Discussion  and  Analysis of  Operations  - Capital
Resources, February 12, 1997 Financing and Change in Control, Private Placements
During 1997 and 1998 and February 18, 1998 Financial Restructuring."

                                     PART IV

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

     (a) Exhibits.

1        3.1         Certificate of Incorporation of the Company

2        3.2         Amendment to Certificate of Incorporation

*        3.3         Amendment to  Certificate of  Incorporation  dated June 27,
                     1997 (authorization of additional shares)

*        3.4         Amendment to  Certificate of  Incorporation  dated February
                     10, 1998 (reverse split)

3        3.5         Amended By-Laws of the Company

*       10.1         Lease  between   Copperfield   Investment  and  Development
                     Company  and the Company  relating to office  space at 4929
                     Wilshire Boulevard, Los Angeles,  California, dated May 28,
                     1997

4       10.2         (a) Lease Agreement by and between MCA Development  Company
                     and Roma, LA, Inc., dated May 27, 1987

                     (b) First  Amendment  to Lease dated May 27,  1987,  by and
                     between MCA Development Company and Roma California,  Inc.,
                     as  successor-in-interest  to Roma LA, Inc., dated July 28,
                     1998

                     (c) Assignment  and Assumption of Lease by and between Roma
                     California, Inc., a successor-in-interest to Roma LA, Inc.,
                     Romacorp.,   Inc.,   as   successor-in-interest   to   Roma
                     Corporation and the Company, dated January 31, 1994

                     (d) Consent   to  Lease   Assignment   by  and   among  MCA
                     Development Company, Roma California,  Inc., Roma LA, Inc.,
                     Roma Corporation and the Company,  dated February 1, 1994 


                                      -40-
<PAGE>


5       10.3         Lease by and between  Four Seas  Investment  Company,  M.D.
                     Hope Close Trust R-21 and the Company  with  respect to the
                     Las Vegas restaurant, dated February 15, 1995

6       10.4         Agreement  regarding  new lease  for Las  Vegas  restaurant
                     between  Restaurant  Ventures of Nevada,  Inc.  and Country
                     Star Restaurants, Inc., dated December 30, 1997

6       10.5         LLC Interest Purchase  Agreement and Assignment between the
                     Company and Mirage Resorts, Inc., dated December 30, 1997

*       10.6         Settlement Agreement by and between 3030 Peachtree,  L.L.C.
                     and the Company, dated December 23, 1997

7       10.7         Secured Loan  Agreement  among Dan Rubin,  Cameron  Capital
                     Ltd. and the Company, dated February 12, 1997

*       10.8         Settlement  Agreement  between Cameron Capital Ltd. and the
                     Company, dated February 18, 1998

*       10.9         Refinancing  Agreement  between Roy B. Rubin,  M.D.,  P.C.,
                     M.P.P.P. and the Company1* Filed herewith.,  dated February
                     18, 1998

----------------------------
1        Previously filed as an exhibit to the Company's  Registration Statement
         on Form SB-2, File No. 33-67526-A.

2        Previously filed as an exhibit to the Company's  Registration Statement
         on Form S-1, File No. 33-96450.

3        Previously filed as an exhibit to the Company's  Registration Statement
         on Form S-3, File No. 333-05105.

4        Previously  filed as an exhibit to the  Company's  Form  10-KSB for the
         year ended December 31, 1993. (filed March 30, 1994).

5        Previously filed as an exhibit to the Company's  Registration Statement
         on Form S-3, File No. 33-33393.

6        Previously  filed as an exhibit to the Company's Form 8-K dated January
         20, 1998.

7        Previously filed as an exhibit to the Company's Form 8-K dated February
         12, 1997.

*        Filed herewith.


                                      -41-
<PAGE>



     (b) Reports on Form 8-K.

         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.")

         On April 29, 1997,  the Company  filed a Current  Report on Form 8-K on
litigation involving its Atlanta restaurant.

         On May 7,  1997,  the  Company  filed a  Current  Report on Form 8-K in
connection  with a sale pursuant to Regulation S under the Act of 5% Convertible
Debentures in the amount of $700,000 to institutional investors.

         On May 28,  1997 the  Company  filed a  Current  Report  on Form 8-K in
connection  with the sale pursuant to Regulation S under the Act of  Convertible
Debt in the amount of $500,000.

         On November 7, 1997,  the Company filed a Current Report on Form 8-K in
connection  with a sale pursuant to Regulation S under the Act of 5% Convertible
Debentures in the amount of $150,000 to institutional investors and the issuance
of 5,000,000 shares of Common Stock to institutional  investors in consideration
of the release of alleged claims  against the Company  arising out of securities
sold by the Company.

         On January 20, 1998,  the Company filed a Current Report on Form 8-K on
the sale of its  interest in the  restaurant  operations  of the  Company's  Las
Vegas,  Nevada  restaurant  and  entering  into a new  lease  of the  restaurant
directly to the Company.


                                      -42-
<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 15th day of April, 1998.


                                           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, 1998
---------------------     -----------------  
    Dan J. Rubin



/s/ ROBERT A. NARDONE         Director               April 15, 1998
---------------------      ---------------  
    Robert A. Nardone



/s/ DARREN RICE               Director               April 15, 1998
---------------------      ---------------
    Darren Rice


<PAGE>

                          INDEX TO FINANCIAL STATEMENTS


Report of Independent Certified Public Accountants ..........................F-2

Consolidated Balance Sheet as of December 31, 1997 ..........................F-3

Consolidated Statements of Operations for the Years Ended
         December 31, 1997 and 1996 .........................................F-4

Consolidated Statements of Stockholders' Equity for the Years Ended
         December 31, 1997 and 1996 .........................................F-5

Consolidated Statements of Cash Flows for the Years Ended
         December 31, 1997 and 1996 .........................................F-6

Notes to Consolidated Financial Statements ..................................F-8


                                      F-1
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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

We have  audited the  accompanying  consolidated  balance  sheet of Country Star
Restaurants,  Inc.  as  of  December  31,  1997  and  the  related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
two  years  ended  December  31,  1997.  These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Country
Star  Restaurants,  Inc.  as of  December  31,  1997,  and the  results of their
operations  and their cash flows for each of the two years  ended  December  31,
1997 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 6 to the
consolidated  financial  statements,  the  Company has  experienced  significant
losses in 1996 and 1997, 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 6. 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.




                                 CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
April 8, 1998


                                      F-2
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                           Consolidated Balance Sheet
                               December 31, 1997

                                     ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                        $  1,218,845
  Inventories                                                           231,762
  Other                                                                 189,757
                                                                   ------------

    TOTAL CURRENT ASSETS                                              1,640,364
                                                                   ------------

PROPERTY AND EQUIPMENT AT COST, NET OF ACCUMULATED
  DEPRECIATION AND AMORTIZATION OF $1,061,470:
  Leasehold improvements                                              3,431,250
  Furniture and equipment                                             1,382,755
  Memorabilia                                                           372,367
                                                                   ------------

    TOTAL PROPERTY AND EQUIPMENT                                      5,186,372

OTHER                                                                   267,423
                                                                   ------------

                                                                   $  7,094,159
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit                                                   $    900,000
  Accounts payable                                                      375,988
  Accrued legal expenses                                                332,000
  Accrued salaries                                                      264,352
  Other accrued expenses                                                121,074
                                                                   ------------

    TOTAL CURRENT LIABILITIES                                         1,993,414

CONVERTIBLE DEBT                                                      3,145,358
                                                                   ------------

    TOTAL LIABILITIES                                                 5,138,772
                                                                   ------------

