ON STAGE ENTERTAINMENT INC, 10KSB/A, 1999-05-21

ON STAGE ENTERTAINMENT INC
10KSB/A, 1999-05-21
AMUSEMENT & RECREATION SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20450
FORM 10-KSB/A No. 2

(Mark One)

[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998 or

[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ____________ to ___________

Commission File Number 0-92402

ON STAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter.)

Nevada 88-0214292
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4625 W. Nevso Drive
Las Vegas, Nevada 89103
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: 702-253-1333

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

Title of each class: None

Name of each exchange on which registered: None

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

Common Stock, par value $0.01 per share
Redeemable Warrants to purchase shares of Common Stock
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant' 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>

The registrant's revenues for the most recent fiscal year ended December 31,
1998 were $27,847,476.

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock as quoted on
April 12, 1999 was $1.19.

The number of shares of the registrant's common stock outstanding as of April
12, 1999 was 7,572,046.

Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]

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<PAGE>

TABLE OF CONTENTS

Page No.
--------

PART I................................................... 1

Item 1. Description of Business......................... 2
Item 2. Description of Property......................... 24
Item 3. Legal Proceedings............................... 26
Item 4. Submission of Matters to a Vote of
Security Holders............................... 27

PART II.................................................. 28

Item 5. Market for Common Equity and Related
Stockholder Matters............................. 28
Item 6. Management's Discussion and Analysis
or Plan of Operation............................ 28
Item 7. Financial Statements............................. 28
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 28

PART III.................................................. 29

Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance with Section
16(a) of the Exchange Act........................ 29
Item 10. Executive Compensation............................ 31
Item 11. Security Ownership of Certain Beneficial
Owners and Management............................ 33
Item 12. Certain Relationships and Related Transactions.... 35
Item 13. Exhibits, and Reports on Form 8-K................. 37

iii
<PAGE>

PART I

This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to potential new show openings, the potential markets for On Stage's
productions, the expansion of existing and potential gaming and tourist markets,
our exposure to various trends in the gaming industry, our acquisition plans and
the benefits we anticipate from these acquisitions, our business strategy, our
outstanding litigation matters and the defenses available to us, the seasonality
of our business, and liquidity issues, as well as information contained
elsewhere in this Report, where current statements are preceded by, followed by
or include the words "believes," "expects," "anticipates" or similar
expressions. For these statements, On Stage claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements in this document
are subject to risks and uncertainties that could cause the assumptions
underlying the forward-looking statements and the actual results to differ
materially from those expressed in or implied by the statements.

The most important factors that could prevent On Stage from achieving our
goals--and cause the assumptions underlying the forward-looking statements and
the actual results to differ materially from those expressed in or implied by
those forward-looking statements--include, the information provided under the
heading "Description of Business-Risk Factors" in Item 1, as well as the
following:

o On Stage's dependence on our flagship Legends in Concert production and
our principal production venues;
o The ability to successfully produce and market new productions and to
manage the growth associated with the any new productions;
o Risks associated with our acquisition strategy, including our ability to
successfully identify, complete and integrate strategic acquisitions;
o The ability to meet our commitments under our credit facilities, which
are currently in default, and to obtain alternative, additional
financing on commercially reasonable terms;
o The ability to continue as an ongoing concern;
o The competitive nature of the leisure and entertainment industry and
the ability to continue to distinguish our services;
o Fluctuations in quarterly operating results and the highly seasonal nature
of our business;
o The ability to reproduce the performance, likeness and voice of various
celebrities without infringing on the publicity rights of such celebrities
or their estates, as well as our ability to protect our intellectual
property rights;
o The ability to successfully manage the litigation pending against us and
to avoid future litigation; and
o The results of operations which depend on numerous factors including,
the commencement and expiration of contracts, the timing and amount of
new business generated by us, our revenue mix, the timing and level of
additional selling, general and administrative expense and the general
competitive conditions in the leisure and entertainment industry as
well as the overall economy. See "Description of Business-Risk
Factors."

<PAGE>
ITEM 1. Description of Business

General

On Stage produces and markets live theatrical productions and operates live
theaters and dinner theaters worldwide. We market our productions directly to
audiences at theaters in resort and urban tourist locations. During 1998, On
Stage performed shows in the following live theaters and dinner theaters
worldwide.

- ---------------------- ------------------------ ---------------- --------------
Owned/
Tourist Market Production Location Leased/
Contracted
- --------------------- ------------------------ --------------- ---------------
Atlatic City,
New Jersey Legends in Concert Bally's Park Contracted
Place

Various Trump Taj Mahal Contracted

Various Atlantic City
Hilton Contracted
- --------------------- ------------------------- ---------------- --------------
Branson, Missouri Legends in Concert Legends Family
Theater Leased
- --------------------- ------------------------ ---------------- --------------
Berlin, Germany Legends in Concert Estrel Residence
& Congress Center Contracted
- --------------------- ------------------------ ----------------- --------------
Buena Park (Anaheim), Wild Bill's Dinner Wild Bill's
California Extravanganza Dinner Theater Leased
- --------------------- ------------------------ ----------------- --------------
Las Vegas, Nevada Legends in Concert Imperial Palace Contracted
- --------------------- ------------------------ ----------------- --------------
Laughlin, Nevada Spice 'N Ice River Palms
Casino Contracted
- --------------------- ------------------------ ----------------- --------------
Myrtle Beach,
South Carolina Legends in Concert Legends Theater Owned

Eddie Miles Show Eddie Miles Leased
Theater
- --------------------- ------------------------ ----------------- --------------
Orlando, Florida King Henry's Feast King Henry's
Dinner Theater Owned

Wild Bill's Dinner Wild Bill's
Extravaganza Dinner Theater Owned
Fort Liberty
Retail Complex

Blazing Pianos Blazing Pianos Leased
Bar
- --------------------- ------------------------ ------------------- -------------
Toronto, Orlando Legends in Concert Legends Theater
at Sheraton Leased
Centre Hotel
- --------------------- ------------------------ ------------------- -------------
Valley Forge,
Pennsylvania Various Lily Langtry
Dinner Theater Contracted
- --------------------- ------------------------ ------------------ --------------

2
<PAGE>

On Stage also markets our productions to commercial clients, which include
casinos, corporations, fairs and expositions, theme and amusement parks, and
cruise lines. We have performed in locations such as the Illinois State Fair,
MGM Grand Theme Park and Dollywood Theme Park; in locations as far away as
Australia, Russia, China, Africa, Japan and the Philippines; and for major
corporate clients such as McDonald's, Hewlett Packard, IBM, Pitney Bowes, Levi
Strauss and Texaco.

For the years ended December 31, 1998 and 1997, approximately 40% and 25%,
respectively, of On Stage's net revenue was generated from theaters and dinner
theaters that we operate in resort and urban tourist markets; approximately 41%
and 61%, respectively, of our net revenue was generated from live productions
performed in gaming markets, predominantly Las Vegas and Atlantic City; and
approximately 16% and 9%, respectively, of our net revenue was generated from
sales to commercial clients other than casinos. The remaining 3% and 5%,
respectively, of our net revenue was generated from merchandise and souvenir
photography sales.

These percentages reflect the early results of On Stage's strategic objective to
become the leading owner and operator of affordable live theatrical productions,
dinner theaters and other location-based entertainment in North America. Our
primary strategy is to build location-based entertainment clusters consisting of
live theatrical productions and other forms of middle market entertainment
including, for example, musical reviews and magic shows, in major tourist
markets. Our plan is to achieve this strategy by:

o establishing a significant market presence through the acquisition of
multiple entertainment venues with strong, predictable cash flows;
o pooling our contacts with ticket wholesalers, tour operators and
individual ticket sellers; and
o rolling out a variety of successful entertainment concepts in the
localities in which we establishe our presence.

Management believes this "clustering" strategy will reduce On Stage's financial
exposure and will enhance our revenue by:

o increasing On Stage's visibility and market acceptance in a greater
number of entertainment venues;
o enabling us to realize cost savings through the consolidation of sales
and marketing and the elimination of duplicative administrative overhead;
and
o enabling us to market productions traditionally performed in a particular
venue in a greater number of venues or an array of markets.

On Stage believes that strong fundamentals for the consolidation of multiple
entertainment venues and the establishment of location-based entertainment
clusters exist, including:

o a large number of North American resort and urban tourist-driven
locations;
o fragmented ownership of location-based entertainment businesses;
o ownership by individuals who lack the ability to capitalize on economies
of scale in sales and marketing, operations, systems and capital
formation;
o ownership by individuals who lack a clear exit strategy;
o acquisitions characterized by predictable cash flows and the ability
to leverage real and personal property;
o numerous cost reduction and revenue enhancement opportunities;
o limited competition for acquisitions; and
o low acquisition multiples (typically 4.0 - 5.0x EBITDA).

Given On Stage's current financial condition (as discussed in the heading "Risk
Factors") our ability to pursue our strategic objectives will be severally
limited.

3
<PAGE>

On Stage was incorporated on October 30, 1985 under the laws of the state of
Nevada as Legends in Concert, Inc. Subsequently, on August 7, 1996, On Stage
changed its name to On Stage Entertainment, Inc. Our principal executive offices
are located at 4625 West Nevso Drive, Las Vegas, Nevada 89103, and our telephone
number is (702) 253-1333.

DEVELOPMENTS DURING 1998

Gedco USA, Inc. Acquisition - March 1998

On March 13, 1998, we purchased assets of Gedco USA Inc., a Florida corporation,
for $14 million. We utilized $11.5 million of our mortgage financing facility
with Imperial Commercial Credit Mortgage Investment Corporation, or ICCMIC, and
595,238 shares of our common stock valued at $4.20 per share, or $2.5 million
worth of our common stock, to fund this transaction. Included in the purchase
were substantially all of the income producing assets and associated real
property of Orlando Entertains and LA Entertains, consisting of King Henry's
Feast and Blazing Pianos located in Orlando, Florida, and the Fort Liberty
retail shopping complex, which includes the Wild Bill's Dinner Theater, located
in Kissimmee, Florida, and Wild Bill's Dinner Theater located in Buena Park,
California. For the year ended December 31, 1997, audited revenues of the assets
purchased were $13.9 million and earnings before interest, taxes, depreciation
and amortization were $2.7 million.

Kodak Relationship - June 1998

On June 3, 1998, On Stage and Kodak Themed Entertainment, a division of the
Eastman Kodak Company that is interested in developing a branded imaging
presence in key entertainment environments, executed a letter of intent. This
letter of intent contemplates the joint development of retail outlets known as
Kodak On Stage Fantasy Stores. The Fantasy Stores will incorporate Kodak's
digital photographic technology with live impersonators from Legends in Concert
to create a unique and entertaining retail experience, blending the strengths of
Kodak's brand and products with the "star power" provided by On Stage's
impersonators. The retail store will include Legends merchandise, licensed
themed clothing, souvenirs of legendary superstars, Kodak traditional
photographic products and Kodak proprietary digital photographic products
featuring licensed character images from The Walt Disney Company, Warner Bros.
Studios and Universal Studios. We are currently evaluating initial launch sites
in New York, Las Vegas and Los Angeles.

Kodak and On Stage have also agreed to share revenue generated by the operation
of digital photography systems to be provided by Kodak in some of our theaters
under a digital imaging systems agreement we executed on June 3, 1998. The new
systems are currently in place in our entertainment venues in Myrtle Beach,
South Carolina, Branson, Missouri and Buena Park, California.

Calvin Gilmore Productions, Inc. Acquisition - June 1998

On June 30, 1998, On Stage purchased certain assets of Calvin Gilmore
Productions, Inc., a subsidiary of Fox Family Worldwide, Inc., Myrtle Beach's
oldest and largest live theater operator, for approximately $2.0 million,
consisting of $1.0 million in cash and 206,612 shares of common stock at a price
of $3.50 per share. On Stage used $1.1 million of our mortgage financing
facility with Imperial Credit to fund the cash portion of the purchase price.
The assets acquired in the transaction include fee simple title to the Legends
Theater and a leasehold interest in the Eddie Miles Theater.

Upon consummation of the transaction, Fox Family also agreed to order television
programming and production services from On Stage, and to give us a 30-day right
of negotiation to acquire specified live theatrical/stage rights in projects
developed and owned by Fox Family over the next five years. Also, Fox Family
increased its stock ownership to a 5% equity stake in On Stage, and Mel Woods,
President and Chief Operating Officer of Fox Family, was elected to our board of
directors.

4
<PAGE>

Substantial Indebtedness Incurred

During 1998, On Stage received mortgage financing from Imperial Credit and
extended our existing credit facilities with First Security Bank of Nevada and
First Security Leasing Company in order to fund our existing operations and
finance our growth strategy with future acquisitions. On Stage has been unable
to service our substantial indebtedness and is, consequently, in default under
these facilities. See Existing Defaults under Credit Facilities" below.

Industry Background

On Stage has focused our clustering efforts in North American resort and tourist
markets. In 1996, international and domestic travelers spent over $473.0 billion
on travel and tourism within the U.S. The table below outlines the spending of
domestic and international travelers within the U.S. for the past 10 years.

[Bar Graph Representing 10-Year Growth Tourism Expenditures in the U.S. omitted]

According to the Travel Industry Association's National Travel Survey, of the
715 million trips taken in 1997, over 61% were pleasure trips. In 1997, the most
popular 10 states among U.S. travelers were California, Florida, New York,
Texas, Illinois, Nevada, Hawaii, New Jersey, Pennsylvania and Georgia. In 1998
On Stage ran productions in seven of these 10 states and has identified
potential acquisitions in the other three. Below is a chart illustrating the top
ten states by traveler expenditures.

[Bar Graph Representing Travel Expenditures by State omitted]

According to the Travel Industry Association of Americans, theme park and
entertainment attractions are one of the top six types of family vacation
destinations. While the most popular destinations include the top gaming sites,
Las Vegas, Nevada and Atlantic City, New Jersey, and the top theme park sites,
Orlando, Florida and Los Angeles, California, several emerging resort locations
such as Myrtle Beach, South Carolina and Branson, Missouri were also included.

