================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K
(MARK ONE)
           [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

              FOR THE FISCAL YEAR (53 WEEKS) ENDED JANUARY 3, 1999

                                       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 0-28258

                       SHELLS SEAFOOD RESTAURANTS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 DELAWARE                                    65-0427966
     (STATE OR OTHER JURISDICTION OF                      (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NUMBER)

     16313 NORTH DALE MABRY HIGHWAY
             TAMPA, FLORIDA                                    33618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)

                                 (813) 961-0944
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                               ----------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                              TITLE OF EACH CLASS:
                    COMMON STOCK, PAR VALUE $.01 PER SHARE

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in Definitive Proxy or Information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

     The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, (based upon the last sales price of the Common Stock reported
on the Nasdaq National Market on March 19, 1999 and the assumption for this
computation only that all directors and executive officers are affiliates of
the Registrant) was $10,151,440.

     As of March 19, 1999, the number of shares outstanding of the Registrant's
Common Stock, $.01 par value, was 4,454,015.
================================================================================

<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE

                       (TO THE EXTENT INDICATED HEREIN)

     Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with solicitations of proxies for the Registrant's
1998 Annual Meeting of Stockholders scheduled to be held on April 28, 1999 is
incorporated by reference in Part III, Items 10, 11, 12 and 13 of this Form
10-K.

     When used in this Annual Report on Form 10-K, the words "believes",
     "anticipates", "expects", and similar expressions are intended to identify
     forward-looking statements. Such statements are subject to certain risks
     and uncertainties which could cause actual results to differ materially
     from those projected.

     In addition to seasonal fluctuations, the Company's quarterly and annual
     operating results are affected by a wide variety of other factors that
     could materially and adversely affect revenues and profitability, including
     changes in consumer preferences, tastes and eating habits; increases in
     food and labor costs; promotional timings and seasonality; the availability
     of qualified labor; national, regional and local economic and weather
     conditions; demographic trends and traffic patterns; competition from other
     restaurants and food service establishments; and the timing of new
     restaurant openings. As a result of these and other factors, the Company
     may experience material fluctuations in future operating results on a
     quarterly or annual basis, which could materially and adversely affect its
     business, financial condition, operating results, and stock price. An
     investment in the Company involves various risks, including those which are
     detailed herein and from time-to-time in the Company's other filings with
     the Securities and Exchange Commission.

     These forward-looking statements speak only as of the date hereof. The
     Company undertakes no obligation to publicly release the results of any
     revisions to these forward-looking statements which may be made to reflect
     events or circumstances after the date hereof or to reflect the occurrence
     of unanticipated events.
<PAGE>

                                    PART I

ITEM 1. BUSINESS

     Shells Seafood Restaurants, Inc. (the "Company") was incorporated under
the laws of the State of Florida in April 1993 and was reincorporated under the
laws of the State of Delaware in April 1996. Effective December 1994, Shells,
Inc., a Company incorporated under the laws of the State of Florida in January
1992, was merged with and into the Company (the "Merger") and became a
wholly-owned subsidiary of the Company. The Merger was accounted for using the
purchase method of accounting and the selected financial data for the year (52
weeks) ended January 1, 1995 where presented herein have disclosed the pro
forma effect of the Merger. The Company completed its initial public offering
(the "Offering") in April 1996.

CONCEPT AND STRATEGY

     As of January 3, 1999, the Company owned 44 Shells restaurants, owned a
51% ownership interest in one Shells restaurant (the "Melbourne Restaurant")
and managed four additional Shells restaurants (the "Managed Restaurants")
pursuant to contractual arrangements. Of these 49 Shells restaurants, 32 were
located in Florida, 10 were located in Ohio, four were located in Illinois, two
were located in Indiana and one was located in Kentucky. The Company opened 10
restaurants during Fiscal 1998. In January 1998, the Company closed its Miami,
Florida (Mall of the Americas) location, which was one of the units acquired as
part of a six unit acquisition in Fiscal 1996. The Shells concept is designed
to appeal to a broad range of customers, particularly families and young
adults, by serving generous portions of high-quality seafood and offering
friendly and efficient service at an attractive price point. Shells restaurants
feature a wide selection of seafood items, including shrimp, oysters, clams,
scallops, lobster, crab, and daily fresh fish specials, cooked to order in a
variety of ways: steamed, sauteed, grilled, blackened and fried. In addition,
Shells restaurants offer a wide selection of signature pasta dishes,
appetizers, salads, desserts and full bar service. All Shells restaurants are
open for dinner and 27 restaurant locations are also open for lunch.