COMMITMENTS AND CONTINGENCIES                                                --

STOCKHOLDERS' EQUITY:
  PREFERRED STOCK, $0.001 par value, 2,000,000 shares authorized,
       no shares issued and outstanding                                      --
  COMMON STOCK,  $0.01 par value, 250,000,000 shares authorized,
       7,872,755 shares issued and outstanding                           78,728
  ADDITIONAL PAID-IN CAPITAL                                         47,201,242
  ACCUMULATED DEFICIT                                               (45,324,583)
                                                                   ------------

    NET STOCKHOLDERS' EQUITY                                          1,955,387
                                                                   ------------

                                                                   $  7,094,159
                                                                   ============


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


                                      F-3
<PAGE>
                         COUNTRY STAR RESTAURANTS, INC.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ----------------------------
                                                           1997            1996
                                                       ------------    ------------
<S>                                                    <C>             <C>         
REVENUES:
  Food and beverage                                    $  5,744,789    $  7,048,023
  Merchandise                                               534,273       1,011,392
                                                       ------------    ------------

                                                          6,279,062       8,059,415
                                                       ------------    ------------
COST AND EXPENSES:
  Cost of revenues:
    Food and beverage                                     1,924,113       2,222,506
    Merchandise                                             451,942         656,760
  Labor                                                   2,650,871       3,917,988
  Rent                                                    2,465,450       1,275,860
  Other restaurant operating                              1,273,895       1,967,020
  Selling, general and administrative                     3,590,291       8,801,764
  Depreciation and amortization                           1,058,608       1,210,685
  Settlement of stockholders' claims                        980,384       2,000,000
  Loss on disposal of assets                             10,178,560              --
  Impairment of long-lived assets                                --       5,584,458
                                                       ------------    ------------

                                                         24,574,114      27,637,041
                                                       ------------    ------------

LOSS FROM OPERATIONS                                    (18,295,052)    (19,577,626)
                                                       ------------    ------------

OTHER INCOME (EXPENSE):
  Interest income                                             7,254         302,626
  Interest expense                                         (410,281)       (375,936)
  Embedded interest expense                              (2,346,286)             --
                                                       ------------    ------------

                                                         (2,749,313)        (73,310)
                                                       ------------    ------------

LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM    (21,044,365)    (19,650,936)

MINORITY INTEREST                                         2,124,446       2,870,554
                                                       ------------    ------------

LOSS BEFORE EXTRAORDINARY ITEM                          (18,919,919)    (16,780,382)

EXTRAORDINARY ITEM - SETTLEMENT OF TRADE PAYABLES         1,673,629              --
                                                       ------------    ------------

NET LOSS                                               $(17,246,290)   $(16,780,382)
                                                       ============    ============

BASIC AND DILUTED LOSS PER COMMON SHARE:
  Loss before extraordinary item                       $      (5.90)   $     (15.54)
  Extraordinary item                                           0.52              --
                                                       ------------    ------------

  Net loss per common share                            $      (5.38)   $     (15.54)
                                                       ============    ============

BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING                              3,208,465       1,107,481
                                                       ============    ============
</TABLE>

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


                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                              COUNTRY STAR RESTAURANTS, INC.
                                     Consolidated Statements of Stockholders' Equity
                                          Years Ended December 31, 1997 and 1996

                                                                 Preferred Stock                Preferred Stock         
                                                                   Series A                         Series B            
                                                          ----------------------------    ----------------------------  
                                                             Number                          Number                     
                                                            of Shares        Amount         of Shares        Amount     
                                                          ------------    ------------    ------------    ------------  
<S>                                                          <C>          <C>             <C>             <C>           
Balance, January 1, 1996                                     1,277,089    $      1,277              --    $         --  
Common stock issued in settlement of legal claim                    --              --              --              --  
Common stock issued in a private placement                          --              --              --              --  
Preferred stock converted to common                         (1,047,015)         (1,047)             --              --  
Common stock issued for dividends on preferred stock                --              --              --              --  
Common stock issued for the exercise of warrants                    --              --              --              --  
Common stock issued for payment of financing charges                --              --              --              --  
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, December 31, 1996                                     400,445             400              --              --  
Common stock issued for dividends on preferred stock                                                --              --  
Preferred stock converted to common                           (400,445)           (400)             --              --  
Common stock issued for the exercise of warrants                    --              --              --              --  
Common stock issued upon conversion of debt                         --              --              --              --  
Common stock issued in private placements
     net of issuance costs of $107,357                              --              --              --              --  
Common stock issued in settlement of trade payables                 --              --              --              --  
Common stock issued for purchase of CSLV interest                   --              --              --              --  
Common stock issued in settlement of claims                         --              --              --              --  
Additional paid-in capital related to embedded interest             --              --              --              --  
Common stock issued for officer bonus                               --              --              --              --  
Common stock issued for payment of financing charges                --              --              --              --  
Common stock issued for services                                    --              --              --              --  
Amortization of stock option cost                                   --              --              --              --  
Net loss                                                            --              --              --              --  
                                                          ------------    ------------    ------------    ------------  
Balance, December 31, 1997                                          --    $         --              --    $         --  
                                                          ============    ============    ============    ============  
</TABLE>
<TABLE>
<CAPTION>
                                                                     Common Stock               
                                                      ------------------------------------------
                                                                                Amount               Additional      Unamortized  
                                                        Number of   ----------------------------       Paid-in      Stock Option  
                                                         Shares       Per Share        Total           Capital          Cost      
                                                      ------------  ------------    ------------    ------------    ------------  
<S>                                                        <C>      <C>             <C>             <C>             <C>           
Balance, January 1, 1996                                   594,758  $         --    $      5,948    $ 29,454,152    $   (232,892) 
Common stock issued in settlement of legal claim             4,319  $      18.52              43          79,957              --  
Common stock issued in a private placement                 120,619  $20.00-35.00           1,206       3,406,051              --  
Preferred stock converted to common                        628,209                         6,282          (5,235)             --  
Common stock issued for dividends on preferred stock        20,082  $ 7.20-41.80             201         432,579              --  
Common stock issued for the exercise of warrants            24,200  $      20.93             242         506,258              --  
Common stock issued for payment of financing charges        36,565  $       7.50             366         273,873              --  
Issuance of preferred stock in a private placement              --            --              --       2,209,830              --  
Issuance of preferred stock in a private placement              --            --              --       3,667,496              --  
Preferred stock converted to convertible debt                   --            --              --      (3,667,496)             --  
Unamortized stock option cost                                   --            --              --         249,250        (249,250) 
Amortization of stock option cost                               --            --              --              --         336,935  
Net loss                                                        --            --              --              --              --  
                                                      ------------  ------------    ------------    ------------    ------------  
Balance, December 31, 1996                               1,428,752                        14,288      36,606,715        (145,207) 
Common stock issued for dividends on preferred stock         2,117  $       5.63              21          11,889              --  
Preferred stock converted to common                        240,267                         2,403          (2,003)             --  
Common stock issued for the exercise of warrants           200,000  $   .75-4.00           2,000         405,500              --  
Common stock issued upon conversion of debt              3,700,670  $   .25-2.84          37,007       4,117,635              --  
Common stock issued in private placements
     net of issuance costs of $107,357                     407,244  $   .62-2.80           4,072         973,209              --  
Common stock issued in settlement of trade payables        260,962  $  2.50-4.25           2,610         980,579              --  
Common stock issued for purchase of CSLV interest          225,000  $       1.44           2,250         322,750              --  
Common stock issued in settlement of claims              1,045,743  $        .94          10,457         969,927              --  
Additional paid-in capital related to embedded interest         --                            --       2,346,286              --  
Common stock issued for officer bonus                       37,000  $        .95             370          34,630              --  
Common stock issued for payment of financing charges       300,000  $   .88-2.80           3,000         325,000              --  
Common stock issued for services                            25,000  $       4.38             250         109,125              --  
Amortization of stock option cost                               --                            --              --         145,207  
Net loss                                                        --                            --              --              --  
                                                      ------------                  ------------    ------------    ------------  
Balance, December 31, 1997                               7,872,755                  $     78,728    $ 47,201,242    $         --  
                                                      ============                  ============    ============    ============  
</TABLE>
<TABLE>
<CAPTION>
                                                                           Total
                                                        Accumulated    Stockholders'
                                                         Deficit          Equity
                                                       ------------    ------------
<S>                                                    <C>             <C>         
Balance, January 1, 1996                               $(10,853,221)   $ 18,375,264
Common stock issued in settlement of legal claim                 --          80,000
Common stock issued in a private placement                       --       3,407,257
Preferred stock converted to common                              --              --
Common stock issued for dividends on preferred stock       (432,780)             --
Common stock issued for the exercise of warrants                 --         506,500
Common stock issued for payment of financing charges             --         274,239
Issuance of preferred stock in a private placement               --       2,210,000
Issuance of preferred stock in a private placement               --       3,667,500
Preferred stock converted to convertible debt                    --      (3,667,500)
Unamortized stock option cost                                    --              --
Amortization of stock option cost                                --         336,935
Net loss                                                (16,780,382)    (16,780,382)
                                                       ------------    ------------
Balance, December 31, 1996                              (28,066,383)      8,409,813
Common stock issued for dividends on preferred stock        (11,910)             --
Preferred stock converted to common                              --              --
Common stock issued for the exercise of warrants                 --         407,500
Common stock issued upon conversion of debt                      --       4,154,642
Common stock issued in private placements
     net of issuance costs of $107,357                           --         977,281
Common stock issued in settlement of trade payables              --         983,189
Common stock issued for purchase of CSLV interest                --         325,000
Common stock issued in settlement of claims                      --         980,384
Additional paid-in capital related to embedded interest          --       2,346,286
Common stock issued for officer bonus                            --          35,000
Common stock issued for payment of financing charges             --         328,000
Common stock issued for services                                 --         109,375
Amortization of stock option cost                                --         145,207
Net loss                                                (17,246,290)    (17,246,290)
                                                       ------------    ------------
Balance, December 31, 1997                             $(45,324,583)   $  1,955,387
                                                       ============    ============
</TABLE>