Set forth below, is general information on the key markets in which On Stage
operated in 1998.

Anaheim /Buena Park, California

Anaheim/Buena Park, California, home of Disneyland, hosted 37.5 million visitors
in 1997, according to the Anaheim/Orange County Visitors & Convention Bureau.
Visitors spent approximately $5.6 billion, of which $1.3 billion was spent on
entertainment. In Buena Park alone, over $81 million was spent on entertainment
in 1997. The Anaheim Convention Center, in conjunction with Disneyland, has
announced a plan to spend over $2 billion over the next five years to revitalize
the convention center and surrounding areas, and expand Disneyland. Expansion
plans for Disneyland include the construction of:

o a 750-room Craftsman-style hotel;
o a second theme park to be named "Disney's Californian Adventure;" and
o a 200,000 square foot entertainment, dining and retail complex joining
the two theme parks.
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<PAGE>

We believe this new investment will increase tourism to this market with
potentially positive results for other entertainment suppliers. In March 1998,
we acquired Wild Bill's Dinner Extravaganza which performs at the Wild Bill's
Dinner Theater in Buena Park, California. Buena Park is in close proximity to
Anaheim, California.

Atlantic City, New Jersey

In 1997, Atlantic City received approximately 37 million visitors according to
the Atlantic City Convention and Visitors Bureau. On Stage currently produces
Legends at Bally's Park Place in Atlantic City, and various productions at the
Trump Taj Mahal, and we have produced numerous other shows in this market
including the Atlantic City Swing at the Atlantic City Hilton, Magic!, Magic!,
Magic! at the Showboat Hotel and Casino, Cabaret on Ice at Trump's Castle, and
Bon Voyage and The Atlantic City Experience at Bally's Park Place. Furthermore,
we are aware of at least two new casino hotel projects under development in
Atlantic City and we believe that these will also contain showrooms for live
entertainment.

Branson, Missouri

Branson is less than a one-day drive for half of the U.S. population and is a
popular vacation destination. The Branson Chamber of Commerce reported that in
1997, Branson attracted six million visitors. Branson is home to 40
entertainment venues with over 70 live productions. The live entertainment
industry in Branson is atypical of other theater districts, with shows beginning
mid-morning and continuing throughout the day and into the evening. On Stage has
presented Legends in Branson since 1995 for limited runs, with successful
results to date. Legends is currently being performed in Branson at the Legends
Family Theater.

Myrtle Beach, South Carolina

Myrtle Beach, which has 99 golf courses and 11 live theatrical venues, was,
according to BYWAYS magazine, ranked the second most highly preferred motor
coach destination in the United States in 1997. The Myrtle Beach Chamber of
Commerce reported that 13.4 million people visited Myrtle Beach in 1997 and
spent approximately $2.6 billion. Visitors, according to the Myrtle Beach
Chamber of Commerce, have an average stay of 5.7 days. On Stage resident Legends
production at the Legends Theater at Surfside Beach (located just South of
Myrtle Beach in beautiful Surfside Beach) opened in March 1995, and is known as
one of the top shows in town.

Las Vegas, Nevada

In 1997, Las Vegas had over 30 million visitors, according to Las Vegas
Convention and Visitors Authority, an increase of almost 30% since 1993, and
spent $25 billion. Las Vegas has 80 hotels and casinos and 35 different live
productions. Visitors to Las Vegas, according to Las Vegas Convention and
Visitors Authority, spent an average of $33.24 a day on shows during an average
4.5 day stay per visitor. According to the Las Vegas Visitor Profile Study, of
these 30 million visitors, 48% attended shows during their stay, up
significantly from 40% in 1994.

Of those people that attended shows, almost 78% attended a regularly scheduled
production show. On Stage's Legends has been playing at the Imperial Palace in
Las Vegas since 1983 and On Stage has produced numerous limited engagements and
other shows in Las Vegas.

6
<PAGE>
Laughlin, Nevada

Laughlin, Nevada is another emerging tourist market in close proximity to Las
Vegas. According to the Laughlin Visitor's Bureau, five million people visited
Laughlin in 1997 and spent an average of $187 per day. In 1997, visitors to
Laughlin spent almost $20 per day on shows and stayed an average of 3.5 days. In
1998, On Stage began performances of Spice'N Ice, an ice skating extravaganza at
the River Palms Hotel & Casino.

Orlando, Florida

Orlando is one the most popular destination cities in the United States and was
voted as the number one theme park destination in 1996 by the National Tourism
Association. According to Orlando's Visitors Bureau, approximately 36.5 million
tourists visited Orlando in 1997 and spent $15.9 billion. In 1997, the Orlando
Visitor's Bureau reported that visitors spent $3.3 billion on entertainment and
stayed for an average of 3.7 days. Orlando's hotel industry is meeting the
demands of visitors, with over 85,000 hotel rooms available in 1996, an 8%
growth over the prior four years. In March 1998, On Stage acquired King Henry's
Feast, Wild Bill's Dinner Extravaganza and Blazing Pianos, all located within
the greater Orlando area.

Toronto, Ontario

Toronto is the tenth largest metropolitan area in North America and the third
largest English-speaking theater market in the world after London and New York
according to Tourism Toronto, the official tourism sales and marketing agency
for the Toronto region. Approximately 20.2 million tourists visited Toronto in
1997 and spent approximately $3.3 billion. Of the $3.3 billion spent, $193
million was spent on entertainment. Tourism Toronto estimates average spending
per person to be approximately $93 per day. Toronto is home to 83 live
productions in 39 live entertainment venues including On Stage's Legends
production featured at the Sheraton Centre Hotel which ran from May of 1998
through April of 1999.

Other Potential Urban and Resort Markets

We believe that there are numerous other emerging urban and resort tourist
markets, both in the United States and Canada, where the demand exists for
quality, affordable live entertainment. We believe that the following urban and
resort tourist locations may be suitable for the acquisition, production and
marketing of location-based entertainment:

Chicago Niagara Falls
Corpus Christi Orlando
Miami Phoenix
Montreal Pigeon Forge
New Orleans San Diego
New York City San Francisco
South Padre Island Vancouver

OTHER COMMERCIAL CLIENTS

On Stage has also produced limited-run Legends shows in the last five years for
other types of commercial clients, including:

o theme parks--Six Flags-MGM Grand Theme Park, Lotte World in Korea;
o cruise ships--Royal Caribbean Cruise Lines, Singapore Cruise Lines; and
o major fairs--Dade County Youth Fair, Illinois State Fair.

7
<PAGE>

In addition, in 1997 and 1998, On Stage produced approximately 185 and 172
events, respectively, for corporate clients, such as McDonald's, Bell South,
Home Depot, IBM, Norwest Bank, and Anheuser Busch.

Show Offerings

Since our inception, On Stage has developed, produced or acquired many different
productions. These productions include Legends, other tribute shows, a variety
of musical reviews, magic shows, ice skating productions and specialty shows.
The principal productions currently produced by On Stage are as follows:

Legends in Concert

Our flagship Legends in Concert production is a live theatrical tribute show
featuring impersonators who recreate past and present music and motion picture
superstars. Legends is the longest running independently produced production in
Las Vegas and Atlantic City. Based on our access to approximately 75 different
Legends tribute acts, we can tailor each tribute show to suit the unique
demographics of any audience and the size of any venue, and we have been able to
attract significant repeat business by varying regularly the composition of the
acts in our shows. In 1998, full-time resident Legends productions were
performed in Atlantic City, New Jersey; Berlin, Germany; Branson, Missouri; Las
Vegas, Nevada; Myrtle Beach, South Carolina; and Toronto, Canada.

Wild Bill's Dinner Extravaganza

As a result of the Gedco Acquisition, we acquired Wild Bill's Dinner
Extravaganza, a two hour dinner show that features the best of the Wild West.
The show includes Indian tribal dances, gun fighting, and showgirls. The show
runs every day throughout the year at the Wild Bill's Dinner Theater at our Fort
Liberty Complex in Kissimmee, Florida and the Wild Bill's Dinner Theater in
Buena Park, California.

King Henry's Feast

As a result of the Gedco Acquisition, we acquired King Henry's Feast, a two hour
dinner show that takes the patrons back to the time of King Henry VIII. The show
includes a sword swallower, a jester, a trapeze act and a sword fight. The show
runs every day throughout the year at our King Henry's Feast Castle located in
Orlando, Florida.

Blazing Pianos

As a result of the Gedco Acquisition, we also acquired Blazing Pianos, an
interactive piano bar featuring three talented comedic piano players and
vocalists, who simultaneously play song requests from patrons on separate
pianos. The shows runs nightly throughout the year at the Blazing Pianos Bar in
Orlando, Florida.

Spice 'N Ice

Spice 'N Ice combines performances by world class skaters with adagio and
comedic skits by skating clowns, dancers and ensemble skating. Currently, Spice
'N Ice runs at the River Palms Casino in Laughlin, Nevada.

8
<PAGE>

PRODUCTION ECONOMICS

Most financial structures for theatrical productions in theaters in resort and
urban markets and in larger casinos are based on the "four-wall" method of
expense and revenue allocation between the producer and the client, while those
produced for clients, such as smaller casinos, corporations, fairs, cruise lines
and theme parks, are typically "contracted productions" are generally produced
for a fixed or "guaranteed" fee.

The four "walls" of any live theatrical production can be illustrated as
follows:

[Graphic presenting the "four walls" of live theaterical production described in
following paragraph]

On Stage generally operates our resident productions in resort and urban tourist
markets and in Las Vegas casinos under either a "four-wall" arrangement or a
"two-wall" arrangement. Under the "four-wall" arrangement On Stage assumes the
responsibility for the cost of the theater, whether leased or purchased, and all
other expenses associated with the presentation of the production, including:

o the artistic aspects of the production of a show;
o the technical requirements associated with producing a show;
o the promotion of a show; and
o ticket sales, concession sales and maintenance.

In return for assuming full responsibility for the cost of presenting the
production under a "four wall" arrangement, On Stage is entitled to 100% of the
revenues, profits and/or losses generated by a show under that arrangement.

Under the "two-wall" arrangement, the client owns or manages the theater. On
Stage and the client are responsible for two of the costing responsibilities, or
"walls," described above. On Stage and our client share revenue generated by a
show under this arrangement; each retains an agreed percentage of the show's
revenues.

Shows produced under either of these two arrangements are referred to as
"at-risk" shows, because our revenues are dependent upon customer attendance
levels. Our resident Legends shows at Myrtle Beach, South Carolina and Toronto,
Canada are examples of "four-wall" arrangements, and our Legends show at the
Imperial Palace in Las Vegas, Nevada is an example of a "two-wall" arrangement.
Although most contracts of this type are by their nature short-term, clients
typically renew their contracts or host a variety of our productions on a
regular basis.

On Stage also operates "low-risk" productions where the client is responsible
for all non-production related expenses and retains all revenue generated from
ticket sales. In these arrangements, On Stage is responsible for all production
related expenses--performers, orchestra, dancers and company manager--and we
typically receive a guaranteed weekly fee, regardless of attendance levels. This
is a typical structure for shows sold to commercial clients, such as
corporations, fairs and theme parks, and to casinos outside the Las Vegas,
Nevada market. Our Legends show at Bally's Park Place in Atlantic City, New
Jersey is an example of a "low-risk" arrangement. Although many of these
contracts are short term, clients typically renew their contracts on a regular
basis.

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CORPORATE STRUCTURE

On Stage Casino Entertainment, Inc.

On Stage has been a leading provider of live entertainment to casinos for over
15 years.

In 1998, On Stage Casino Entertainment had long running productions in the
following locations:

- ------------------- ----------------------- ----------------------------------
Venue City Type of Structure
- ------------------- ----------------------- ----------------------------------
Imperial Palace Las Vegas "Two-Wall"
Bally's Park Place Atlantic City Guaranteed Fee
River Palms Casino Laughlin Guaranteed Fee
Trump's Taj Mahal Atlantic City Guaranteed Fee
Atlantic City Hilton Atlantic City Guaranteed Fee
- ------------------- ----------------------- ----------------------------------

On Stage Theaters, Inc.

Upon completion of the Gedco asset acquisition, we formed On Stage Theaters,
Inc., a wholly-owned subsidiary created to manage our theaters from our offices
in Orlando, Florida. During 1998, On Stage operated seven live theater
productions, managed the sublease of the Eddie Miles Theater and produced one
show under contract in the following locations:

- ----------------- -------------- ----------- ------------- ------------
Venue City # of Seats Own/lease/ Date of
contracted expiration
- ----------------- -------------- ----------- ------------- ------------
Contracted
Productions:

Lily Langtry
Dinner Theater Valley Forge, PA 500 Contracted 1/00

"Four - Wall"
Productions:

Blazing Pianos Bar Orlando, FL 400 Lease 10/00
Eddie Miles Theater N.Myrtle Beach, SC 946 Lease 12/04
King Henry's Dinner
Theater Orlando, FL 620 Own N/A
Legends Theater Myrtle Beach, SC 800 Own N/A
Legends at Sheraton
Centre Hotel Toronto, ON 647 Lease 2/03
Wild Bill's Dinner
Theater Buena Park, CA 820 Lease 6/10
Wild Bill's Dinner
Theater Kissimmee, FL 628 Own N/A
Legends Family
Theater Branson, MO 984 Lease 12/98
- ----------------- --------------- ----------- ------------ -------------

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On Stage Events, Inc.

On Stage Events creates numerous types of special entertainment events for
corporate clients such as casinos, fairs, theme parks, cruise lines and
corporations. These events utilize On Stage's inventory of props, decorations,
sound, lighting and costumes. In addition to creative custom-designed events,
this business segment has in-stock, unique interactive shows, as well as stage
shows, which have played for long runs at theaters and casinos and are now
available for private events. On Stage Events has typically produced either
interactive dinner shows or theme parties, such as Las Vegas Spectacular, a
theme party in which a casino is created and participants are allowed to gamble
as if they were in a Las Vegas casino. In 1998, the division had sales offices
in Atlantic City, New Jersey, Atlanta, Georgia, Palm Springs, California and Las
Vegas, Nevada. Examples of our corporate clients are:

Illinois State Fair Dollywood Theme Park Hyatt Hotels Worldwide
MGM Grand Theme Park McDonald's Six Flags Over Georgia
Hewlett Packard IBM National Football League
Levi Strauss Texaco Xerox

On Stage Merchandise, Inc.