     In an effort to increase Shells' name recognition and benefit from
customer loyalty, the Company has a prototypical image for its restaurants. The
restaurants are identified by the exterior "Shells" logo sign and a common
interior color scheme and design. Shells restaurants are decorated with a
tropical islands flair, bright colors and cheerful signage to create a
high-energy, casual atmosphere consistent with the Shells concept. The
Company's commitment to promoting a casual, fun dining experience is
underscored by the design of its menu, which incorporates a variety of nautical
caricatures, and by the colorful "island" shirts worn by the Company's service
staff. The Company believes that the selection and training of its employees
results in friendly and efficient customer service, and contributes to an
enjoyable casual dining experience.


                                       1
<PAGE>


EXPANSION STRATEGY

     In Fiscal 1997, the Company began to focus its expansion efforts in the
Midwest markets. Of the nine new restaurants opened in 1997, seven were opened
in Ohio and Kentucky. In 1998, the Company opened 10 new restaurants, all of
which were opened in the Midwest markets. The decision to expand into the
Midwest markets was made in an attempt to diversify and minimize the seasonal
effect of the Florida market.

     The Company has opened one new restaurant in the first quarter of 1999 and
plans to open additional restaurants in Fiscal 1999 in the Florida and Midwest
markets. The actual number and location of the new restaurant openings will
depend on the Company's ability to locate suitable properties and execute
satisfactory lease or purchase terms. When opening restaurants outside of
Florida, the Company anticipates continuing to focus on existing markets
thereby providing the Company efficiencies in advertising, supervision and
distribution of food and other supplies within that market, and the potential
to capture a significant percentage of market share with several restaurants.
In March 1998, the Company entered into an agreement to acquire up to seven
restaurant locations in the Chicago and central Illinois areas. Upon completion
of the due diligence, the Company was able to convert and open four of these
acquired properties as Shells restaurants in the second half of Fiscal 1998, a
fifth restaurant in February 1999, and determined two were not viable
properties for acquisition. The Company will continue to explore the
acquisition of multiple units as part of its expansion strategy into new
markets; however, there is no certainty that multiple unit acquisitions will
occur.

     The Company may from time-to-time make minor adjustments to its menu to
accommodate local preferences in new markets that it serves. In tandem with its
expansion plan, the Company must continually hire management candidates
externally or promote qualified candidates internally who then are required to
complete an extensive 11 week training program. The Company believes that it
has a sufficient number of assistant restaurant managers trained and qualified
for promotion to restaurant manager to allow the Company to transfer
experienced restaurant managers to new locations. Given current economic
conditions and the availability of labor in certain markets, obtaining
qualified candidates for hire and retention from time-to-time can be difficult.
 
     The Company has historically converted and renovated existing restaurants
into Shells restaurants in order to minimize initial capital expenditures. The
Company intends to use its existing cash balances, projected cash flows from
operations, and from time-to-time, third party financing to implement its
expansion strategy. In order to facilitate its expansion strategy, the company
may from time-to-time develop build-to-suit properties requiring third party
financing.

SITE SELECTION

     The Company believes that its ability to select high-traffic, neighborhood
restaurant sites is critical to its expansion strategy and, as a consequence,
focuses on locations in



                                       2
<PAGE>

areas with high levels of traffic which are located in close proximity to
heavily populated residential and/or tourist areas. The Company considers a
variety of factors in its site selection process, including local market
demographics, site visibility and accessibility and proximity to highways and
entertainment and tourist centers. The Company also reviews the potential
competition in each market and attempts to analyze the sales volume of national
chain restaurants operating in the target area. If possible, the Company
prefers to locate its restaurants within close proximity to high-performing
national or regional chain restaurants. The Company believes that clusters of
such restaurants generate increased destination dining traffic. In addition,
the Company evaluates each potential conversion site to ensure that it has
sufficient dining capacity, kitchen facilities, and vehicle parking to make the
site suitable for conversion. Upon selecting a restaurant location, the Company
renovates the interior and exterior to conform to the prototypical Shells
image. Of restaurants in operation, the Company currently leases all but four
of its sites, which are financed real estate purchases.