                                         F-5
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31,
                                                             ----------------------------
                                                                 1997            1996
                                                             ------------    ------------
<S>                                                          <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   $(17,246,290)   $(16,780,382)
  Adjustments to reconcile net loss to net cash
    used by operating activities:
    Depreciation and amortization                               1,058,608       1,210,685
    Stock issued in settlement of legal claim                          --          80,000
    Embedded interest expense                                   2,346,286              --
    Stock issued for settlement of stockholders' claims           980,384       2,000,000
    Stock issued for services                                     109,375              --
    Stock issued for settlement of trade payables                 670,689              --
    Stock issued for financing charges                            328,000         274,239
    Stock issued for officer bonus                                 35,000              --
    Amortization of stock options cost                            145,207         336,935
    Loss on disposal of assets                                 10,178,560              --
    Impairment of long-lived assets                                    --       5,584,458
    Extraordinary gain on settlement of trade payables         (1,673,629)             --
    Minority interests                                         (2,124,446)     (2,870,554)
  Changes in assets and liabilities:
    Decrease (increase) in inventories                            512,845        (363,999)
    Decrease (increase) in preopening costs                            --        (300,000)
    Decrease (increase) in prepaid expenses and other             141,378        (467,830)
    Decrease (increase) in other non-current assets                45,901        (104,899)
    (Decrease) increase in accounts payable                      (506,086)      2,955,362
    Increase in accrued expenses                                  177,234         563,990
                                                             ------------    ------------

    Net cash used by operating activities                      (4,820,984)     (7,881,995)
                                                             ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of fixed assets                                             --     (15,109,955)
  Proceeds from disposal of assets                              1,550,000              --
  Proceeds received from minority interests                            --       4,500,000
                                                             ------------    ------------

    Net cash provided (used) by investing activities            1,550,000     (10,609,955)
                                                             ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from line of credit                                    900,000              --
  Proceeds from convertible debt                                1,350,000              --
  Net proceeds from issuance of common and preferred stock      1,384,781       9,791,257
  Capital lease payments                                          (94,157)       (110,777)
                                                             ------------    ------------

    Net cash provided by financing activities                   3,540,624       9,680,480
                                                             ------------    ------------

Net increase (decrease) in cash                                   269,640      (8,811,470)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      949,205       9,760,675
                                                             ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                       $  1,218,845    $    949,205
                                                             ============    ============
 
                                                                               (continued)

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


                                      F-6
<PAGE>


                                     COUNTRY STAR RESTAURANTS, INC.
                           Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                           -----------------------------
                                                                              1997               1996
                                                                           ----------         ----------   
<S>                                                                        <C>                <C>       
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES:

  Equipment acquired with capital leases                                   $       --         $  288,474

  Common stock issued to settle capital lease obligations                     312,500                 --

  Common stock issued in acquisition of additional CSLV interest              325,000                 --

  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

  Common stock issued upon conversion of debt                               4,154,642                 --

  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                                   $   82,281         $   44,810
                                                                           ==========         ==========


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


                                                   F-7
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                   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").  Effective
      December 30,  1997,  as discussed in Note 3, the Company sold its interest
      in CSLV.  All material  intercompany  transactions  and accounts have been
      eliminated in consolidation.

      NATURE 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.
      At December 31, 1997, the Company had no cash  equivalents,  and virtually
      all demand deposits were with one financial  institution.  The Company has
      not experienced any losses in such accounts and believes it is not exposed
      to any significant credit risks.

      INVENTORIES

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

      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. Accordingly, the carrying values of these assets were written
      down to the  Company's  estimates  of fair  values.  Fair  value was based
      principally on a thorough  analysis of comparable  theme-based  restaurant
      assets and an appraisal of one of the Company's restaurants.


                                      F-8
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 1 - NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
         (CONTINUED)

      PROPERTY AND EQUIPMENT (CONTINUED)

      The impairment  recorded in 1996 by restaurant location and asset type was
      as follows:

                                LEASEHOLD        FURNITURE AND
                               IMPROVEMENTS        EQUIPMENT           TOTAL
                               ------------      -------------     ------------
Country Star Hollywood         $  1,307,363      $     365,063     $  1,672,426
Country Star Las Vegas            2,354,330                 --        2,354,330
Country Star Atlanta              1,557,702                 --        1,557,702
                               ------------      -------------     ------------

                               $  5,219,395      $     365,063     $  5,584,458
                               ============      =============     ============



      This non-cash  charge to  operations  increased the 1996 loss by $5.04 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                                           5
                  Leasehold improvements                               18

      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.

      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.


                                      F-9
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 1 - NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
         (CONTINUED)

      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 (the "FASB") 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.

      ADVERTISING AND PROMOTIONAL COSTS

      Costs of advertising  and promotion are expensed either as incurred or the
      first-time advertising and promotion takes place. Such costs were $402,000
      in 1997 and $1,782,000 in 1996.


                                      F-10
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 1 - NATURE OF  BUSINESS  AND  SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
         (CONTINUED)

      NET EARNINGS PER SHARE

      The Company  adopted  FASB  Statement  No. 128,  Earnings Per Share ("SFAS
      128"),  which is effective for all interim and annual periods ending after
      December 15, 1997. Those entities that have only common stock  outstanding
      are  required  to present  basic  earnings  per share  amounts.  All other
      entities  are  required to present  basic and  diluted per share  amounts.
      Diluted per share amounts assume the  conversion,  exercise or issuance of
      all potential  common stock  instruments  unless the effect is to reduce a
      loss or increase the income per common share from continuing operations.