On Stage Merchandise sells merchandise at all of its venues in tourist locations
and, if permitted, in client venues. Merchandise includes logo clothing,
keychains, magnets, pins, canvas tote bags and coffee mugs, plus specialty
licensed merchandise featuring On Stage's more popular Legends acts such as
Elvis, the Blues Brothers and Marilyn Monroe. In addition, this wholly-owned
subsidiary sells autographed photographs of impersonators or other headline acts
posing with audience members, for which it pays nominal royalties to featured
performers. We believe that our relationship with Kodak Themed Entertainment
will further augment revenues from merchandising. See "Developments During
1998".

On Stage Productions, Inc.

On Stage Productions is located in Las Vegas, Nevada. This division is capable
of simultaneously producing multiple shows of varying complexity. Among its
responsibilities are choreography, costume, talent, lighting and sound. We
intend to produce multiple shows in each locality in which we have established
ourself through this single, centralized production facility.

CORPORATE OPERATIONS

Sales and Marketing

Since many people plan to attend a specific live performance prior to leaving
for vacation, it is imperative that On Stage market to potential customers
before they arrive at their destination. The development and maintenance of
amicable, professional relationships with individual sales representatives and
individuals working in group sales offices is, therefore, essential to our
clustering strategy. At some point in the future, we may invest in or acquire
receptive operators.

On Stage generally targets mass market audiences with average prices for our
productions ranging from $20.00 to $40.00 per adult ticket. Show pricing is
determined by competition in the local marketplace and is typically neither the
lowest nor the highest in a particular market. Once ticket pricing has been
determined, the composition of the show--number of headline acts, singers,
dancers, orchestra, technicians, etc.--and facility and equipment requirements
are adjusted so that each show will generate profits based upon projected
attendance. We distribute, from time to time, show coupons offering discounts of
up to 20% on individual ticket purchases, and offer volume discounts of up to
60% to ticket and tour wholesalers buying large blocks of tickets.

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Advertising and Promotion

On Stage provides advertising and publicity support and seeks major ongoing
media coverage for all of our shows through our network of media contacts.
Exposure on television and radio, and in national periodicals, major
metropolitan newspapers, and local tourist entertainment guides has served to
promote On Stage's shows both regionally and nationally. Over the last three
years, publicity for On Stage included appearances at the 1996 Miss Universe
Pageant, Jay Leno's Tonight Show from Las Vegas, Nevada, VH1's Route 96, CNN's
Burden of Proof and on Wheel-of-Fortune. In February 1999, our Legends Show in
Branson, Missouri was featured on a winter season special on The Nashville
Network.

Advertising designed to target the individual tourist includes newspaper and
magazine print ads, television and radio commercials, airport videos and
signage, billboard and outdoor advertising, transit advertising, and brochures
placed in areas with a high concentration of tourists (such as visitor and
tourist welcome centers). In some resort markets, such as Myrtle Beach, South
Carolina and Branson, Missouri, advertising commences up to one year in advance
of a show's opening, and includes direct mail campaigns, attendance at consumer
and travel trade shows, and placement of print ads in travel and trade
publications. Within casinos and hotels, table tent cards, coupons, flyers and
brochures are placed in each guest-room, restaurant and lounge, whenever
possible, and promotional show videos are broadcast on in-house television
systems. As On Stage begins to control other pieces of the distribution chain,
and forms entertainment clusters, traditional advertising and promotion costs
can be decreased due to economies of scale.

Competition

The leisure and entertainment market, which includes the market for live
theatrical productions, is highly competitive. Many of our markets contain a
large number of competing live theatrical productions. In resort and urban
tourist locations, we compete for ticket sales with other live productions and
headline stars, many of whom have better name recognition and greater financial
and other resources.

The live theatrical entertainment industry is highly fragmented and contains
many small, independent production companies and several major production
companies. On Stage competes with these production companies for the most
desirable commercial and tourist venues, and for talent and production
personnel. Major production companies in our markets include Feld Entertainment
Productions, Blair Farrington Productions and Dick Foster Productions in Las
Vegas, and Greg Thompson Productions in Seattle. In addition to competition from
major production companies, which produce other forms of live theatrical shows,
we also compete directly against a large number of smaller independent producers
who sometimes produce tribute or impersonator shows. However, we believe that
only one of these competitors, Spring Time Productions, produces such shows on a
continuous basis in more than one location, and therefore presently offers any
material competition. Spring Time Productions currently produces its American
Superstars impersonator show at the Stratosphere Hotel and Casino in Las Vegas,
Nevada and at the Grand Casino in Gulfport, Mississippi.

In Orlando, Florida and Buena Park, California, where On Stage operates dinner
theaters, other major competing dinner theater shows include Medieval Times,
Arabian Nights, and Wizards. The dinner theater market is highly competitive and
we compete with other forms of live entertainment in addition to the dinner
theaters, primarily theme parks.

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Talent

On Stage has featured approximately 175 impersonators and numerous variety acts
(magicians, aerial acts, jugglers, clowns, sword fighters, jesters and
comedians), singers, dancers, musicians and musical directors in our
productions, and we regularly receive promotional materials from individuals who
are eager for work. An average of 30 inquiries are received per month, and for
every working performer, we have access to approximately three potential
performers. We periodically hold auditions for new impersonators, singers, and
dancers in Las Vegas, Nevada, Atlantic City, New Jersey, Myrtle Beach, South
Carolina and Los Angeles, California, and we often view acts in outside show
environments and clubs.

All performers receive creative and professional support from On Stage's various
in-house personnel. On Stage employs choreographers to work with new and
existing entertainers to develop their skills and improve their confidence on
stage. Utilizing our in-house music library, musical arrangements are developed
for new and existing performers and digital audio tapes are developed for
principal acts. Our in-house wardrobe personnel, together with several well
established costume designers, create new performers' wardrobes and update the
wardrobes of existing talent. We contract with an independent photographer to
provide promotional photographs of the headline acts and employ a writer to
prepare professional biographies and press releases.

On Stage believes we are the premier producer of impersonator shows worldwide
and that we have the ability to offer a variety of consistent work to our acts
by rotating them among our different shows and events. On Stage's musicians,
singers, dancers and production personnel are generally employees of On Stage,
while headline acts, including the impersonators utilized in our tribute shows,
are treated as independent contractors in accordance with industry practice.

Intellectual Property

On Stage has filed the following intellectual property marks:

Name: Class(es) Status Country

Legends in Concert 41 Registered United States
Legends in Concert 41 Registered Japan
Legends in Concert 41 Registered Canada
Legends in Concert 41 Registered Great Britain
Legends in Concert 41 Registered Mexico
Legends in Concert 6, 16, 18, 21,
25, 26 Registered United States
Legends in Concert
w/ design 6, 16, 18, 21,
25, 26 Registered United States
Legends in Concert 41 Pending Europe
Legends in Concert 41 Pending Australia
Legends of Country 41 Pending United States
Legends Live 107 Registered United States
Legends of the
Rat Pack 41 Published United States
Atlantic City
Experience 41 Registered United States
Camouflage Aux
Folles 41 Published United States
Wild Bill's
Extravaganza 41 Pending United States

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We anticipate filing applications for protection of our Legends service mark in
France, South America, China and several other foreign countries, as
appropriate. We believe we either own or have appropriately licensed all of the
intellectual property rights required to perform our shows in the manner in
which they are currently produced, including, the right to publicly present and
otherwise perform all non-dramatic copyrighted musical compositions pursuant to
musical licenses with Broadcast Music, Inc. (BMI) and American Society of
Composers, Authors and Publishers (ASCAP).

We typically require our independent contractors, employees, consultants and
advisors to execute appropriate confidentiality and non-competition agreements
in connection with their employment, consulting or advisory relationship with
us.

Government Regulation

Providing entertainment to the casino gaming industry may subject On Stage to
various licensing regulations. We are regulated and required to obtain a casino
industry license from the New Jersey Casino Control Commission pursuant to the
New Jersey Casino Control Act. Our current casino service industry license from
the New Jersey Casino Control Commission was issued on January 17, 1997 and
expires on September 30, 1999. In connection with the license application, the
New Jersey Division of Gaming Enforcement conducted an investigation of On Stage
to determine our suitability for licensure. Management believes that we are not
required to obtain a license to provide our services to casinos in Nevada or in
any other jurisdictions in which we operate, other than New Jersey. The Nevada
Gaming Control Board and similar authorities in other jurisdictions, however,
have broad authority to order providers of services to casinos to file
applications, be investigated, have their suitability determined, obtain
licenses and cease providing their services, if they find the service providers
to be unfit. Additionally, many of the casinos mandate that a production company
is either properly licensed in accordance with the local gaming laws before it
will contract for their services.

In addition, On Stage leases or owns certain of the theaters for our new
brand-name resident productions, thereby absorbing all costs and risks
associated with producing the show in order to retain 100% of the show's
profits. Producing shows under this "four-wall" arrangement may require us to
obtain and maintain certain local licenses and permits as we were required to
obtain for the opening of our Myrtle Beach show, a"four-wall" production. These
licenses and permits could include, amusement licenses, music licenses (i.e.,
BMI or ASCAP), business licenses, liquor licenses, retail sales tax licenses,
food and beverage licenses and a health inspection rating (if dairy products
and/or hot food, other than popcorn, is to be sold). Difficulties or failure in
obtaining required licenses or regulatory approvals could delay or prevent the
opening of a new show or, alter, delay or hinder our expansion plans. In
addition, the suspension of, or inability to renew, a license needed to operate
any of our currently running productions would adversely affect our operations.

Employees

As of March 25, 1999, On Stage employed approximately (a) 207 full-time
employees, including 51 entertainers, 37 theater operations personnel, 17
production personnel, 25 food & beverage personnel, 40 administrative personnel,
20 marketing personnel, 8 box office/concession personnel and nine executive
officers; and (b) 402 part-time employees. None of our current employees are
covered by a collective bargaining agreement. We believe that our relationship
with our employees is good.

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EXISTING DEFAULTS UNDER CREDIT FACILITIES

Working Capital Line

In May 1997, First Security Bank of Nevada issued a line of credit to us for up
to $250,000. Borrowings under this line of credit bear variable interest at 1.5%
over the First Security Bank of Idaho's index 10% per year as of the facility's
inception--and are due on demand. John W. Stuart has personally guaranteed this
line of credit.

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

Capital Equipment Financing Commitment

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

Mortgage Financing Commitment

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

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

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Delisting Inquiry

RISK FACTORS

Existing Defaults Under Credit Facilities. During 1998, On Stage received
mortgage financing from Imperial Credit Commercial Mortgage Investment
Corporation and extended our existing credit facilities with First Security Bank
of Nevada and First Security Leasing Company to fund our existing operations and
finance our growth strategy with future acquisitions. We have been unable to
service our substantial indebtedness and we are, consequently, in default under
those facilities.

We are continuing to negotiate with First Security to either extend the line of
credit or convert it into a term loan facility. We are also discussing with
Imperial Credit a possible restructuring of their loans. On April 29, 1999, On
Stage received a notice of default under the line of credit from First Security.
In the notice of default, First Security asked us to make a repayment proposal
and provide additional information. We have provided additional information to
First Security and are currently discussing various restructuring options with
First Security. While we are attempting to negotiate an extension or
restructuring of all of our loans, there can be no assurance that our attempts
to negotiate an extension or restructuring of our debt will be successful or
that either or both of Imperial Credit or First Security will not take
additional action to collect their debt.

Need for Additional Financing. On Stage's cash, cash equivalent balances and
anticipated revenues from operations will not be sufficient to fund our current
operations or to service our substantial indebtedness under our existing credit
facilities. We must restructure our existing indebtedness or obtain additional
sources of financing in order to avoid foreclosure under these credit
facilities. There can be no assurance that we will be able to negotiate a
restructuring or that funds will be available to us. We will not be able to
pursue our growth strategy if we are not able to obtain additional financing
and, as a result of our financing difficulties, we are currently reevaluating
our growth strategy. We have no current arrangements with respect to, or
potential sources of, additional financing, and any inability to obtain
financing could cause us to curtail, delay or eliminate present or anticipated
productions, or to fund those productions through arrangements with third
parties that may require us to relinquish rights to substantial portions of our
revenue, which may result in foreclosure under our existing credit facilities.

Increased Operating Expenses. Increased operating expenses in connection with
our recent acquisitions or our proposed expansion plans, delays in the
introduction of new productions and factors adversely affecting our current
productions, could have a material adverse effect on our future operating
results. There can be no assurance that we will continue to generate significant
net income in the future or that our future operations will be profitable.

Dependence on Legends. To date, our revenue has been limited largely to the
production of Legends. Our future success will depend, to a significant extent,
on our ability to successfully produce and market Legends shows in other venues.
To the extent we are unsuccessful in expanding the production of Legends, or to
the extent the Legends production concept ceases to be successful or profitable
for us, there will be a material adverse effect on us.

Reliance on Principal Production Venues . On Stage anticipates that we will
continue to rely upon our six current largest revenue producing show sites,
including our resident Legends productions in Las Vegas, Nevada, Branson,
Missouri and Myrtle Beach, South Carolina, as well as our King Henry's Dinner
Theater in Orlando Florida, Wild Bill's Dinner Theater in Buena Park, California
and Wild Bill's Dinner Theater in Kissimmee, Florida, for the substantial
majority of our revenue. The loss of all or a substantial portion of the
business generated at those venues or the termination or impairment of
contractual relationships that make some of these venues available to us would
have a material adverse effect on us.