RESTAURANT LOCATIONS

     As of March 1999, the Company managed and operated 50 restaurants. The
Company's restaurants are located in the following markets: (i) the
Tampa/Sarasota, Florida market consists of seven owned restaurants which are
located in Brandon, Clearwater, Holmes Beach, Redington Shores, St. Petersburg,
St. Pete Beach and Winter Haven, and the Managed Restaurants which are located
in Carrollwood, North Tampa, Sarasota and South Tampa, (ii) the Orlando,
Florida market consists of eight owned restaurants (including the Melbourne
Restaurant) which are located in Altamonte Springs, Daytona Beach, Kissimmee,
New Smyrna Beach, Ocala, Orlando, Winter Park and Melbourne, (iii) the South
Florida market consists of six owned restaurants which are located in Coral
Springs, Davie, Ft. Lauderdale, Kendall, Pembroke Pines and Sunrise, (iv) the
Cincinnati, Ohio market which consists of five owned restaurants including
three in Cincinnati, Ohio proper and one in each of Middletown, Ohio and
Florence, Kentucky, (v) the West Palm Beach, Florida market consists of three
owned restaurants which are located in Delray Beach, Stuart and West Palm
Beach, (vi) the Cleveland, Ohio market which consists of Akron, Lyndhurst and
Mentor, (vii) the Chicago, Illinois market which consists of four owned
restaurants which are located in Carpentersville, Oakbrook Terrace, Streamwood
and Woodridge, (viii) the Fort Myers, Florida market consists of two owned
restaurants which are located in Fort Myers and Port Charlotte, (ix) the
Indianapolis, Indiana market which consists of two owned restaurants, (x) the
Columbus, Ohio market which consists of two owned restaurants, one in each of
Columbus and Reynoldsburg, (xi) the Bloomington, Illinois market which consists
of one owned restaurant, (xii) the Dayton, Ohio market which consists of one
owned restaurant, (xiii) the Jacksonville, Florida market which consists of one
owned restaurant in Mandarin, and (xiv) the Tallahassee, Florida market which
consists of one owned restaurant.

                                       3
<PAGE>

RESTAURANT OPERATIONS

     MANAGEMENT AND EMPLOYEES. The Company currently employs nine area
supervisors. Each area supervisor is responsible for the management of several
restaurants, including management development, recruiting, training, quality of
operations and unit profitability. The Company anticipates hiring a restaurant
supervisor for every five to six additional restaurants opened. The staff of a
typical dinner-only restaurant consists of one general manager, two assistant
managers, a kitchen manager and approximately 40 other employees. The
restaurants which are also open for lunch generally have 15 to 20 additional
employees. Restaurant management participates in a discretionary quarterly
bonus program based upon the financial results of their particular restaurant.
Bonuses typically average between 10% and 25% of salary.

     RESTAURANT REPORTING. The Company maintains financial and accounting
controls for each restaurant through a central accounting system. The Company's
financial systems and controls allow the Company to access each restaurant's
sales, inventory costs and other financial data on a real-time basis, enabling
both store-level management and senior management to quickly react to changing
sales trends, to effectively manage food, beverage and labor costs, to minimize
theft, and to improve the quality and efficiency of accounting and audit
procedures.

     RECRUITMENT AND TRAINING. The Company believes that achieving customer
satisfaction by providing knowledgeable, friendly, efficient service is
critical to the restaurants' long-term success. The Company attempts to recruit
restaurant managers with significant experience in the restaurant industry.
During an 11-week training program, restaurant managers are taught to promote
the Company's team-oriented atmosphere among restaurant employees with emphasis
on preparing and serving food in accordance with strict standards and providing
friendly, courteous and attentive service. The restaurant staff is trained on
site by restaurant managers and other staff members. The Company believes that
the quality and training of its restaurant managers and staff results in
friendly, courteous, efficient service which contributes to a casual and
pleasurable dining experience for the customer.

     PURCHASING. Obtaining a reliable supply of quality seafood at competitive
prices is critical to the Company's success. The Company has formed long-term
relationships with several seafood suppliers and purchases frozen seafood and
certain other supplies used in restaurant operations in bulk. In addition,
Shells' menu has been designed to feature seafood varieties with stable sources
of supply, as well as to provide flexibility to adjust to shortages and to take
advantage of occasional purchasing opportunities. The Company believes its
diverse menu selection reduces the risk and minimizes the effect of the
shortage of any seafood products. The Company has been able to anticipate and
react to fluctuations in food costs through selected menu price adjustments,
purchasing seafood directly from numerous suppliers and promoting certain
alternative menu selections (in response to availability and price of supply).
To date, the Company generally has not experienced any significant delays in
receiving its food and beverage inventories, restaurant supplies or equipment.