      As required  by SFAS 128,  earnings  per share is computed  based upon the
      weighted  average  common shares  outstanding  for the year.  Earnings per
      share  excludes the effect of  outstanding  warrants and stock options and
      the conversion of convertible  debt because the effect of their  inclusion
      would be  antidilutive,  as defined in the Statement.  In conjunction with
      SFAS 128,  the Company has  restated the  accompanying  1996  consolidated
      financial statements for all per share data presented.

      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 the
      line of credit and convertible  debt, 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  to  the  1996  consolidated
      financial statements to conform with the 1997 presentation.


                                      F-11
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS

      REVERSE COMMON STOCK SPLIT

      On February  12, 1998 the  Company  effected a one for ten reverse  common
      stock  split.  Accordingly,  all  references  to number of common  shares,
      except shares authorized, and to per share information in the consolidated
      financial statements have been adjusted to reflect the reverse stock split
      on a retroactive basis.

      PREFERRED STOCK - SERIES A

      On November 10, 1995, the Company sold  1,200,000  shares of 6% Cumulative
      Convertible Series A Preferred Stock ("Series A") at $12.00 per share. The
      net proceeds totaled  $12,372,500 after expenses of $2,027,500.  Dividends
      are payable  quarterly in cash or common stock at the Company's  election.
      Liquidation  value  is  $12.00  per  share.  Each  share  of  Series  A is
      convertible  into .6  shares  of  common  stock  with  unconverted  shares
      automatically   converting  on  May  10,  1997.   The  Company  issued  to
      underwriters,  for nominal  consideration,  warrants  to purchase  120,000
      shares of Series A with an  exercise  price of  $14.40,  expiring  in five
      years.  No value was  assigned  to these  warrants.  These  warrants  were
      automatically  converted into warrants to purchase  72,000 of common stock
      at $24.00 per share on May 10, 1997 and remain outstanding at December 31,
      1997.  Concurrent  with this  offering,  18,500  shares  of  common  stock
      included  in units  sold in a  Private  Placement  on July 28,  1995  were
      converted into 77,089 shares of Series A.

      On August 28, 1996,  the Company  sold  170,371  shares of Series A to Dan
      Rubin,  the  pension  plan of Dr. Roy Rubin  (Dan's  father)  and  another
      individual  (collectively,  the  "Rubin  Group")  at $13.50  per share for
      aggregate proceeds of $2,210,000 after expenses of $90,000.  In connection
      with  this  transaction,  the  purchasers  received  30,667  common  stock
      purchase warrants exercisable at $22.50 per share, expiring in 5 years. No
      value was assigned to these warrants.  These warrants were  surrendered in
      conjunction with the February 12, 1997 settlement outlined below.

      All Series A shares were converted as follows:  1,047,015  shares in 1996,
      165,264  shares prior to May 10, 1997 and the remaining  235,181 shares on
      May 10, 1997.

      PREFERRED STOCK - SERIES B

      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
      ("Series  B").  The sale was  made to  Cameron  Capital  Ltd.,  a  foreign
      institutional   investor  ("Cameron"),   for  aggregate  net  proceeds  of
      $3,667,500.  On February 12, 1997, all the outstanding  shares of Series B
      were  exchanged  for a Convertible  Term Note in the  principal  amount of
      $4,000,000, as outlined below.


                                      F-12
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      FEBRUARY 12, 1997 - FINANCING AGREEMENTS AND SETTLEMENTS OF CLAIMS

      Following  the sale of the  Series B shares to  Cameron,  the Rubin  Group
      asserted claims against the Company relating to alleged misrepresentations
      of the  financial  condition of the Company and  concerning  the Company's
      proposed future sales of its equity instruments.  Negotiations ensued, and
      on February 12, 1997,  the Company  finalized the secured loan  agreements
      with Cameron and the Rubin Group described below.

      Cameron exchanged its 4,000 Series B shares purchased on October 10, 1996,
      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 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
      90 days after February 12, 1997. 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) $13.30,  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.  In
      addition,  the Company  shall pay the lenders a premium of 3% per month of
      the outstanding  convertible note balance if it does not file the required
      Registration  Statement  with the SEC by May 1, 1997 or if such  filing is
      not  declared  effective  by  July  1,  1997.  Because  such  Registration
      Statement was not filed by May 1, 1997 and became  effective on August 20,
      1997,  the  Company  is liable for four  months of  premium,  or 12%.  The
      maximum number of shares into which the convertible note may be converted,
      which was initially set at 300,000, was ultimately increased to 2,000,000.
      The  conversion  formula is subject  to  adjustment  in the event of stock
      splits, stock dividends, mergers, consolidations, or similar transactions.
      The Company's recording of this exchange  transaction included a charge to
      debt issuance  costs of $332,500,  which were fully  amortized at February
      12, 1997.  In addition,  the Company  recorded  $1,000,000  as  additional
      paid-in capital for the discount  related to the embedded  interest in the
      convertible  debentures  and  amortized  this  expense  over 90 days  from
      February  12,  1997  to May 13,  1997,  when  the  debentures  were  first
      convertible.  This interest  expense is included in the caption  "Embedded
      interest  expense" in the accompanying  1997 statement of operations.  The
      exchange  of the  4,000  Series B shares  for  $4,000,000  debentures  was
      reflected in the December 31, 1996 balance sheet because substantially all
      the conditions  precedent to the occurrence of this  transaction and those
      described  below had taken  place as of the end of  fiscal  1996.  Cameron
      waived the 7% accrued  interest on the convertible  debt and the aggregate
      12%  premium  related  to the  timing of the  Registration  Statement  and
      converted  $1,004,642 of these  debentures into 1,505,000 shares of common
      stock in 1997.


                                      F-13
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      FEBRUARY  12,  1997 -  FINANCING  AGREEMENTS  AND  SETTLEMENTS  OF  CLAIMS
      (CONTINUED)

      As part of the secured  financing  agreement,  the Rubin  Group  agreed to
      settle all claims  against the Company for  $2,000,000.  Accordingly,  the
      Company  issued   convertible  term  notes  in  the  aggregate  amount  of
      $1,950,000  and  agreed  to pay  $50,000  cash  to the  Rubin  Group.  The
      $2,000,000  charge to "Settlement of stockholders'  claims" is included in
      the 1996 statement of operations and the related liabilities are reflected
      in the December 31, 1996 balance sheet. The convertible term notes contain
      the same  terms and  conditions  as the  convertible  term note  issued to
      Cameron, except that the Rubin Group may convert at any time following the
      closing. The maximum number of shares into which the convertible notes may
      be converted is 2,350,000. The Company has recorded $487,500 as additional
      paid-in capital for the discount  related to the embedded  interest in the
      convertible  debentures  and fully  amortized  the expense on February 12,
      1997, when the debentures  became  convertible.  This interest  expense is
      included in the caption  "Embedded  interest  expense" in the accompanying
      1997  statement of  operations.  In October  1997,  the Board of Directors
      approved the issuance of 300,000  common  shares at a 20% discount in full
      payment of the 7% accrued  interest and the 12% accrued premium due to the
      Rubin Group.  Accordingly,  the Company has recorded $82,000 in additional
      paid-in capital and related  embedded  interest  expense for such discount
      feature.  During  1997 the Rubin  Group  converted  the entire  $1,950,000
      debentures into 1,780,000 shares of common stock.

      Also as part of the secured financing agreement,  the Rubin Group has made
      a  $3,500,000  line of credit  available  to the Company at prime plus 4%,
      payable semi-annually,  commencing on December 31, 1997, due on October 9,
      1999.  In  addition,  the Company  will issue one warrant to purchase  its
      common stock for each $30  advanced.  These  warrants are  exercisable  at
      $6.25 per share and expire on October 9, 1999.  As of December  31,  1997,
      there was $900,000  outstanding under the line of credit,  and the Company
      issued 30,000  warrants,  none of which has been exercised at December 31,
      1997. No value was assigned to these warrants.  In October 1997, the terms
      of this line of credit were amended to provide  that amounts  advanced may
      be converted to common  stock under the same terms and  conditions  as the
      convertible term notes issued to the Rubin Group. Accordingly, the Company
      recorded  $225,000 as additional  paid-in capital for the discount related
      to the  embedded  interest  in the  line  of  credit  advances  and  fully
      amortized the expense.  This  interest  expense is included in the caption
      "Embedded   interest  expense"  in  the  accompanying  1997  statement  of
      operations.