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Risks Associated with Proposed Acquisition Strategy. If we are able to pursue
our expansion plans, we intend to pursue strategic acquisitions of, or joint
ventures with, independent production companies, and to market our brand name
products to the established customer bases of any acquired companies, in order
to increase revenues and market share. In addition, we intend to acquire
additional established, brand-name shows which we believe have the potential to
be successful in new markets. We have planned to enter into these types of
arrangements on a shared revenue and/or profit basis and to make these
acquisitions through limited equity distributions rather than through cash
payments or investments. In addition, if our stock price is too low, we may not
be able or willing to use our common stock in acquisitions. There may, in the
future, be attractive acquisition candidates for which cash funding is our only
choice, in which case, any acquisitions will likely be contingent upon us
acquiring additional financing. There can be no assurance that we will be able
to acquire financing or, even with additional financing, that we will be able to
acquire acceptable production companies or shows, nor can there be any assurance
that we will be able to enter into beneficial joint ventures on commercially
reasonable terms or in a timely manner. Furthermore, we can provide no assurance
that any acquired customer bases will be receptive to our productions or that we
will be able to successfully develop any acquired shows. To the extent we effect
an acquisition or joint venture, there can be no assurance that we will be able
to successfully integrate into our operations any business or productions which
we may acquire. Any inability to do so, particularly in instances in which we
make significant capital investments, could have a material adverse effect on
us. In addition, there can be no assurance that any acquired business will
increase our revenue and/or market share or otherwise improve our financial
condition.

Competition. The leisure and entertainment market, which includes the market for
live theatrical productions, is highly competitive, and many of On Stage's
markets contain a large number of competing live theatrical productions. In
resort and urban tourist locations, we compete for ticket sales with the
producers of other live productions, many of whom have greater financial and
other resources than we do and/or feature productions and headline stars with
greater name recognition than those we have. In addition, we compete with other
production companies for the most desirable commercial and tourist venues and
for talent and production personnel. Any inability to secure those venues or
personnel could have a material adverse effect on us. In addition, one or more
of the commercial venues in which we currently have, or plan to have, a live
production show could decide to self-produce its live entertainment needs. There
can be no assurance that we will be able to secure alternative venues for
displaced productions or that those alternative venues could be secured under
similar or favorable terms.

Availability of Talent and Lack of Long-Term Contracts. On Stage's future
success will depend largely upon our ability to attract and retain personnel
sufficiently trained in performing arts and theatrical production, including
singers, dancers, musicians, choreographers and technical personnel. We maintain
rigorous standards with respect to the abilities and level of experience of
these personnel in order to ensure consistency, quality and professionalism in
our productions. This may make it more difficult for us to obtain qualified
personnel. Moreover, that difficulty is compounded by the fact that Legends, our
flagship production, features impersonators of past and present superstar
vocalists. Because these headline performers must look, sound and act like
specific celebrities, the pool of performers from which we can choose is
significantly reduced. In addition, while our musicians, singers, dancers and
production personnel are generally employees, our headline acts are independent
contractors who enter into new contracts with us for each new show or venue in
which they perform. We do not maintain any long-term contracts with our
performers. We will need to hire additional performers and production
technicians as we continue to open new productions, as well as to supplement
personnel in our existing productions. Our inability to attract and retain
needed personnel, for either new or existing productions, could have a material
adverse effect on us.

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Fluctuations in Quarterly Operating Results; High Seasonality. On Stage has
experienced, and expects to continue to experience, fluctuations in quarterly
results of operations. Our live theatrical production business is highly
seasonal. We expect these seasonal trends to continue. Additionally, we
typically spend significant resources on new resident theatrical productions up
to six months in advance of show openings, and believe that, as we emphasize
pre-opening market research and development as part of our expansion plans, both
the amount of pre-opening expenditures and the lag between the time in which we
incur those expenditures and the receipt of post-opening revenue will increase.
Accordingly, our operating results may also vary significantly from quarter to
quarter or year to year due to the opening and timing of new shows and the
fluctuations associated with the pre-opening and start-up phases of new
productions in new and varying venues. Consequently, revenue as well as profit
and loss may vary significantly from quarter to quarter and the results in any
one period will not necessarily be indicative of results in subsequent periods.

Cyclical and Economy-Sensitive Industry; Changing Trends. The live entertainment
industry is cyclical, with consumer spending tending to decline during
recessionary periods when disposable income is low. Although we believe our
moderate ticket prices may enhance the appeal of our productions to consumers in
a recessionary environment, there can be no assurance that a poor general
economic climate will not have an adverse impact on our ability to compete for
limited consumer resources. The live entertainment industry is also subject to
changing consumer demands and trends and, while the markets for live
entertainment have grown significantly over the past several years, there can be
no assurance that such growth will continue or that these trends will not be
reversed. For instance, the rate of growth in the casino gaming industry has
recently begun to decrease due to consolidation within the industry. Our success
will depend on our ability to anticipate and respond to changing consumer
demands and trends and other factors affecting the live entertainment industry,
including new artists and musicians, as well as general trends affecting the
music industry and its performers. Failure to respond to these factors in a
timely manner could have a material adverse effect on us.

Dependence on the Casino Gaming Industry. Although On Stage has recently shifted
our primary emphasis away from gaming markets and towards the resort and urban
tourist markets, our success has been, and will continue to be, highly dependent
on the casino gaming industry. Consequently, a change in the laws or regulations
governing the casino gaming industry, or a significant decline in casino gaming
in the United States, could have a material adverse effect on us.

Intellectual Property. On Stage's success depends to a large extent on our
ability to reproduce the performance, likeness and voice of various celebrities
without infringing on the publicity rights of those celebrities or their
estates. Although we believe that our productions do not violate those
intellectual property rights under applicable state and federal laws, in the
event a claim were made against us, litigation, regardless of the outcome, could
be expensive and time consuming for us to defend. Additionally, if we were
determined to be infringing any intellectual property rights in the production
of our performances, we could be required to pay damages--possibly including
treble and/or statutory damages--costs and attorney fees, alter our productions,
obtain licenses or cease certain activities, all of which, individually or
collectively, could have a material adverse effect on us. Furthermore, if we
were required to obtain licenses from the celebrities we impersonate, there can
be no assurance that we would be able to acquire those licenses on commercially
favorable terms, if at all. In addition, an element of our business strategy is
to expand our merchandising program by introducing a wider variety of clothing
items and new products, such as compact discs, and audio and video tapes. We
have filed trademark applications, as necessary, in order to protect our rights
in the products that we sell. There can be no assurance that we will be able to
obtain any trademarks on terms and conditions acceptable to us. Our inability to
obtain those rights could have a material adverse effect on our ability to
successfully implement our merchandising strategy. Additionally, Representative
Coble (R-NC), Chairman of the House Judiciary Committee's Sub-Committee on
Courts and Intellectual Property, is currently drafting legislation to create a
federal right to publicity, which if made into law, could significantly impair
our ability to perform our flagship Legends in Concert production.

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Government Regulation. Providing entertainment to the casino gaming industry may
subject On Stage to various licensing regulations. For instance, the Casino
Control Commission of the State of New Jersey requires that we obtain a Casino
Service Industry License to perform our shows at our Atlantic City venues.
Although we have obtained this license, there may be other licenses or permits
which may be required for us to perform our shows in casinos in other areas.

In addition, under our expansion program we plan to lease or purchase theaters
for our new Legends or other brand-name resident productions. As a result, we
will be required to absorb all costs and risks associated with producing the
show in order to retain 100% of the show's profits--referred to as a "four-wall"
production. Producing shows on this basis may require us to obtain and maintain
certain business, professional, retail and local licenses and permits--as we
were required to obtain for the opening of our Myrtle Beach show, a "four-wall"
production. Difficulties or failure in obtaining required licenses or regulatory
approvals could delay or prevent the opening of a new show or, alter, delay or
hinder our expansion plans. In addition, the suspension of, or inability to
renew, a license needed to operate any of our currently running productions
would adversely affect our operations.

Our current casino service industry license from the New Jersey Casino Control
Commission was issued on January 17, 1997 and expires on September 30, 1999. In
connection with the license application, the New Jersey Division of Gaming
Enforcement conducted an investigation of On Stage to determine our suitability
for licensure. Management believes that we are not required to obtain a license
to provide our services to casinos in Nevada or in any other jurisdictions in
which we operate, other than New Jersey. The Nevada Gaming Control Board and
similar authorities in other jurisdictions, however, have broad authority to
order providers of services to casinos to file applications, be investigated,
have their suitability determined, obtain licenses and cease providing their
services, if they find the service providers to be unfit. Additionally, many of
the casinos mandate that a production company be properly licensed in accordance
with the local gaming laws before it will contract for their services.

Dependence on Key Personnel. On Stage's future success will depend largely on
the efforts and abilities of our existing senior management, particularly Mr.
John W. Stuart, On Stage's chairman and chief executive officer, and Mr. David
Hope, On Stage's president and chief operating officer. The loss of the services
of Mr. Stuart, Mr. Hope or other members of On Stage's management team could
have a material adverse effect on us. In April 1999, our chief financial
officer, Kiran Sidhu, agreed to restructure his contract with us to provide that
we will utilize his services on a contract, and not a full-time, basis. Although
we currently maintain a key-man life insurance policy on the life of Mr. Stuart
in the amount of $5,000,000, those proceeds may not be sufficient to compensate
us for the loss of his services. In particular, Mr. Stuart's death would result
in the loss of his creative contribution to On Stage and would give the owner of
the Imperial Palace the right to terminate its contract with us relating to our
resident Legends production in Las Vegas, one of our largest revenue producing
venues. In addition, while Messrs. Stuart and Hope have entered into
non-competition agreements restricting their ability to work for a competitor
during the term of their employment agreements--which expire on May 31,
2000--and thereafter for periods of up to five and two years, respectively,
there can be no assurance that those non-competition agreements will be
enforceable or that On Stage will be in a position to pay Messrs. Stuart or Hope
the contractual amount required to effectuate their respective non-competition
agreements. Finally, there can be no assurance that On Stage will be able to
attract and retain the additional qualified senior management personnel
necessary to manage our planned growth.

Risk of Employment Tax Liability. Consistent with industry standards, On Stage
has, since inception, treated, and expects to continue to treat, the headline
acts of productions as independent contractors rather than as employees. In
making the determination that we are qualified to characterize the headline acts
as independent contractors, On Stage, in addition to following industry
precedent, made an independent review of, and analyzed, the applicable
guidelines issued by the Internal Revenue Service. There can be no assurance,
however, that we are qualified to treat the headline acts as independent
contractors. If we have improperly classified the headline acts as independent
contractors, than we would be liable for the payment of employment taxes for
those periods in which the headline acts were incorrectly characterized as
independent contractors. If imposed, that employment tax liability would have a
material adverse effect on us.

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Litigation. On Stage is involved in certain pending and threatened lawsuits in
which the adverse parties are seeking damages. There can be no assurance that
any of the instituted or threatened lawsuits will be settled or decided in our
favor. Moreover, regardless of the outcome of those lawsuits and claims, if we
were to be engaged in protracted litigation, the costs of that litigation could
be substantial. Even in situations where we are fully indemnified by third
parties, the time and effort expended by On Stage personnel in connection with
those matters could be significant, leaving us with less opportunity to pursue
our strategic goals.

Limitations on Liability of Directors and Officers. On Stage's Articles of
Incorporation include provisions to eliminate, to the full extent permitted by
Nevada General Corporation Law, the personal liability of directors for monetary
damages arising from a breach of their fiduciary duties as directors. Our
Articles of Incorporation also include provisions to the effect that On Stage
shall, to the maximum extent permitted under Nevada law, indemnify and, upon
request, advance expenses to any director or officer to the extent that the
indemnification and advancement of expense is permitted under that law.

No Dividends. On Stage has never paid any dividends on our common stock and we
do not anticipate paying cash dividends in the foreseeable future. Our existing
credit facilities also prohibit the payment of dividends. We currently intend to
retain all earnings for use in connection with our business. The declaration and
payment of future dividends, if any, will be at the sole discretion of our board
of directors and will depend upon our profitability, financial condition, cash
requirements, future prospects, credit agreements and other factors deemed
relevant by the board.

Possible Adverse Effects of Authorization of Preferred Stock. On Stage's
Articles of Incorporation authorize the board of directors to issue up to
1,000,000 shares of "blank check" preferred stock, with such designations,
rights and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors will be empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting, or other rights, which could adversely affect the voting
power of the holders of common stock and, under certain circumstances, could
make it difficult for a third party to gain control of On Stage, prevent or
substantially delay a change in control, discourage bids for the common stock at
a premium, or otherwise adversely affect the market price of the common stock.
Although we have no current plans to issue any shares of preferred stock, there
can be no assurance that the board will not decide to do so in the future.

Unaffiliated Bankruptcy. A real estate partnership which is not affiliated with
On Stage but of which Mr. John W. Stuart, our chairman and chief executive
officer, was a partner, Maze Stone Canyon Estates Partnership, filed for
bankruptcy under Chapter 11 in December 1991 in the United States Bankruptcy
Court, Central District of California. The partnership's plan of reorganization
was withdrawn before adoption by the bankruptcy court in August 1992. The
partnership Maze Stone Canyon Estates Partnership was subsequently dissolved.

Possible Delisting of Securities from the Nasdaq SmallCap Market. In order to
continue to be listed on the Nasdaq SmallCap Market, On Stage must maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share; provided,
however, that if On Stage falls below that minimum bid price, we will remain
eligible for continued inclusion on the Nasdaq SmallCap Market if the market
value of the public float is at least $1,000,000 and we have $2,000,000 in
capital and surplus. Our stock price has recently dipped below $1.00 per share.
Nasdaq has recently proposed new maintenance criteria which, if implemented,
would eliminate the foregoing exception to the minimum bid price requirement and
require, among other things, $2,000,000 in net tangible assets, $1,000,000
market value of the public float and adherence to certain corporate governance
provisions.

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On April 20, 1999, On Stage received a letter of inquiry from The Nasdaq Stock
Market, Inc. requesting that we submit a detailed letter describing our plans to
address the specific items that led to the issuance of a "going concern" opinion
from our independent auditor, BDO Seidman, LLP. The letter further requested
that we discuss why we believe we will be able to sustain compliance with the
continued listing standards of The Nasdaq SmallCap Market. We are required to
provide a responsive answer by June 4, 1999. The failure to meet these
maintenance criteria in the future, and the failure to adequately assure Nasdaq
that we will be able to meet the listing criteria in the future, may result in
the delisting of our securities from the Nasdaq SmallCap Market. If this occurs,
the trading, if any, in our securities would be conducted in the non-Nasdaq
over-the-counter market. As a result of a delisting, an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, our securities.