                                      F-14
<PAGE>


                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements


NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      FEBRUARY  12,  1997 -  FINANCING  AGREEMENTS  AND  SETTLEMENTS  OF  CLAIMS
      (CONTINUED)

      The line of credit advances and all convertible  term notes are secured by
      a lien on substantially all of the 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 the Rubin Group, as its agent, and immediately after the closing,
      Dan Rubin  was  elected  Chief  Executive  Officer  and  President  of the
      Company.

      MAY 1997 - CONVERTIBLE DEBT TRANSACTIONS

      In May 1997,  the Company sold pursuant to Regulation S of the  Securities
      Act of 1933 5%  Convertible  Debentures  for  $1,200,000 to  institutional
      investors  abroad,  convertible  41 days after closing at a price equal to
      70% of the  average  closing  bid price  during the 5 days  preceding  the
      conversion date. The Company has recorded  $514,286 as additional  paid-in
      capital  for  the  discount  related  to  the  embedded  interest  in  the
      convertible  debentures  and  amortized the expense over the 41 day period
      before  the  debentures  became  convertible.  This  interest  expense  is
      included in the caption  "Embedded  interest  expense" in the accompanying
      1997 statement of operations.  In October 1997, the Company issued 500,000
      shares of common  stock to these  investors  in  consideration  for a full
      release of claims arising out of the securities sold to them. These claims
      alleged that the securities  sold in May 1997 had been unfairly priced and
      the additional shares were issued to give the  institutional  investors an
      overall  price that  reflected the market value of the common stock at the
      time of settlement.  Accordingly, $468,750 has been charged to "Settlement
      of stockholders'  claims" in the accompanying 1997 statement of operations
      reflecting  the fair  value of the  common  stock  surrendered.  All these
      debentures were converted into 415,670 shares of common stock during 1997.

      OCTOBER 1997 - CONVERTIBLE DEBT TRANSACTIONS

      In  October  1997,  the  Company  sold  pursuant  to  Regulation  S of the
      Securities Act of 1993 5% Convertible  Debentures due January 31, 1998 for
      $150,000 to institutional investors abroad,  convertible immediately after
      closing at a price  equal to 80% of the average  closing bid price  during
      the 5 days preceding the conversion date. The Company has recorded $37,500
      as  additional  paid-in  capital for the discount  related to the embedded
      interest  in the  convertible  debentures  and  amortized  the  expense in
      October 1997,  when the debentures were first  convertible.  This interest
      expense is  included  in the caption  "Embedded  interest  expense" in the
      accompanying  1997  statement of  operations.  All these  debentures  were
      automatically converted as of January 31, 1998 into 461,504 shares.


                                      F-15
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      FEBRUARY 18, 1998 - FINANCIAL RESTRUCTURING AND SETTLEMENT OF CLAIMS

      After Cameron had converted  $1,004,642 of its  $4,000,000 7%  convertible
      debt,  leaving a balance of  $2,995,358,  a dispute  arose  regarding  the
      proper use of the  proceeds  realized  from the sale of CSLV (See Note 3).
      Cameron  contended  that the Company was  obligated to use the proceeds to
      prepay its debt;  the Company  believed  that the proceeds were needed for
      working capital and the repayment of other debt.  Cameron  commenced legal
      action  against  the  Company  on  February  13,  1998 in which it  sought
      recovery of the full $1,550,000 received by the Company in connection with
      the sale of CSLV, and obtained a temporary  restraining  order prohibiting
      the Company from using the proceeds until the dispute was resolved.

      Under the terms of the  Settlement  Agreement  dated  February  18,  1998,
      Cameron  agreed to dismiss  its legal  action  against  the Company and to
      accept as payment in full of its  unconverted  debt $1,300,000 in cash and
      670,000  shares  of the  Company's  common  stock  with a market  value of
      $167,500.  Cameron does not have any  registration  rights with respect to
      the common  stock but is eligible to resell  certain  amounts  immediately
      pursuant to the  provisions of Rule 144 under the  Securities Act of 1933.
      The Settlement  Agreement  provides for mutual releases of all claims held
      by the Company  against Cameron and by Cameron against the Company and Dan
      Rubin.

      The Company funded  Cameron's  settlement with an advance of $1,300,000 on
      the Rubin Group's  $3,500,000 line of credit  described  above. The lender
      also received  warrants to acquire  43,333 shares of the Company's  common
      stock at an exercise  price of $6.25 per share.  No value was  assigned to
      these warrants.  The Company has recorded  $325,000 as additional  paid-in
      capital for the discount  related to the embedded  interest in the line of
      credit advances and fully amortized the expense on February 18, 1998.

      COMMON STOCK

      In 1996,  the Company sold shares of its common  stock in various  private
      placement  transactions as follows:

<TABLE>
<CAPTION>
          DATE                            COMMON STOCK                             WARRANTS
-------------------------  ---------------------------------------  -----------------------------------
                                                           NET                       EXERCISE  TERMS IN
                                SHARES       PRICE       PROCEEDS         NUMBER      PRICE      YEARS
                           ---------------------------------------  -----------------------------------
<S>                                <C>      <C>        <C>                <C>        <C>          <C>         
February 12, 1996                  24,190   $ 26.25    $   635,000            --         n/a      n/a
March 28, 1996                     75,000     30.00      2,192,257        37,500     $ 30.00        5
July 10, 1996                      11,429     35.00        380,000         8,572       35.00        5
September 10, 1996                 10,000     20.00        200,000        10,000       20.00        5
                           --------------              -----------
                                  120,619              $ 3,407,257
                           ==============              ===========
</TABLE>

No value was assigned to these warrants.


                                      F-16
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      COMMON STOCK (CONTINUED)

      During May through July 1997,  the Company  issued an aggregate of 260,962
      shares of its common  stock with a value of $983,189 to certain  creditors
      and vendors in full  settlement of their claims  against the Company.  The
      resulting extraordinary item is more fully described in Note 7.

      In June 1997, the Company issued warrants to acquire 150,000 shares of its
      common stock at an exercise price of $2.10 per share to private investors.
      The warrants were  exercised  immediately  and the Company  issued 150,000
      shares of its  common  stock,  receiving  net  proceeds  of  $315,000.  No
      commissions  or  fees  were  paid  by  the  Company  as  a  part  of  this
      transaction.  In October 1997 the Company  issued 102,000 shares of common
      stock to these  investors  in  consideration  for a full release of claims
      arising out of the securities sold to them.  These claims alleged that the
      securities  sold in June 1997 had been unfairly  priced and the additional
      shares were issued to give the investors an overall  price that  reflected
      the  market  value  of  the  common  stock  at  the  time  of  settlement.
      Accordingly,  $95,625 has been  charged to  "Settlement  of  stockholders'
      claims" in the accompanying  1997 statement of operations,  reflecting the
      fair value of the common stock surrendered.

      During July and August  1997,  the Company  sold in a private  offering an
      aggregate of 357,857 shares of its common stock at $2.80 per share for net
      proceeds of $894,643 after deducting expenses of $107,357. In October 1997
      the Company issued  443,743  shares of common stock to these  investors in
      consideration  for a full release of claims  arising out of the securities
      sold to them.  These claims alleged that the  securities  sold in July and
      August 1997 had been unfairly priced and the additional shares were issued
      to give the investors an overall price that  reflected the market value of
      the common stock at the time of settlement. Accordingly, $416,009 has been
      charged to "Settlement of stockholders'  claims" in the accompanying  1997
      statement  of  operations  reflecting  the fair value of the common  stock
      surrendered.

      In November 1997, the Company  granted a bonus of $35,000 to its President
      and CEO, in the form of 37,000 shares of its common stock.

      INCENTIVE STOCK OPTION PLAN

      In July 1993, the Company  adopted an Incentive Stock Option Plan covering
      10,000 shares of common stock.  In 1994,  9,000 options were granted at an
      exercise price of $40.00 per share.  During 1997, these 9,000 options were
      canceled.


                                      F-17
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      NONQUALIFIED STOCK OPTION PLAN

      In January 1994, the Company  adopted the 1994  Nonqualified  Stock Option
      Plan ("NSOP")  covering 100,000 shares of common stock. The exercise price
      shall not be less than 100% of the fair market  value of the common  stock
      on the date of grant.  In April  1994,  the  Company  granted  options  to
      purchase 52,100 shares. During 1997, 48,850 of these options were canceled
      and the remaining 3,250 are outstanding,  with an exercise price of $20.00
      per share.

      OTHER OPTIONS

      In 1994, the Company  granted  options to purchase 46,700 common shares at
      $40.00 per share to certain non-employees for services to be performed. Of
      this amount,  35,000 options were granted to certain celebrities  pursuant
      to license  agreements  with such  celebrities.  The Company  recognized a
      charge  to  earnings  over  the  period  services  were  rendered  by  the
      non-employees  based on the fair  market  value of the options at the date
      granted.  The entire  amount has been  amortized  as of December 31, 1997.
      Options  totaling  36,250 were canceled in 1997 and 10,450 are outstanding
      at December 31, 1997.

      NON-EMPLOYEE WARRANTS

      The Company had 134,500 common stock purchase  warrants  outstanding as of
      January  1,  1996.  Of these,  10,000  issued as part of CSLV's  financing
      agreement were canceled in 1997, and 124,500 issued to underwriters remain
      outstanding.  In 1996, the Company  issued 5,000 warrants to  non-employee
      members of the Board of Directors, which were canceled in 1997, and 50,850
      warrants were issued to celebrities. Of these 17,000 were canceled in 1997
      and 33,850 remain outstanding.  An additional 127,238 warrants were issued
      in 1996 in conjunction  with various private  placement  transactions.  Of
      these, 20,000 were exercised in 1997, 86,238 were canceled, and 21,000 are
      outstanding at exercise  prices ranging from $20.00 to $40.00.  In 1997, a
      warrant to purchase 150,000 shares was granted and immediately  exercised,
      and warrants to acquire 30,000 shares at $6.25 were granted in conjunction
      with the line of credit advances described above.


                                      F-18
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      NON-EMPLOYEE WARRANTS (CONTINUED)

      Combined  transactions in  non-employee  warrants for 1997 and 1996 are as
      follows:

<TABLE>
<CAPTION>
                                                     1997                          1996
                                         ----------------------------   ----------------------------
                                                           WEIGHTED                       WEIGHTED
                                            NUMBER OF      AVERAGE        NUMBER OF       AVERAGE
                                             SHARES    EXERCISE PRICE      SHARES     EXERCISE PRICE
                                         ----------------------------   ----------------------------
<S>                                          <C>            <C>            <C>             <C>      
Warrants outstanding January 1               317,588        $   24.40      134,500         $   24.00
Granted                                      180,000             2.44      183,088             24.70
Canceled                                    (118,238)           26.83           --                --
Exercised                                   (170,000)            2.24           --                --
                                         -----------        ---------   ----------         ---------

Warrants outstanding December 31             209,350        $   19.23      317,588         $   24.40
                                         ===========        =========   ==========         =========
</TABLE>

EMPLOYEE WARRANTS

Combined transactions in employee warrants for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                     1997                            1996
                                         ----------------------------   ----------------------------
                                                           WEIGHTED                       WEIGHTED
                                            NUMBER OF      AVERAGE        NUMBER OF       AVERAGE
                                             SHARES    EXERCISE PRICE      SHARES     EXERCISE PRICE
                                         ----------------------------   ----------------------------
<S>                                          <C>            <C>          <C>               <C>      
Warrants outstanding January 1               151,900        $   21.58           --         $      --
Granted                                      105,000             1.25      151,900             21.58
Canceled                                     (96,500)           31.40           --                --
Exercised                                    (30,000)            0.90           --                --
                                         -----------        ---------   ----------         ---------

Warrants outstanding December 31             130,400        $    2.21      151,900         $   21.58
                                         ===========        =========   ==========         =========
</TABLE>

<TABLE>
<CAPTION>
The following information applies to employee warrants outstanding at December 31, 1997:

                                          WARRANTS OUTSTANDING                   WARRANTS EXERCISABLE
                            ----------------------------------------------  -----------------------------
                                             WEIGHTED
                                              AVERAGE          WEIGHTED                        WEIGHTED
                               NUMBER        REMAINING         AVERAGE          NUMBER          AVERAGE
                             OUTSTANDING    LIFE (YEARS)    EXERCISE PRICE  EXERCISABLE    EXERCISE PRICE
                            -------------  -------------    --------------  -----------    --------------
<S>                                <C>                 <C>  <C>                  <C>       <C>           
Range of exercise prices
           $1.25                   77,500              5    $         1.25       77,500    $         1.25
           $2.50                   50,000              4    $         2.50       50,000    $         2.50
          $20.00                    2,900              4    $        20.00        2,900    $        20.00
                            -------------  -------------    --------------  -----------    --------------

                                  130,400            4.5    $         2.21      130,400    $         2.21
                            =============  =============    ==============  ===========    ==============
</TABLE>

                                               F-19
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)

      EMPLOYEE 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:

<TABLE>
<CAPTION>
                                                                       1997                   1996
                                                                  --------------         --------------
<S>                                                               <C>                    <C>           
               Net loss
                 As reported                                      $ (17,246,290)         $ (16,780,382)
                 Pro forma                                          (17,439,290)           (22,227,382)

               Basic and diluted earnings per share
                 As reported                                      $       (5.38)         $      (15.54)
                 Pro forma                                                (5.44)                (20.46)
</TABLE>


      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  $77,000 in 1997 and $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 1997 and 1996:

                           Expected life (years)                         5
                           Risk-free interest rate                    6.00%
                           Volatility                             120%-200%

      The weighted fair value of warrants granted during 1997 and 1996 for which
      the  exercise  price  approximated  the market price on the grant date was
      $1.25 and $33.90, respectively.


                                      F-20
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 3 - LOSS ON DISPOSAL OF ASSETS

      COUNTRY STAR ATLANTA

      Pursuant to a  settlement  agreement  effective  as of  December  23, 1997
      between  the  Company and its  Atlanta  landlord,  the  Company  agreed to
      voluntarily  relinquish its rights, title, interest and possession to real
      property under the lease  agreement for the Atlanta  restaurant  facility.
      Accordingly,  as of that date,  the Atlanta lease ceased and expired.  See
      Note 5.

      Except  for  $320,000  of  furniture,  equipment  and  memorabilia  to  be
      relocated,  all property and equipment  associated  with this location has
      been  written  off in 1997.  The  write  off  amounted  to  $5,754,000  of
      leasehold improvements and $728,267 of furniture and equipment.