Risks Relating to Penny Stocks. In addition, if the common stock were to become
delisted from trading on the Nasdaq SmallCap Market and the trading price of the
common stock were to remain below $5.00 per share, trading in the common stock
would also be subject to the requirements of certain rules, promulgated under
the Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a "penny stock."
Generally, "penny stock" is any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to limited exceptions. Those rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated with it, and
impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited
investors--generally institutions. For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by these requirements
may discourage broker-dealers from effecting transactions in the common stock,
which could severely limit the market liquidity of the common stock and the
ability of stockholders to sell the common stock in the market.

Current Annual Report on Form 10-KSB and State Registration Required to Exercise
Warrants. Holders of outstanding warrants to acquire On Stage common stock will
be able to exercise their warrants only if a current Annual Report on Form
10-KSB under the Securities Act relating to the securities underlying the
warrants, is then in effect and those securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of warrants reside. Although we intend to use our best
efforts to maintain a current Annual Report on Form 10-KSB covering the
securities underlying the warrants at the earliest practicable date, to the
extent required by federal securities laws, there can be no assurance that we
will be able to do so. As a result of the defaults under our credit facilities,
we are not eligible to use the "short-form" registration procedures available to
other issuers under the Securities Act. Therefore, our ability to maintain a
current Annual Report on Form 10-KSB will be impaired until we are again
eligible to use the "short-form" registration procedures, which we do not
anticipate will occur prior to March 31, 2000. The value of the warrants may be
greatly reduced if a Annual Report on Form 10-KSB covering the securities
issuable upon the exercise of the warrants is not kept current or if the
securities are not qualified, or exempt from qualification, in the states in
which the holders of warrants reside. Persons holding warrants who reside in
jurisdictions in which those securities are not qualified and in which there is
no exemption will be unable to exercise their warrants and would either have to
sell their warrants in the open market or allow them to expire unexercised.

Restrictive Debt Covenants. On Stage's various loan agreements contain covenants
that, among other things, restrict the ability of our operating subsidiaries to
dispose of assets, incur additional indebtedness, pay cash dividends, create
liens on assets, make investments or acquisitions, engage in mergers or
consolidations, make capital expenditures, engage in certain transactions with
affiliates or redeem or repurchase the indebtedness of such subsidiaries. In
addition, under our loan agreements, we are required to satisfy financial ratio
tests, including interest expense, fixed charges and total debt coverage ratios.
Our ability to satisfy financial tests and ratios could be affected by numerous
events beyond our control, including economic, weather and industry conditions.
The breach of any financial covenant contained in a loan agreement could result
in the termination of our credit facilities--and the acceleration of the
maturity of all amounts outstanding thereunder--and, by virtue of cross default
provisions, the acceleration of the maturity of our other indebtedness. See
"Management Discussion and Analysis of Financial Conditions and Results of
Operations."

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Prior Losses. For the year ended December 31, 1996, we had net income of
$900,998. For the years ended December 31, 1997 and December 31, 1998, and for
the three months ended March 31, 1999, we had net losses of $2,946,056,
$4,870,989 and $883,564, respectively. Moreover, increased operating expenses in
connection with our proposed expansion plans, delays in the introduction of new
productions and factors adversely affecting our current productions could have a
material adverse effect on us. There can be no assurance that we will generate
net income in the future or that our future operations will be profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Transactions" and the financial statements contained
elsewhere in this Annual Report on Form 10-KSB .

No Assurance of Continued Public Market; Possible Continued Volatility of Market
Price of Common Stock. There can be no assurance that a regular trading market
for the common stock will be sustained. The market prices of our securities may
continue to be characterized by volatility and low trading volume. Factors such
as our operating results, announcements by us or our competitors of new
production contracts, and various factors affecting the entertainment industry
generally, may have a significant impact on the market price of our securities.

Risks Relating to Proposed Expansion Plans; Possible Inability to Achieve or
Manage Growth. On Stage's continued growth depends, to a significant degree, on
our ability to produce and market new theatrical productions on a profitable
basis. It will also be highly dependent on our ability to restructure our
existing debt and obtain additional financing. Our expansion plans include
increasing both the number of productions in operation at any given time and the
rate at which such productions open. This expansion strategy contemplates the
opening of up to ten additional resident productions over the next 36 months,
which strategy, if successful, will place significant pressures on our
personnel, as that growth will require development and operation of a
significantly larger business over a broader geographical area. Because of our
current debt position and defaults, we are reevaluating our expansion strategy.
The success of our expansion, if we are able to pursue it, strategy will depend
upon a number of factors, including, among others:

o our ability to restructure our debt and obtain additional financing;
o our ability to hire and retain additional skilled management,
marketing, technical and performing arts and theatrical production
personnel;
o our ability to secure suitable venues for new productions on a timely
basis and on commercially reasonable terms; and o our ability to
successfully manage our growth (which will require us to develop and
improve upon our operational, management and financial systems and
controls).

Our prospects and future growth will also be largely dependent upon the ability
of our Legends productions to achieve significant market share in targeted
tourist and gaming markets and our ability to develop and/or acquire and
commercialize additional productions. There can be no assurance that we will be
able to achieve our expansion goals or that, if we are able to expand our
operations, we will be able to effectively manage our growth, anticipate and
satisfy all of the changing demands and requirements that this growth will
impose upon us or achieve greater operating income or profitability. Moreover,
in light of

(1) the significant up-front capital expenditures and pre-opening
costs--estimated to be approximately $500,000 to $1,000,000 in the
case of a leased theater--associated with the establishment of a new
resident production,

(2) the length of time required to prepare for the opening of a new
resident production (typically three to six months), and

(3) the significant time required before a new resident production can
achieve the market acceptance and name recognition required for local
ticket wholesalers and tour specialists to promote it,

the discontinuation of any new production--whether due to inadequate advance
marketing, inadequate performances, poor site selection or otherwise--would have
a material adverse effect on us. For instance, during 1997, we discontinued our
resident production of Legends in Daytona Beach, Florida, as a result of less
than optimal ticket sales in the start-up phase of the show, which caused an
aggregate estimated loss to us of at least $877,000.

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<PAGE>

Control by Principal Stockholder. John W. Stuart, our chairman and chief
executive officer, beneficially owns approximately 48.6% of the outstanding
common stock. Accordingly, Mr. Stuart, together with our other officers, is able
to control On Stage and direct our affairs, including the election of directors,
and cause an increase in our authorized capital or the dissolution, merger or
sale of On Stage or substantially all of our assets.

Our Facilities. On Stage's corporate headquarters consist of approximately
16,000 square feet of nondescript office and warehouse space located in an
industrial strip mall in Las Vegas, Nevada. This lease is currently set to
expire on August 31, 1999. Leases of other facilities in Atlantic City, New
Jersey, and Branson , Missouri are scheduled to expire in 1999. Although we
intend to let the leases expire on some of our locations that we do not intend
to continue to occupy, we will need to retain or replace the leases for some of
this space. There can be no assurance that we will be successful in retaining or
replacing the space we want. The termination of the lease of these desired
facilities could have a material adverse effect on our operations.

Many of the properties we presently occupy and use for our productions were
acquired with loans provided by Imperial Credit Commercial Mortgage Investment
Corporation. Imperial Credit holds mortgages covering these properties to secure
these loans. We are currently in default under these loans and any foreclosure
by Imperial Credit may cause us to lose these properties as venues to operate
our productions.

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ITEM 2. Description of Property

On Stage's corporate headquarters consist of approximately 16,000 square feet of
nondescript office and warehouse space located in an industrial strip mall in
Las Vegas, Nevada. This lease is currently set to expire on August 31, 1999. The
table provided below lists certain information regarding our other facilities
that were in use during 1998.

- --------------------- ------------ ------------- ----------- ----------------
Square Type of Lease Principal
Location Footage Possession Expiration Function
- --------------------- ------------ ------------- ----------- ----------------
Atlantic City, NJ 2,000 Lease 09/99 Office
Atlantic City,NJ (1) N/A Lease 06/00 Residential
Branson, MO 27,500 Lease 12/99 Theater/Office
Buena Park, CA (2) 27,599 Lease 06/10 Theater
Kissimmee, FL (3) 31,350 Own N/A Retail
Kissimmee, FL (4) 18,221 Own N/A Theater
Las Vegas, NV (5) 16,000 Lease 08/99 Corporate
Office
Las Vegas, NV (5) 4,668 Lease 08/99 Warehouse
N. Myrtle Beach, SC (6) 15,000 Lease 12/04 Theater/Office
Myrtle Beach, SC (7) 16,171 Own N/A Theater/Office
Orlando, FL 3,640 Lease 06/02 Warehouse
Orlando, FL (8) 10,000 Lease 10/00 Office/Bar
Orlando, FL (9) 15,500 Own N/A Theater
Toronto, ON 9,410 Lease 02/03 Theater
Toronto, ON 627 Lease Month-to-
Month Office
- --------------------- -------------- ------------ ---------- -----------------

(1) Consists of seven condominium units for use by our performers when they are
performing in our Legends show at Bally's Park Place in Atlantic City, New
Jersey. We lease these units from John W. Stuart, our chief executive
officer, and his wife.

(2) On Stage's wholly-owned subsidiary, On Stage Theaters, Inc., subleases this
property from Wild Bill's California, Inc., a wholly-owned subsidiary of On
Stage Theaters. Wild Bill's California, Inc. leases the property from an
unrelated third party.

(3) This property is owned by Fort Liberty, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from Fort
Liberty, Inc. Fort Liberty, Inc.'s ownership is subject to a lien in favor
of Imperial Credit securing a loan in the principal amount of $2.7 million.
The terms of this loan provide for monthly interest payments of $21,938,
plus monthly principal amortization of $7,500, commencing April 13, 1999.
The loan matures March 16, 2008, at which time the projected loan balance,
assuming no prepayments, of $2,676,199 million will be due and payable. We
have no present plans for the further development or improvement of the
property, beyond ordinary

24
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maintenance. The annual real property taxes on the property are approximately
$33,400. Depreciation with respect to the building at the property is taken at a
rate of $22,630 per year under the straight line method over a 30-year estimated
life. The occupancy of this mixed-use retail space is approximately 83% and a
restaurant tenant occupies approximately 17% of the total square footage of the
property on a lease and providing for monthly triple net rent of approximately
$7,300. The following is a schedule of the lease expirations at the property for
each of the next 10 years, with none with terms beyond 2004:

Square Feet Percent of
Year Expiring Annual Rent Total Rent

Month to
Month Leases
1999 8,500 21.29 $ 100,420
2000 4,840 14.52 $ 68,520
2001 3,750 11.26 $ 53,120
2002 11,658 37.27 $ 175,820
2003 750 3.18 $ 15,000
2004 2,669 7.58 $ 35,750
2005 1,500 4.90 $ 23,140

(4) This property is owned by Fort Liberty, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from Fort
Liberty, Inc. The lease is for a term of 11 years and provides for monthly
rent of $89,117, plus taxes and utilities. Fort Liberty, Inc.'s ownership
is subject to a lien in favor of Imperial Credit securing a loan in the
principal amount of $3.9 million. The terms of this loan provide for
monthly interest payments of $31,688, plus monthly principal amortization
of $10,833, commencing April 13, 1999. The loan matures March 16, 2008, at
which time the projected loan balance, assuming no prepayments, of
$3,856,620 will be due and payable. We have no present plans for the
further development or improvement of the property, beyond ordinary
maintenance. The annual real property taxes on the property are
approximately $65,800. Depreciation with respect to the building at the
property is taken at a rate of $26,568 per year under the straight line
method over a 30-year estimated life.

(5) This lease may be terminated at any time after August 31, 1999 by providing
written notice of that intention.

(6) This property is subleased to Eddie Miles Entertainment.

(7) This property is owned by On Stage Theaters, Inc. On Stage Theaters leases
this property from On Stage Theaters Surfside Beach, Inc.

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<PAGE>

(8) On Stage Theaters subleases this property from Blazing Pianos, Inc., a
wholly-owned subsidiary of On Stage Theaters. Blazing Pianos, Inc. leases
the property from an unrelated third party.

(9) This property is owned by King Henry's, Inc., a wholly-owned subsidiary of
On Stage Theaters. On Stage Theaters leases this property from King
Henry's, Inc. King Henry's, Inc.'s ownership is subject to a lien in favor
of Imperial Credit securing a loan in the principal amount of $5 million.
The terms of this loan provide for monthly interest payments of $40,625,
plus monthly principal amortization of $13,999, commencing April 13, 1999.
The loan matures March 16, 2008, at which time the projected loan balance,
assuming no prepayments, of $4.33 million will be due and payable. We have
no present plans for the further development or improvement of the
property, beyond ordinary maintenance. The annual real property taxes on
the property are approximately $89,850. Depreciation with respect to the
building at the property is taken at a rate of $44,201 under the straight
line method over a 30-year estimated life.

We believe that our existing facilities are suitable and adequate for our
current operations and are adequately insured.

ITEM 3. Legal Proceedings

On September 25, 1998, On Stage successfully defended a suit filed against it in
March 1997 by Benny R. Pittman, a shareholder of Grand Strand Entertainment,
Inc. This suit arose out of a dispute relating to the termination of a licensing
agreement between On Stage and Mr. Pittman and the control of On Stage's Legends
in Concert production in Surfside Beach, South Carolina. While On Stage
prevailed on all the counts alleged in the complaint, On Stage stipulated to
allow an arbitrator to resolve plaintiffs claim for damages in quantum meruit.
The plaintiffs claim for damages quantum meruit was resolved by the arbitrator
in the favor of the plaintiff for a total of $15,400 in consideration for
services provided to On Stage by the plaintiff in connection with the opening of
the Legends production. While it is our position that any claim Mr. Pittman may
have against us was fully adjudicated by the arbitrator, we have recently been
informed that Mr. Pittman intends to file a complaint in South Carolina against
us alleging a claim for loss of business opportunities. However, no formal claim
has been filed against us to date.

On August 20, 1998, a complaint was filed against On Stage by the trustee of the
United States Bankruptcy Court for the District of Nevada, alleging breach of
contract, monies due and owing and turnover of the property to the estate. The
basis of the complaint stems from the purchase of certain furniture by a third
party while purporting to be a representative of On Stage. We believe we have a
valid defense for this claim based upon fraud and misrepresentation. The case is
currently in the discovery stage of litigation and the matter has been set for
trial on May 27, 1999.

On May 28, 1998, Silver State Property Management, a Nevada corporation, Roger
A. Bergmann Enterprises, a Nevada corporation, and R.E. Lyle Corp., a Nevada
corporation filed a complaint in the Second Judicial District Court of the State
of Nevada, County of Washoe, alleging, among other things, that John W. Stuart,
acting as an agent, chairman of the board and chief executive officer of On
Stage, breached an alleged oral agreement to purchase the Plaintiff's respective
interests in the Legends in Concert production in Hawaii for an aggregate
purchase price of $1,000,000. The case is currently in the discovery stage of
litigation and the matter has been set for trial on September 20, 1999.

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<PAGE>

On April 21, 1998, On Stage filed a complaint for declaratory relief in the
United States District Court for the District of Nevada, against Hemisphere Tour
and Travel, Inc., Richard Winokur, Media Corp. of America and Stephen Zadrick.
On Stage filed this complaint in order to obtain a declaration by the court that
the defendants were not entitled to commissions claimed by the defendants in
connection with our acquisition of assets of Gedco USA, Inc. The defendants
counterclaimed, alleging breach of contract and demanding payment of the
disputed commission. This matter has been stayed by the court pending settlement
negotiations.

In July 1996, an impersonator of Hank Williams, Sr. who performed for On Stage,
filed suit against On Stage in the circuit court of Taney County, Missouri. The
plaintiff alleges that On Stage misappropriated his name, image and likeness for
commercial purposes by taking a photograph of him during a performance,
reproducing that photograph and publishing it in an On Stage brochure. The
plaintiff has claimed damages in the amount of $2,000,000. During discovery, the
plaintiff agreed to settle this dispute for a nominal payment in favor of us.

Although On Stage believes that it has meritorious defenses with respect to all
of the foregoing matters which it will vigorously pursue, there can be no
assurance that the ultimate outcome of these or any other actions that may be
asserted against On Stage will be resolved favorably to On Stage or that the
litigation will not have an adverse effect on us.

ITEM 4. Submission of Matters to a Vote of Security-Holders

No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1998.

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<PAGE>

PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters

The common stock trades on the Nasdaq SmallCap Market under the symbol "ONST."
The following table sets forth, for the periods indicated, the high and low
sales prices as quoted on the Nasdaq SmallCap Market.

Period High Low

Fiscal 1998:
First Quarter 5.4375 3.50
Second Quarter 5.125 3.625
Third Quarter 4.75 1.75
Fourth Quarter 2.25 1.18

Fiscal 1997:

Third Quarter 5.625 4.50
Fourth Quarter 6.50 3.825

As of April 9, 1999 there were 85 holders of record on the common stock. On
April 12, 1999, the closing sale price of the common stock as reported by the
Nasdaq Stock Market was $1.19.

On Stage has never declared or paid any cash dividends on its capital stock. On
Stage currently intends to retain its earnings to finance future growth and
working capital needs and therefore does not anticipate paying any cash
dividends in the foreseeable future.

ITEM 6. Management's Discussion and Analysis or Plan of Operation

The information appearing in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" from the portions of
On Stage's 1998 Annual Report to Stockholders, filed as Exhibit 10.18 to this
Form 10-KSB, is incorporated herein by reference.

ITEM 7. Financial Statements and Supplementary Data

The information appearing in the section captioned "Financial Statements" from
the portions of On Stage's 1998 Annual Report to Stockholders filed as Exhibit
10.18 to this Form 10-KSB, are incorporated herein by reference. See "List of
Financial Statements" beginning on page F-1.

ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

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PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

The following sets forth biographical information about each of On Stage's
directors and executive officers who served during 1998 or who are presently
serving in those capacities.

Name Age Position

John W. Stuart............... 56 Chairman and Chief Executive Officer
David Hope................... 40 President and Chief Operating Officer
Kiranjit S. Sidhu............ 34 Senior Vice President, Chief
Financial Officer and Treasurer
Christopher R. Grobl......... 31 General Counsel and Secretary
James L. Nederlander......... 38 Director
Mark Tratos.................. 46 Director
Mel Woods.................... 47 Director
Matthew Gohd................. 43 Director

John W. Stuart has served as the Chairman and Chief Executive Officer of On
Stage since April 1996 and also was the President of On Stage from October 1985
through March 1996. He founded On Stage in 1985. He has been involved in the
theatrical business since age seven and has produced or appeared in over 200
theater productions and several feature films. Mr. Stuart received a Bachelor of
Arts degree in 1967 from California State University at Fullerton.

David Hope has served as the President, Chief Operating Officer and as a
director of On Stage since joining On Stage in April 1996. For ten years prior
to that time, Mr. Hope served in various capacities, including most recently as
Executive Vice President and Chief Operating Officer, for ITC Entertainment
Group ("ITC"), a major independent producer and worldwide distributor of feature
films, television movies and mini-series and a subsidiary of Polygram N.V.,
where, as Chief Operating Officer, he was responsible for day-to-day operations,
as well as strategic and corporate development and acquisitions. Prior to that
time, Mr. Hope was a production manager with Hinchcliffe Productions, a United
Kingdom-based producer and distributor of documentaries and motor sport events.
Mr. Hope received a degree in Management Science in 1981 from the Loughborough
University in England.

Kiranjit S. Sidhu has been On Stage's Senior Vice President, Chief Financial
Officer and Treasurer since joining On Stage in August 1995. Prior to joining On
Stage, Mr. Sidhu served as Chief Financial Officer and Corporate Secretary for
Aspen Technologies, a computer peripheral manufacturer, from July 1994 to July
1995. From January 1993 to June 1994, Mr. Sidhu served as President and a
director for Aspen Peripherals, a computer peripheral reseller. From February
1992 to June 1993, Mr. Sidhu served as a financial consultant to ITC. From
January 1992 to July 1993, Mr. Sidhu served as Vice President of Finance and a
director for Nuvo Holdings of America, a computer peripheral manufacturer. Mr.
Sidhu holds a Masters of Business Administration from the Wharton School of
Business and a Bachelor of Arts in Computer Science from Brown University.

On April 16, 1999, Mr. Sidhu agreed to restructure his current employment
agreement with On Stage in an attempt to assist On Stage with our restructuring
plan. Pursuant to the terms of his employment restructuring, Mr. Sidhu and On
Stage entered into a new agreement under which he will be an "at-will"
consultant.

Christopher R. Grobl has been the General Counsel and Secretary of On Stage
since November 1994. Mr. Grobl received a Bachelor of Arts in 1990 from the
University of Illinois and a Juris Doctor in 1994 from the John Marshall Law
School in Chicago, Illinois.

James L. Nederlander has been a director of On Stage since August 1996. He has
also been the Chairman of the Nederlander Production Company of America, a
producer of live entertainment shows, since August 1996 and prior to such time,
commencing in 1980, he was Executive Vice President of that organization.

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Mark Tratos has been a director of On Stage since March 1997. Mr. Tratos has
been the managing partner of the law firm Quirk & Tratos of Las Vegas, Nevada
since 1983. He received his Juris Doctor degree from Lewis and Clark Law School
in 1979. Since 1982, Mr. Tratos has also served as a member of the adjunct
faculty of the University of Nevada Las Vegas, teaching a variety of subjects in
the areas of fine and performing arts and entertainment and business law.

Mel Woods has been a director of On Stage since July 1998. Mr. Woods is the
President and Chief Operating Officer of Fox Family Worldwide, Inc., Saban
Entertainment's parent company since 1997. Previously, Mr. Woods was the Chief
Financial Officer and Senior Vice President of DIC Enterprises.

Matthew Gohd has been a director of On Stage since September 1998. Mr. Gohd is
currently a Senior Managing director at Whale Securities Co., LP., the
underwriter for On Stage's initial public offering. Mr. Gohd has over 20 years
in the securities field working in various companies in industries such as
retail, technology, healthcare and consumer finance.

Directors Resigning During 1998 and 1999

Four directors resigned during 1998 and 1999, Kenneth Berg, Nelson Foster, Jules
Haimovitz and Mark S. Karlan. Mr. Berg resigned on January 21, 1998, Mr. Foster
resigned on June 26, 1998, Mr. Haimovitz resigned on September 8, 1998 and Mr.
Karlan resigned on April 16, 1999. Mr. Foster resigned to create a vacancy for
current director Mel Woods and Jules Haimovitz resigned to create a vacancy for
current director Matt Gohd. Mr. Karlan has been the President, Chief Executive
Officer and a director of Imperial Credit Commercial Mortgage Investment Corp.,
a publicly traded real estate investment trust, since July 1997. Mr. Karlan
resigned from the board following On Stage's default in its loans from Imperial
Credit.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on our review of the copies of Forms 3, 4 and 5 received by On
Stage or of written representations from officers, directors and other persons
required to report under Section 16(a) of the Securities Exchange Act of 1934
initial or changes in beneficial ownership of On Stage's common stock, we
believe that all the reporting persons complied with the applicable filing
requirements of Section 16(a) for 1998.

Executive Bonus Plan

In March 1997, On Stage implemented a three-year executive bonus plan, which is
administered by the compensation committee of the board. Under the executive
bonus plan, an annual bonus pool of up to 5% of On Stage's audited pre-tax
earnings, after non-recurring charges, such as original issue discount,
compensation and interest expense charges and excluding extraordinary items, may
be established for distribution at the discretion of the board of directors, to
our executive officers (other than Mr. Stuart, who is not eligible for bonuses
under the plan) in 1999 and 2000, provided that On Stage achieves at least
minimum pre-tax earnings as calculated under the for the respective preceding
fiscal year as follows:

Year Minimum Pre-Tax Earnings
------- -----------------------------------
1998 $5,000,000
1999 $8,700,000

The terms of the executive bonus plan, including the minimum pre-tax earnings
requirements set forth above, were determined by negotiations between On Stage
and the underwriter of our initial public offering, and should not be construed
to imply or predict any future earnings. No bonuses have been paid under the
executive bonus plan.

Compensation of Directors

Directors currently are not paid a fee for their services, but are reimbursed
for all reasonable expenses incurred in attending board meetings. In addition,
each non-employee director will receive options to purchase an aggregate of

30
<PAGE>

10,000 shares of common stock each year that the director serves as a director,
partially contingent upon the director's attendance at the four scheduled board
of directors meetings during the year of grant. One-quarter of the annual option
grant will vest as of each of the grant year's scheduled meetings. In 1998, On
Stage granted each director 10,000 stock options at $1.50 strike price as
consideration for the excessive time and energy the board spent on company
issues during 1998.

ITEM 10. Executive Compensation
<TABLE>
<CAPTION> Executive Compensation

Annual Long Term
Compensation Compensation
------------ ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SAR Compensation
- --------------------------- ---- ------- ------ ------------- ---------- ------------

John W. Stuart............. 1998 $250,000 - 35,869(1) 75,000 -
Chairman and Chief 1997 $259,615 - 38,321(2) - 239,398(3)
Executive Officer

David Hope................. 1998 $207,308 - 19,578(4) 50,000 -
President and Chief 1997 $221,461 $37,865 19,578(5) - -
Operating Officer

Kiran Sidhu................ 1998 $157,385 - 14,993(6) 30,000 -
Senior Vice President 1997 $161,596 $162,129(8) 17,215(7) 85,000 -
Chief Finanical Officer
and Treasurer

Gerard O' Riordan.......... 1998 $106,664 - 14,424(9) - -
President-On Stage Theaters 1997 - - - - -

Richard Kanfer............. 1998 $109,154 - 14,791(10) 15,165 -
Vice President- Sales 1997 $115,769 - 10,560(11) - -

Gary Panter................ 1998 $102,370 10,595(14) 13,627(12) 21,439 -
Senior Vice President 1997 $101,400 - 13,909(13) 10,389 -
Operations
</TABLE>

(1) Represents $11,971 in unused vacation time accrued but not paid and $23,898
of car and health allowances accrued, of which $14,895 was paid in 1998.
Does not include $149,686 of rent accrued for the leases to On Stage of
which $76,028 was paid in 1998.

(2) Represents $14,423 in unused vacation time accrued but not paid and $23,898
of car and health allowances paid in 1997. Does not include $150,686 of
rent for the leases to On Stage paid in 1997.

(3) Includes $221,500 in compensation as a result of forgiveness of certain
indebtedness owed by Mr. Stuart to On Stage and payment of $17,898 of
unused vacation time carried forward from prior years.

(4) Represents $6,346 in unused vacation time accrued but not paid and $13,232
of car and health allowances accrued, of which $9,732 was paid in 1998.

31
<PAGE>

(5) Represents $6,346 in unused vacation time accrued but not paid and $13,232
of car and health allowances accrued, paid in 1997.

(6) Represents $5,393 in unused vacation time accrued but not paid and $9,600
of car and health allowances accrued, of which $6,100 was paid in 1998.

(7) Represents $7,615 in unused vacation time accrued but not paid and $9,600
of car and health allowances paid in 1997.

(8) Represents the fair market value of the issuance of 40,532 shares of common
stock as incentive compensation pursuant to his employment agreement.

(9) Represents $14,424 of car and health allowances paid in 1998.

(10) Represents $4,231 in unused vacation time accrued but not paid and $10,560
of car and health allowances accrued, of which $7,560 was paid in 1998.

(11) Represents $10,560 of car and health allowances paid in 1997.

(12) Represents $3,238 in unused vacation time accrued but not paid and $10,389
of car and health allowances accrued, of which $8,639 was paid in 1998 and
$11,050 of housing allowance payments.

(13) Represents $3,520 in unused vacation time accrued but not paid and $10,389
of car and health allowances, was paid in 1997.