      COUNTRY STAR LAS VEGAS

      During 1996,  in  connection  with  certain  financing  arrangements,  the
      Company acquired a 50.05% ownership position in CSLV.  Pursuant to certain
      concurrent  agreements  concluded on December 30, 1997,  the Company first
      acquired  the  remaining  interest in CSLV not held by the  purchaser  for
      $200,000 cash and 225,000 shares of common stock valued at $325,000,  then
      sold its entire interest in CSLV for $1,550,000.  Accordingly, the Company
      surrendered its properties, interest and rights in CSLV and entered into a
      new lease as tenant to  operate  the  restaurant  facility,  as more fully
      disclosed in Note 5. In conjunction with the Las Vegas restaurant facility
      transaction,  the minority  interests' equity in the 1997 loss of CSLV was
      limited to their capital balance of $2,124,446.

      Except for $268,000 of furniture, equipment and memorabilia still owned by
      the Company,  all property and equipment associated with this location has
      been  written  off in 1997.  The  write  off  amounted  to  $4,700,000  of
      leasehold improvements and $546,293 of furniture and equipment.

      The loss on disposal of the Atlanta and Las Vegas assets  reflected in the
      1997 consolidated statement of operations is as follows:

               Country Star Atlanta                         $      6,482,267
               Country Star Las Vegas                              5,246,293
               Sale of CSLV - gross proceeds                      (1,550,000)
                                                            ----------------

                                                            $     10,178,560
                                                            ================


                                      F-21
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 4 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                            1997                          1996
                                 --------------------------    --------------------------
                                   AMOUNT            %           AMOUNT            %
                                 -----------    -----------    -----------    -----------
<S>                              <C>                     <C>   <C>                     <C>
Computed income tax benefit at
  statutory rate                 $ 5,863,000             34%   $ 5,705,000             34%
Operating loss with no current
  tax benefit                     (5,863,000)           -34%    (5,705,000)           -34%
                                 -----------    -----------    -----------    -----------
Income tax benefit               $        --              0%   $        --              0%
                                 ===========    ===========    ===========    ===========
</TABLE>

      At December 31, 1997,  the Company had a net operating  loss  carryforward
      for federal tax purposes of approximately  $35,500,000 which, if unused to
      offset  future  taxable  income,  will expire  between 2008 and 2012,  and
      approximately  $12,000,000  for state tax  purposes  which will  expire if
      unused  between 1998 and 2002. A valuation  allowance has been  recognized
      for 1997 and 1996 to offset  the  related  deferred  tax assets due to the
      uncertainty  of realizing any benefit  therefrom.  During 1997, no changes
      occurred  in the  conclusions  regarding  the  need  for a 100%  valuation
      allowance in all tax jurisdictions.

      Under Section 382 of the Internal  Revenue Code,  the  utilization  of net
      operating  loss  carryforwards  is limited after an ownership  change,  as
      defined,  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 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's  utilization of pre-1996 net operating losses
      is limited to  approximately  $1,000,000  per year. The  determination  of
      whether a change in control has  occurred  can be a very  complex and time
      consuming process. The Company is not currently in a position to determine
      whether  additional  changes in control might have occurred since November
      1995.

      Significant  components  of  the  Company's  deferred  tax  assets  are as
      follows:

                                                    1997               1996
                                              --------------      -------------
         Net operating loss carryforwards     $   13,142,000      $   6,721,000
         Impairment of long-lived assets             618,000          2,066,000
         Other                                       199,000              5,000
                                              --------------      -------------

                                                  13,959,000          8,792,000
         Depreciation                               (265,000)           152,000
         Valuation allowance                     (13,694,000)        (8,944,000)
                                              --------------      -------------

         Net deferred tax assets              $           --      $          --
                                              ==============      =============


                                      F-22
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 5 - COMMITMENTS AND CONTINGENCIES

      LEASES

      As of December  31, 1997 the Company has lease  agreements  to operate its
      two restaurant  facilities in Hollywood,  California and Las Vegas, Nevada
      and for its corporate offices in Los Angeles, California.

      COUNTRY STAR HOLLYWOOD

      The  Hollywood   restaurant's   lease  was  extended   during  1997  under
      substantially  the same  terms  as the  prior  lease,  and  under  certain
      conditions,  is subject to two  additional  extensions of five years each.
      The lease requires annual minimum payments of $312,000,  subject to annual
      adjustment.  The adjusted amount was $318,800 for 1997. 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.

      COUNTRY STAR LAS VEGAS

      As  discussed  in Note 3, the prior  lease  for the Las  Vegas  restaurant
      facility  was  terminated  on December  30, 1997 and  replaced  with a new
      lease.  The new lease,  which is to terminate on September 30, 1998 unless
      mutually extended on a month-to-month  basis,  provides for the Company to
      pay a monthly base rent of 50% of positive  cash flow from  operating  the
      restaurant (with no reduction for the Company's  corporate overhead except
      for half the salary and related expenses for an accounts payable employee,
      a payroll employee and an executive chef).

      CORPORATE OFFICES

      The lease on the corporate  office expires in June 2002 and provides for a
      basic  rent of $5,175  per month  through  June 2000 and  $5,558 per month
      thereafter.

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

                   YEAR ENDING DECEMBER 31,                       AMOUNT
               ----------------------------------            --------------

                             1998                            $      380,809
                             1999                                   380,809
                             2000                                   349,851
                             2001                                   318,804
                             2002                                   318,804
                          Thereafter                              3,188,040
                                                             --------------

                                                             $    4,937,117
                                                             ==============


                                      F-23
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      LITIGATION

      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  all  of  the
      $1,200,000  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 these
      contractors, whom it believes have filed invalid lien claims.

      CONTRACTOR LITIGATION IN ATLANTA

      On  February  3, 1998,  Pacific  Southwest  Design,  Inc.  filed a suit in
      Atlanta  against the Company  claiming  damages of $597,659 for failure to
      pay amounts due for services  rendered.  The Company intends to vigorously
      defend  against  this  action  and has  counterclaimed  for  damages in an
      undetermined amount for the contractor's breach of contract and failure to
      perform work which caused the Company to lose its Atlanta lease.

      Management believes that the probable resolution of the litigation matters
      described  above will not  materially  affect the  consolidated  financial
      position or results of operations of the Company.

NOTE 6 - GOING CONCERN

      The Company has  experienced a loss of over  $34,000,000  for the two year
      period  ended  December 31, 1997 and its cash balance at March 25, 1998 is
      less than $10,000.

      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  permanent  closing of Country  Star  Atlanta  and the sale of CSLV in
      December 1997,  (ii) the expansion of the "country"  theme,  (iii) planned
      expansion  through  joint  ventures and  licensing  rather than  expensive
      construction of new restaurant facilities,  and (iv) settlement with trade
      creditors.

      Management  continues  to make  operational  changes to improve  revenues,
      control  operating costs, and limit corporate  overhead.  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>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 7 - EXTRAORDINARY ITEM

      During 1997, the Company recognized an extraordinary gain of $1,673,629 on
      the  settlement  of trade  payables  and capital  leases  whereby  certain
      vendors and lessors  accepted  cash  payments  and/or common stock for the
      full release of their claims.