(14) Represents $10,595 non-recurring relocation-related expenses.

Option Grants. The table below sets forth the grants of stock options to the
persons named in the Summary Compensation Table during the year ended December
31, 1998
<TABLE>

<CAPTION> Option Grant in Last Fiscal Year

Percent Value at
of Assumed Annual
Options/SARS Rates of Stock
Granted Price Application
Name and Principal Options to Employees Exercise Expire Potential Value
Position Granted in Fiscal Year Price Date 5% 10%
- -------------------- -------- -------------- -------- ------ --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John W. Stuart............... 75,000 21% $ 4.38 6/03 $418,780 $528,449
Chairman and Chief
Executive Officer

David Hope................... 50,000 14% $1.50 6/03 $95,721 $120,788
President and Chief
Operating Officer

Kiran Sidhu.................. 30,000(2) 9% $1.50 9/03 $57,433 $ 72,473
Senior Vice President
Chief Financial Officer
and Treasurer

Gerard O' Riordan............ 0(1) 0% - - - -
President, On Stage
Theaters

Richard Kanfer............... 15,165 4% $1.50 9/03 $29,032 $ 36,635
Vice President-Sales

Gary Panter.................. 12,500 4% $1.50 9/03 $23,930 $ 30,197
Senior Vice President of
Operations
</TABLE>
(1) Excludes warrants to purchase 180,000 shares of common stock granted in
connection with the Gedco asset acquisition.
(2) Mr. Sidhu's options were subsequently cancelled.

32
<PAGE>
Option Exercise and Fiscal Year-End Option Values

The following table summarizes the value of vested and unvested in-the-money
options for the persons named in the Summary Compensation Table at December 31,
1998. Year-end values are based upon a price of $1.50 per share, which was the
closing market price of a share of common stock on December 31, 1998. No options
were exercised by the named executive officers in 1998.

<TABLE>
<CAPTION> Aggregated Option Exercise in Last Year and Year-End Option Values

Value of Unexercised
Number of Unexercised In-the-Money Options
Options at December 31, 1998 at December 31, 1998
---------------------------- ------------------------

Name Exercisable Unexercisable Exercisable Unexercisable
- -------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
John W. Stuart..... - 75,000 $ - $ -

David Hope......... 361,300 - $ - $ -

Kiran Sidhu........ 139,794 - $ - $ -

Gerard O'Riordan... - - $ - $ -

Richard S. Kanfer.. - - $ - $ -

Gary Panter........ 1,563 10,937
</TABLE>

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of April 30, 1999 (except
as otherwise noted) regarding the ownership of On Stage common stock (1) by each
person known by us to be the beneficial owner of more than five percent of the
outstanding common stock, (2) by each director, (3) by each executive officer
named in the Summary Compensation Table and (4) by all current executive
officers and directors as a group.

Number of Shares Percentage of
Name and Address (1) Beneficially Owned (2) Class(2)
- ---------------------- ---------------------- -------------

John W. Stuart (3).............. 3,678,755 48.6%
David Hope (4).................. 377,300 5.0%
Kiranjit S. Sidhu (5)........... 147,000 1.9%
James L. Nederlander (6)........ 30,000 *
Mark Tratos (7)................. 30,000 *
Mel Woods (8)................... 20,000 *
Matt Gohd (9)................... 367,500 4.8%
Hanover Restaurants, Inc........ 595,238 7.9%
Imperial Credit Industries,
Inc (10)....................... 575,000 7.6%
All executive officers and
directors as a group
(9 persons) (11)............... 5,820,793 76.8%
- -------------------------
*Less than one percent

(1) Unless otherwise indicated, the address for each named individual or group
is in care of On Stage at 4625 West Nevso, Las Vegas, NV 89103.

(2) Unless otherwise indicated, On Stage believes that all persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws where applicable. In accordance with the rules of the
Securities and Exchange Commission, a person is deemed to be the beneficial
owner of common stock that can be acquired by that person within 60 days,
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by that person (but not those held by any other person) and
which are exercisable within 60 days have been exercised. Percentages
herein assume a base of 7,572,046 shares of common stock outstanding as of
April 30, 1999.

33
<PAGE>

(3) Includes: (a) 382,790 shares of common stock transferarable by Mr. Stuart
to third parties upon the exercise of options granted by him; and (b)
300,000 shares of common stock issuable upon the exercise of immediately
exercisable warrants.

(4) Includes 368,800 shares of common stock issuable upon the exercise of
options or warrants.

(5) Includes 142,500 shares of common stock issuable upon the exercise of
options or warrants.

(6) Includes 30,000 shares of common stock issuable upon the exercise of
options.

(7) Includes 30,000 shares of common stock issuable upon the exercise of
options.

(8) Includes 20,000 shares of common stock issuable upon the exercise of
options.

(9) Includes 217,500 shares of common stock issuable upon the exercise of
options or warrants.

(10) Includes 325,000 shares of common stock issuable upon the exercise of an a
warrant granted to Imperial Credit Commercial Mortgage Investment
Corporation. Imperial Credit is managed by Imperial Credit Commercial Asset
Management Corporation, which is a wholly owned subsidiary of Imperial
Credit Industries, Inc. Imperial Credit Industries, Inc. also beneficially
owns approximately 8.9% of the outstanding common stock of Imperial Credit.
Also includes 250,000 shares of common stock issuable upon the exercise of
a warrant granted to Imperial Capital Group, LLC. Imperial Credit
Industries, Inc. has a 60% interest in Imperial Capital Group. Imperial
Credit Industries, Inc. disclaims the beneficial ownership of the shares of
common stock held by Imperial Capital Group. All information provided in
this footnote 10 was derived from a Schedule 13G filed by Imperial Credit
Industries, Inc. with the Securities and Exchange Commission on April 3,
1998.

(11) Includes 464,973 and 339,375 shares of common stock issuable upon the
exercise of options and warrants.

34
<PAGE>
ITEM 12. Certain Relationships and Related Transactions

Subsequent Events

DY/DX Corporation Common Stock Purchase Agreement

On October 2, 1998, On Stage entered into a Stock Purchase Agreement with DY/DX
Corporation, an Illinois corporation, to sell up to 500,000 shares of common
stock at an aggregate purchase price of $500,000. As of November 4, 1998, DY/DX
Corporation had purchased 55,000 shares of common stock pursuant to this
agreement.

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

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

Notes Payable to Principal Stockholder

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

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

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

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

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

35
<PAGE>
Note Receivable from Chief Financial Officer

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

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

Chief Financial Officer Employment Restructuring

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

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

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

Imperial Credit Commercial Mortgage Investment Corporation Related Transactions

On March 13, 1998, Imperial Credit Commercial Mortgage Investment Corporation
signed an agreement with On Stage to fund up to $20,000,000 of mortgate
financing. On the same day, On Stage used $12,500,000 of the facility to fund
the cash portion of the acquisition of assets of On Stage purchased from Gedco
USA, Inc. and related fees. On June 30, 1998, On Stage used an additional
$1,100,000 to fund the cash portion of the purchase of a fee simple interest in
the Legends Theater in Surfside Beach, South Carolina, and the purchase of a
leasehold interest in the Eddie Miles Theater in North Myrtle Beach, South
Carolina. On October 7, 1998, On Stage used an additional $550,000 for working
capital purposes. The initial $12,500,000 loan and the subsequent $1,650,000 in
loans extended by Imperial Credit to On Stage under the mortgage financing
facility currently bear interest at the rate of 9.06% and 9.9%, respectively. In
addition, On Stage granted Imperial Credit and a related entity warrants to
purchase an aggregate of 575,000 shares of common stock at an exercise price of
$4.44 per share. In consideration for Imperial Credit's October 7, 1998 funding
of $550,000, On Stage reset the strike price on 325,000 of the Imperial Credit
warrants from $4.44 to $1.25 per share. This transaction is discussed in Item 11
entitled "Security Ownership of Certain Beneficial Owners and Management" below.
Mr. Karlan, a director of On Stage until April 20, 1999, is the President, Chief
Executive Officer and a Director of Imperial Credit.

Re-Purchase of Common Stock and Resale of Interactive Events, Inc.

On February 23, 1999, On Stage entered into a Common Stock Purchase Agreement
with Richard S. Kanfer, On Stage's former vice president of sales, under which
the parties agreed to rescind the November 1996 acquisition by On Stage of

36
<PAGE>

Interactive Events, Inc., a Georgia corporation owned by Mr. Kanfer. Under the
terms of the Agreement, On Stage reconveyed all of the assets of Interactive
Events, Inc. to Mr. Kanfer, in consideration for the reconveyance by Mr. Kanfer
of 30,304 shares of On Stage's common stock valued at $1.125 per share, a
non-plan option to purchase 15,000 shares of common stock and incentive stock
options to purchase 19,835 shares of common stock at a price of $5.00 per share.
In addition, the parties agreed to release one another from any liability
arising out of the November 1996 acquisition of Interactive Events, Inc. and any
claim relating to Mr. Kanfer's subsequent employment with On Stage. On Stage and
Mr. Kanfer also entered into a exclusive right of representation agreement in
February 1999, under which On Stage granted to Mr. Kanfer the right to represent
our Legends production in designated areas in consideration of a portion of the
gross proceeds generated from those productions.

ITEM 13. Exhibits, Listed and Reports on Form 8-K

(a) Exhibits

The following is a list of exhibits filed as part of this annual report on Form
10-KSB. Exhibits which were previously filed are incorporated by reference and
this has been indicated by a footnote. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated parenthetically,
except in those situations where the exhibit number was the same as set forth
below.

37
<PAGE>
SIGNATURES

In accordance with the requirements of 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 authorized.

ON STAGE ENTERTAINMENT, INC.
(Registrant)

Dated: May 21, 1999 By: /s/ John W. Stuart
-----------------------------
John W. Stuart, Chairman of the Board
and Chief Executive Officer

38
<PAGE>
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

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

/s/ John W. Stuart Chairman and Chief Executive May 21, 1999
- --------------------- Officer and Director
John W. Stuart (principal executive officer)

/s/ David Hope President, Chief Operating May 21, 1999
- --------------------- Officer and Director
David Hope

/s/ Kiranjit S. Sidhu Chief Financial Officer (principal May 21, 1999
- --------------------- financial and accounting officer)
Kiranjit S. Sidhu and Treasurer

/s/ Mel Woods Director May 21, 1999
- ---------------------
Mel Woods

/s/ Matthew Gohd Director May 21, 1999
- ---------------------
Matthew Gohd

/s/ James L. Nederlander Director May 21, 1999
- -----------------------
James L. Nederlander

/s/ Mark Tratos Director May 21, 1999
- ----------------------
Mark Tratos

39
<PAGE>

Exhibit
Number Description

3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (3)
4.1 Specimen Stock Certificate Representing the Common Stock (3)
4.2 Specimen Warrant Certificate Representing the Warrants (3)
4.3 Form of Public Warrant Agreement (3)
4.4 Form of Underwriter's Warrant Agreement (3)
10.1 Employment Agreement between the Registrant and John W. Stuart (1)
10.2 Employment Agreement between the Registrant and David Hope (1)
10.3 Employment Agreement between the Registrant and Kiranjit S. Sidhu (1)
10.4 Confidentiality and Non-Competition Agreement between the Registrant
and John W. Stuart (1)
10.5 Confidentiality and Non-Competition Agreement between the Registrant
and David Hope (1)
10.6 Confidentiality and Non-Competition Agreement between the Registrant
and Kiranjit S Sidhu (1)
10.7 Amended and Restated 1996 Stock Option Plan (1)
10.8 Contribution Agreement between the Registrant and John W. Stuart (1)
10.9 Security and Pledge Agreement between the Registrant and John W.
Stuart Relating to Contribution of LVHE shares (1)
10.10 Security and Pledge Agreement between the Registrant and John W. Stuart
relating to LVHE Litigation Indemnity (1)
10.11 Indemnification Agreement between the Registrant, John W. Stuart and
Grand Strand Entertainment, Inc. (1)
10.12 Security and Pledge Agreement between the Registrant and John W.
Stuart relating to Grand Strand Entertainment, Inc. Litigation
Indemnity (1)
10.13 Promissory Note to John Stuart dated March 4, 1999+
10.14 Entertainment Production Agreement between the Registrant, Imperial
Palace, Inc. and John W. Stuart dated December, 1995 (3) (Filed in
redacted form pursuant to Rule 406 promulgated under the Securities
Act. Filed separately in unredacted form subject to a request for
confidential treatment pursuant to Rule 406 under the Securities Act.)
10.15 Agreement between the Registrant and Bally's Park Place, Inc. dated
September 1, 1994 and subsequent renewal letters (3) (Filed in redacted
form pursuant to Rule 406 promulgated under the Securities Act. Filed
separately in unredacted form subject to a request for confidential
treatment pursuant to Rule 406 under the Securities Act.)
10.16 Common Stock Purchase Agreement between Registrant and Interactive
Events, Inc. (2) (Exhibit No. 10.18)
10.17 (a) Show Production Agreement between the Registrant and Kurz
Management (3) (Exhibit No. 10.19)
10.18 Portions of 1998 Annual Report to Stockholders+
10.19 Promissory Note to John Stuart dated April 5, 1999+
10.20 First Security Bank Agreement+
10.21 Common Stock Purchase Agreement with Whale Securities dated
December 1998+
10.22 Common Stock Purchase Agreement between On Stage Entertainment, Inc.
and Richard S. Kanfer+
13 Management's Discussion and Analysis of Financial Condition and Results
of Operations; Report on Audited Consolidated Financial Statements For
the Years Ended December 31, 1997 and 1998+
21 Subsidiaries of the Registrant+
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule+
- ------------------

+ Previously filed.
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 on
April 7, 1997 (Registration No. 333-24681).
(2) Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 on June 3, 1997(Registration No. 333-24681)
(3) Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 on August 6,1997 (Registration No. 333-24681)
(4) Reports on Form 8-K

40
<PAGE>

(b) Reports on Form 8-K

We filed reports on Form 8-K on October 6, 1998 and on November 16, 1998. The
report filed on October 6, 1998 we reported under Item 5 information about our
proposed acquisition of Country Tonight. No financial statements were filed in
that report.

In the report filed on November 16, 1998, we filed amended financial information
under Item 7 relating to our acquisition of assets of Gedco USA, Inc. and its
related entities with this Report, we filed the following amended or
supplemental financial statements relating to the Gedco asset acquisition:

1. Audited Financial Statements of business acquired, relating to the Gedco
entities

2. Pro Forma Financial Information (unaudited), relating to the Gedco asset
acquisition.

a) Unaudited Pro Forma Balance Sheet as of December 31, 1997
b) Unaudited Pro Forma Statement of Operations for year ended
December 31, 1997
c) Notes to Pro Forma Consolidated Financial Statements

41
<PAGE>

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

Overview

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

On Stage derives net revenues from four reportable segments:

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

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

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

1
<PAGE>

Results of Operations

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

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

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

The following tables sets forth, the results of operations for the reportable
segment indicated:

Year ended December 31, 1997

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

2
<PAGE>

Year ended December 31, 1997
(continued)

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

Year ended December 31, 1998

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

3
<PAGE>

Year ended December 31, 1998
(continued)

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

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

Net Revenues

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

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

4
<PAGE>

Events revenues were $2,555,000 for the year ended December 31, 1998 compared to
$2,552,000 for the year ended December 31, 1997, an increase of $3,000, or
0.12%.

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

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

Costs of Revenues

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

Selling, General and Administrative

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

5
<PAGE>

Depreciation and Amortization

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

Expenses to Discontinued Location

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

Asset Impairment Loss

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

Operating Income

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

Interest Expense, Net Asset

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

Seasonality and Quarterly Results

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

6
<PAGE>

The following table sets forth On Stage's net revenues for each of the last
eight quarters ended December 31, 1998:

Net Revenues
($ in thousands)

March 30, June 30, September 30, December 31,
---------- ----------- ------------ ------------
Fiscal 1997........ $ 2,719 $ 3,979 $ 5,071 $ 3,957
Fiscal 1998........ $ 3,724 $ 8,245 $ 8,059 $ 7,819

Tax Net Operating Losses

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

Liquidity and Capital Resources

General

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

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

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

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

7
<PAGE>

The net cash used in investing activities for the year ended December 31, 1997
of $1,241,000 was primarily attributable to capital expenditures and advances on
notes receivable from officers, and direct acquisition costs. The net cash used
in investing activities for the year ended December 31, 1998 of $14,548,000 was
primarily attributable to advances on notes receivable from officers, capital
expenditures and direct acquisition costs related to acquisitions.

On August 13, 1997, On Stage completed an initial public offering of 1,400,000
shares of common stock at $5.00 per share and redeemable warrants to purchase
1,610,000 shares of common stock at $0.10 per warrant. The net proceeds were
from the offering, were approximately $4,856,000, net of offering underwriting
discounts, commissions and expenses and costs incurred by us was approximately
$1,414,000.

Net cash provided by financing activities for the year ended December 31, 1997
of $4,373,000 was primarily generated from our initial public offering. This
increase in cash was partially offset by the repayment of a $750,000 bridge
loan. Net cash provided by financing activities for the year ended December 31,
1998 of $14,701,000 was primarily attributable to Imperial Credit Commercial
Mortgage Investment Corporation funding of $12,500,000 for the Gedco asset
acquisition and $1,650,000 million for the Fox Family asset acquisition.

Working Capital

At December 31, 1997, On Stage had working capital of approximately $1,797,000,
primarily from proceeds derived from the sale of our common stock and redeemable
warrants from the our initial public offering. The proceeds of the offering were
partially offset by increases in inventory and deposits. At December 31, 1998,
we had a working capital deficit of approximately $16,791,000, which resulted,
primarily, from an increase in our working capital line of credit, accounts
payable, accrued expenses, and accrued payroll and other liabilities. Because of
the recurring losses, the working capital deficit and the loan defaults, our
auditors have issued a going concern opinion.

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

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

As of December 31, 1996, On Stage had a term loan outstanding in the principal
amount of $150,000, with First Security Bank of Nevada, which accrued interest
at a rate of 11.5% per annum. On October 10, 1997, we paid off the balance of
this term loan, in full, which, including all outstanding principal and accrued
interest, was $19,091.

8
<PAGE>
Working Capital Line

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

Capital Equipment Financing Commitment

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

Mortgage Financing Commitment

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

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

9
<PAGE>

Impact of Inflation

On Stage believes that inflation has not had a material impact on our
operations. However, substantial increases in material costs could adversely
affect our operations in future periods.

Year 2000

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

However, we are still continuing to assess Year 2000 preparedness, through
actively coordinating with vendors, creditors and financial organizations to
prepare for possible repercussions of non-compliance. We are also undertaking
exhaustive surveys in each of our geographic locations to further determine
preparedness. We have hired Business Communications, Inc. to visit each site and
physically re-certify that each machine, microprocessor and software program in
use is Year 2000 compliant. We have allocated $50,000 to complete our
certification program and we anticipate completion by June 30, 1999.

New Accounting Pronouncements

Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129") issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard reinstates
various securities disclosure requirements previously in effect under Account
Principles Board Opinion No. 15, which has been superseded by SFAS No. 129. On
Stage adopted SFAS No. 129 as of January 1, 1998 which had no effect on our
financial position or results of operations.

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

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

Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
("SOFP 98-5")issued by the American Institute of Certified Public Accountants is
effective for financial statements beginning after December 15, 1998. SOP 98-5
requires that the costs of start-up activities, including organization costs, be
expensed as incurred. Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customers (excluding ongoing customer acquisition costs, such as policy
acquisition costs and loan origination costs) or beneficiary, initiating a new
process in an existing facility, or commencing some new operation. On Stage does
not expect the adoption of SOP 98-5 to have a material impact, if any, on
ourfinancial position or results of operations.

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

10
<PAGE>

Subsequent Events

Notes Payable to Principal Stockholder

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

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

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

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

34
<PAGE>

Note Receivable from Chief Financial Officer

Chief Financial Officer Employment Restructuring

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

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

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

11
<PAGE>

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

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

12
<PAGE>

On Stage Entertainment, Inc. and Subsidiaries

_______________________

Report on Audited Consolidated Financial Statements

For the Years Ended December 31, 1997 and 1998

_______________________

<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page Number

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

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

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

<PAGE>

ON STAGE ENTERTAINMENT, INC.

List of Financial Statements

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

Report of BDO Seidman, LLP Independent Certified Public Accountants

Balance sheet at December 31, 1998 and 1997

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

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

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

Notes to Financial Statements

F-2
<PAGE>

Report of Independent Certified Public Accountants

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

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

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

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

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

/s/ BDO SEIDMAN, LLP

Los Angeles, California
April 5, 1999

F-3
<PAGE>

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

Liabilities and Stockholders' Equity

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

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

F-4
<PAGE>

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

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

F-5
<PAGE>

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

Income taxes (Note 10)................... 6,673 -
--------------- --------------
Net loss................................. $ (2,946,056) $ (4,870,989)
--------------- --------------
Basic loss per share..................... $ (0.55) $ (0.68)
--------------- --------------
Diluted loss per share................... $ (0.55) $ (0.68)
--------------- --------------
Basic average number of common
shares outstanding...................... 5,365,851 7,191,276
--------------- --------------
Diluted average number of common
shares outstanding...................... 5,365,851 7,191,276
--------------- --------------

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

F-6
<PAGE>

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS STOCKHOLDER'S EQUITY (DEFICIT)

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

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

F-7
<PAGE>

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)

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

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

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

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

F-8
<PAGE>

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

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

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

F-9
<PAGE>

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

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

Supplemental Disclosure of Cash
Flow Information
Cash paid during the year for:
Interest.............................. $ 278,059 $ 1,551,574
Taxes................................. $ 6,673 $ 44,111
============= ===========

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

F-10

<PAGE>

Supplemental Schedule of Non-Cash Investing and Financing Activities

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

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

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

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

Upon the consummation of the Company's initial public offering, 1,799,910 of
outstanding convertible debentures were converted into 505,549 shares of common
stock.

During 1997, the Company issued 11,020 shares of common stock in connection with
the Interactive Events acquisition.

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

F-11

<PAGE>

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

SUMMARY OF ACCOUNTING POLICIES

BUSINESS ACTIVITY

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

PRINCIPLES OF CONSOLIDATION

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

ACCOUNTS RECEIVABLE

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

ESTIMATES

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

F-12
<PAGE>

INVENTORY

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

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

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

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

STOCK BASED COMPENSATION

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

F-13
<PAGE>

LOSS PER SHARE

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

INCOME TAXES

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

F-14
<PAGE>

CASH EQUIVALENTS

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

FOREIGN CURRENCY TRANSLATION

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

CONCENTRATION OF CREDIT RISK

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

NEW ACCOUNTING STANDARDS

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

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

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

F-15
<PAGE>

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

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

RECLASSIFICATIONS

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

F-16
<PAGE>

ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consist of the following:

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

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

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

NOTE 2 - GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses and has a
working capital deficit $16,791,000 that impairs its ability to obtain
additional financing. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainities

The Company has historically met its working capital requirements through a
combination of cash flow from operations, equity and debt offerings and
traditional bank and financing. The Company anticipates, based on its proposed
plans and assumptions relating to its operations that the Company's current
cash, cash equivalent balances, anticipated revenues from operations are
insufficient to fund the Company's ongoing operations.

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

F-17
<PAGE>

NOTE 2 - GOING CONCERN (continued)

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

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

WORKING CAPITAL LINE

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

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

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

F-18
<PAGE>

NOTE - 3 WORKING CAPITAL LINE (Continued)

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

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

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

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

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

F-19
<PAGE>

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

WORKING CAPITAL LINE (Continued)

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

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

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

F-19
<PAGE>

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

WORKING CAPITAL LINE (Continued)

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

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

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

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

Bridge Financing

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

NOTE 4 - COMMITMENTS AND CONTINGENCIES

Leases

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

F-20
<PAGE>

NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)

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

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

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

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

Aggregate commitments related to employment contracts are as follows:

Year ending
December 31, Amount
-------------------- -------------

1999............................................$ 668,940
2000............................................ 320,270
2001............................................ 47,482
-------------
$ 1,036,692
=============

Executive Bonus Plan

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

F-21
<PAGE>

NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)

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

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

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

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

NOTE 5 - STOCKHOLDER'S EQUITY

Initial Public Offering

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

Stock Split

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

DY/DX Corp. Common Stock Purchase Agreement

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

F-22

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Warrants Converted to Common Stock

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

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

1996 Stock Option Plan

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

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

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

F-23
<PAGE>

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

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

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

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

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

Non-employee Directors' Options

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

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

F-24
<PAGE>

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Non-employee Directors' Options (Continued)

The option and warrant activity during the years ended December 31, 1997 and
1998 is as follows:

Weighted
Number of Average
Options Exercise
and Warrants Price
-------------- -------------

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

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

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

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

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

F-25
<PAGE>

NOTE 5 - STOCKHOLDER'S EQUITY (Continued)

Non-employee Directors' Options (Continued)

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

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

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

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

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

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

F-26
<PAGE>

NOTE 6 - SIGNIFICANT VENUES AND CONCENTRATION OF CREDIT RISK

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

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

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

NOTE 7 - NOTES RECEIVABLE FROM OFFICERS

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

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

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

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

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

F-27
<PAGE>

NOTE 8 - EXPENSES AT DISCONTINUED LOCATION

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

NOTE 9 - INTEREST EXPENSE

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

NOTE 10 - INCOME TAXES

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

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

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

Deferred taxes are as follows:

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

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

F-28
<PAGE>

NOTE 10 - INCOME TAXES (Continued)

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

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

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

NOTE 11 - BUSINESS ACQUISITIONS

Interactive Purchase and Disposition

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

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

F-29
<PAGE>

NOTE 11 - BUSINESS ACQUISITION (continued)

Gedco USA, Inc. Acquisition

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

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

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

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

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

F-30
<PAGE>

NOTE 11 - BUSINESS ACQUISITION (continued)

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

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

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

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

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

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

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

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

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

F-31
<PAGE>

NOTE 11 - BUSINESS ACQUISITION (continued)

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

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

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

Calvin Gilmore Productions, Inc. Acquisition

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

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

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

NOTE 12 - IMPAIRMENT OF TORONTO ASSETS

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

F-32
<PAGE>

NOTE 13 - SEGMENT INFORMATION

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

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

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

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

F-33
<PAGE>

NOTE 13 - SEGMENT INFORMATION (Continued)

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

Year Ended December 31, 1998
-------------------------------------------------

Casinos Events Merchandise Theaters
--------- ---------- ----------- -----------

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

Interest expense..... $ 4,712 $ 1,292 $ 193 $ 1,354,370

Depreciation
and amortization... $ 268,780 $ 140,455 $ 5,055 $ 1,086,822

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

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

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

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

Interest expense..... $ - $ 194,310 $ 1,554,877

Depreciation
and amortization... $ 47,705 $ 260,709 $ 1,806,526

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

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

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

F-34
<PAGE>

NOTE 13 - SEGMENT INFORMATION (Continued)

Year Ended December 31, 1997
-------------------------------------------------

Casinos Events Merchandise Theaters
--------- ---------- ----------- -----------

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

Interest expense..... $ - $ (297) $ - $ -

Depreciation
and amortization... $ 141,275 $ 6,221 $ - $ 323,336

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

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

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

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

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

Interest expense..... $ - $ 834,630 $ 834,333

Depreciation
and amortization... $ - $ 511,348 $ 982,180

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

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

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

F-35
<PAGE>

NOTE 14 - SUBSEQUENT EVENTS

Note Payable to Principal Stockholder

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

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

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

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

F-36

<PAGE>

Consent of Independent Certified Public Accountants

On Stage Entertainment, Inc.
Las Vegas, Nevada

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (file number 333-56285) of our report dated April 5, 1999
relating to the consolidated financial statements of On Stage Entertainment,
Inc. appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.

BDO Seidman, LLP

Los Angeles, California
May 17, 1999