<TABLE>
<CAPTION>
                                                                            Value of
                                       Recorded            Cash              Stock
                                       Liability         Payments            Issued             Gain
                                    ---------------  ----------------   ---------------   ---------------

<S>                                 <C>              <C>                <C>               <C>            
     Trade payables                 $     3,005,024  $        845,667   $       670,689   $     1,488,668
     Capital leases                         497,461                --           312,500           184,961
                                    ---------------  ----------------   ---------------   ---------------

                                    $     3,502,485  $        845,667   $       983,189   $     1,673,629
                                    ===============  ================   ===============   ===============
</TABLE>

NOTE 8 - BASIC AND DILUTED NET LOSS PER SHARE

      The  following   table   illustrates   the  required   disclosure  of  the
      reconciliation of the numerators and denominators of the basic and diluted
      loss per share computations:

<TABLE>
<CAPTION>
                                                                     1997                 1996
                                                            ------------------    --------------------
<S>                                                         <C>                   <C>                  
BASIC AND DILUTED LOSS PER SHARE:
  Numerator
    Loss before extraordinary item                          $      (18,919,919)   $        (16,780,382)
    Preferred dividend                                                 (11,910)               (432,780)
                                                            ------------------    --------------------
                                                                   (18,931,829)            (17,213,162)
    Extraordinary item                                               1,673,629                      --
                                                            ------------------    --------------------
                                                            $      (17,258,200)   $        (17,213,162)
                                                            ==================    ====================
  Denominator
    Basic and diluted weighted average number of
    common shares outstanding during the period                      3,208,465               1,107,481
                                                            ==================    ====================
Basic and diluted net loss per share:
  Loss before extraordinary item                            $            (5.90)   $             (15.54)
  Extraordinary item                                                      0.52                      --
                                                            ------------------    --------------------
    Net loss per common share                               $            (5.38)   $             (15.54)
                                                            ==================    ====================
</TABLE>

      Potential  common stock  instruments  at December 31, 1997,  which include
      13,700 options,  339,750 warrants,  convertible line of credit advances of
      $900,000,  and convertible debt of $3,145,358 are not included in the loss
      per share calculation because their inclusion would be anti-dilutive.


                                      F-25
<PAGE>

                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 9 - RECENT PRONOUNCEMENTS

      In June 1997, the FASB issued SFAS 130, "Reporting  Comprehensive Income",
      which established standards for the reporting and display of comprehensive
      income and its components (revenues, expenses, gains and losses). SFAS 130
      requires all items that are  required to be  recognized  under  accounting
      standards  as  components  of  comprehensive  income to be  reported  in a
      financial  statement that is displayed  with the same  prominence as other
      financial  statements.  SFAS 130  requires an  enterprise  to (a) classify
      items  of  other  comprehensive  income  by their  nature  in a  financial
      statement and (b) display the accumulated  balance of other  comprehensive
      income separately from retained earnings and additional paid-in capital in
      the equity  section of a  statement  of  financial  position.  SFAS 130 is
      effective for fiscal years beginning  after December 15, 1997.  Management
      has  determined  that the  adoption  of SFAS 130 will not have a  material
      impact on the Company's financial position or results of operations.

      In June 1997, the FASB issued SFAS 131,  "Disclosures about Segments of an
      Enterprise and Related Information" which established standards for public
      business  enterprises to report  information  about operating  segments in
      annual  financial  statements and requires that those  enterprises  report
      selected information about operating segments in interim financial reports
      issued  to  stockholders.   It  also  establishes  standards  for  related
      disclosures  about  products  and  services,  geographic  areas  and major
      customers.  SFAS 131 requires,  among other items,  that a public business
      enterprise  report a measure of segment profit or loss,  certain  specific
      revenue and expense items, segment assets,  information about the revenues
      derived from the  enterprise's  products or services and major  customers.
      SFAS 131 also requires that the enterprise report descriptive  information
      about the way that the operating segments were determined and the products
      and services provided by the operating segments. SFAS 131 is effective for
      financial statements for periods beginning after December 15, 1997. In the
      initial year of application,  comparative information for earlier years to
      be restated.  SFAS 131 need not be applied to interim financial statements
      in the  initial  year of  application,  but  comparative  information  for
      interim  periods in the initial year of  application  is to be reported in
      financial   statements   for  interim   periods  in  the  second  year  of
      application.  Management has determined that the adoption of SFAS 131 will
      not have a material impact on the Company's financial reporting.


                                      F-26
<PAGE>
                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 10 - REVISED QUARTERLY INFORMATION (UNAUDITED)

      The unaudited  financial  statements  included in the Company's 1997 Forms
      10-QSB did not include the additional  paid-in  capital and the equivalent
      charge to operations  resulting from the discount  related to the embedded
      interest in the  convertible  debentures  issued in February and May 1997.
      Accordingly,  the following table shows the pertinent  financial statement
      information as was originally  presented and as now revised. The revisions
      affect only equity and embedded interest expense.

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED                   YEAR TO DATE
                                             ----------------------------    -------------------------------
                                              ORIGINALLY                      ORIGINALLY
                                                FILED           REVISED          FILED           REVISED
                                             ------------    ------------    -------------    -------------
      Q1 - MARCH 31, 1997
      -------------------
<S>                                             <C>             <C>              <C>              <C>      
      Preferred stock                        $        235    $        235
      Common stock                                 15,364          15,364
      Additional paid in capital               36,180,881      37,190,603
      Unamortized stock option cost              (136,579)       (136,579)
      Accumulated deficit                     (29,823,540)    (30,833,262)
                                             ------------    ------------

      Total stockholders' equity             $  6,236,361    $  6,236,361
                                             ============    ============

      Net loss                               $ (2,189,938)   $ (3,199,600)
                                             ============    ============

      Basic and diluted loss per common share
        Loss before extraordinary item       $      (1.49)   $      (2.18)
        Extraordinary item                             --              --
                                             ------------    ------------

        Net loss                             $      (1.49)   $      (2.18)
                                             ============    ============

      Weighted average number of shares         1,470,760       1,470,760
                                             ============    ============

      Q2 - JUNE 30, 1997
      -------------------

      Preferred stock                        $         --    $         --
      Common stock                                 23,619          23,619
      Additional paid in capital               38,156,860      40,158,646
      Unamortized stock option cost              (118,428)       (118,428)
      Accumulated deficit                     (30,002,625)    (32,004,411)
                                             ------------    ------------

        Total stockholders' equity           $  8,059,426    $  8,059,426
                                             ============    ============

      Net loss                               $   (179,084)   $ (1,171,148)   $  (2,369,022)   $  (4,370,808)
                                             ============    ============    =============    =============

      Basic and diluted loss per common share
        Loss before extraordinary item       $      (0.86)   $      (1.43)   $       (2.31)   $       (3.55)
        Extraordinary item                           0.76            0.76             0.84             0.84
                                             ------------    ------------    -------------    -------------

        Net loss                             $      (0.10)   $      (0.67)   $       (1.47)   $       (2.71)
                                             ============    ============    =============    =============

      Weighted average number of shares         1,752,408       1,752,408        1,612,239        1,612,239
                                             ============    ============    =============    =============
</TABLE>

                                                    F-27
<PAGE>
                         COUNTRY STAR RESTAURANTS, INC.
                   Notes to Consolidated Financial Statements

NOTE 10 - REVISED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED                   YEAR TO DATE
                                             ----------------------------    -----------------------------
                                              ORIGINALLY                      ORIGINALLY
                                                FILED           REVISED          FILED           REVISED
                                             ------------    ------------    -------------    ------------
<S>                                          <C>             <C>             <C>              <C>          
      Q3 - SEPTEMBER 30, 1997
      ----------------------------

      Preferred stock                        $         --    $         --
      Common stock                                 38,887          38,887
      Additional paid in capital               40,649,812      42,651,598
      Unamortized stock option cost              (100,276)       (100,276)
      Accumulated deficit                     (31,057,219)    (33,059,005)
                                             ------------    ------------

        Total stockholders' equity           $  9,531,204    $  9,531,204
                                             ============    ============

      Net loss                               $ (1,054,591)   $ (1,054,591)   $  (3,423,616)   $ (5,425,402)
                                             ============    ============    =============    ============

      Basic and diluted loss per common share
        Loss before extraordinary item       $      (0.45)   $      (0.45)   $       (2.44)   $      (3.39)
        Extraordinary item                           0.10            0.10             0.79            0.79
                                             ------------    ------------    -------------    ------------

        Net loss                             $      (0.35)   $      (0.35)   $       (1.65)   $      (2.60)
                                             ============    ============    =============    ============

      Weighted average number of shares         3,041,412       3,041,412        2,083,525       2,083,525
                                             ============    ============    =============    ============
</TABLE>


                                                   F-28