                                       4
<PAGE>

     In order to facilitate the distribution of seafood to its restaurants and
minimize the risks relating to storing and distributing seafood, the Company
has entered into a distribution agreement with U.S. Foodservice, Inc. ("U.S.
Foods"), formerly Rykoff-Sexton, whereby U.S. Foods purchases from the Company
at cost and takes ownership of all frozen seafood the Company purchases. U.S.
Foods stores the seafood at its cold storage facilities and the Company pays
U.S. Foods a carrying cost which represents the interest expense on the average
amount U.S. Foods has invested in the Company's frozen seafood. Upon the
Company's direction, U.S. Foods resells the frozen seafood to the Company at
cost, plus handling and delivery fees, and distributes the frozen seafood
directly to the individual Shells restaurants. In addition, U.S. Foods
procures, on behalf of the Company, many of the supplies, other than seafood,
used by the restaurants and distributes and sells these products to the
individual restaurants at agreed upon price mark-ups. The Company believes that
if its relationship with U.S. Foods was terminated, alternate arrangements for
warehousing and procurement of supplies could be made without a significant
interruption of the Company's business. Although the Company believes that its
relationships with its suppliers and U.S. Foods are satisfactory and that
alternate sources are readily available, the loss of certain suppliers or of
its relationship with U.S. Foods, or substantial price increases imposed by
such suppliers, in the absence of alternative sources of supply in a timely
manner, could have a material adverse effect on the Company.

     QUALITY CONTROL. The Company maintains a continuous inspection program for
all of its seafood purchases. Each shipment of frozen seafood is inspected
through statistical sampling methods upon receipt at U.S. Foods' distribution
center for quality and conformance to the Company's written specifications,
prior to delivery to the restaurants. In addition, fresh fish purchased by the
individual restaurants must be purchased from a Company-approved supplier and
is inspected by a restaurant manager at the time of delivery. The restaurants'
employees are educated as to the correct handling and proper physical
characteristics of each product.

     The Company's area supervisors, general managers, assistant managers and
kitchen managers are all responsible for properly training hourly employees and
ensuring that the Company's restaurants are operated in accordance with strict
health and quality standards. Compliance with the Company's quality standards
is monitored by on-site visits and formal inspections by the area supervisors.
The Company believes that its inspection procedures and its employee training
practices help the Company to maintain a high standard of quality for the food
and service it provides. The Company believes that it has not experienced any
material adverse effect from contaminated foods. Nevertheless, there can be no
assurance that seafood contamination or consumer perception of inadequate
seafood quality, in the industry in general or as to the Company in particular,
will not have a material adverse effect on the Company's operations and
profitability.

ADVERTISING AND MARKETING

     The Company employs a marketing strategy that seeks continuous visibility
and name recognition through the use of billboards, radio and television
advertisements. The

                                        5
<PAGE>

Company's strategy of developing a significant number of restaurants in a
market is designed to provide for the Company's cost-effective use of
television and radio advertising and other marketing efforts.

JOINT VENTURE AND THIRD-PARTY OWNED RESTAURANTS

     The Shells restaurant system consists of (i) 45 restaurants owned by the
Company; (ii) the Melbourne Restaurant; and (iii) the four Managed Restaurants.
The Company anticipates that all future restaurants will be owned, as opposed
to licensed, by the Company.

     The Melbourne Restaurant is owned by a joint venture in which the Company
has a 51% equity interest and the minority partner, WLH Investments, a
corporation wholly-owned by Wanda L. Hattaway, wife of William E. Hattaway, the
Company's president, has a 49% equity interest. The Company has entered into a
Management and License Agreement with the joint venture whereby the Company
receives a management fee of 6% of the restaurant sales of the Melbourne
Restaurant.

     Three of the Managed Restaurants are managed and operated by the Company
pursuant to management and license agreements (the "Management Agreements"),
which became effective in July 1993. Pursuant to the Management Agreements, the
Company provides management services and licenses the Company's proprietary
information required to operate these Managed Restaurants to the respective
third-party owner, for a management fee of 4% of that restaurant's sales. The
Company has complete authority to determine the programs and policies affecting
the day-to-day operations of each of these Managed Restaurants. Although the
Management Agreements differ slightly, they generally have an initial term of
30 years and provide that the third-party owners are responsible for funding
all the restaurant expenses, including food and beverage costs, staffing,
training, recruiting, inventory, and working capital. Pursuant to amended
option agreements, entered into in August 1995 (the "Amended Option
Agreements"), upon the Company's market capitalization reaching certain
prescribed levels, either a third-party owner of a Managed Restaurant or the
Company has the option to transfer that restaurant's assets to the Company in
exchange for a purchase price equal to six times the restaurant's adjusted
annual cash flow, less the amount, if any, of the third-party owner's
liabilities assumed by the Company. The purchase price is to be paid in the
form of shares of the Company's common stock which have certain registration
rights.

     The fourth Managed Restaurant is operated by the Company pursuant to the
terms of an agreement requiring that the restaurant be operated in conformity
with the policies and procedures established by the Company for Shells
restaurants. The restaurant is currently managed by the Company pursuant to an
oral agreement, providing for the Company to receive a management fee of 4% of
the restaurant's sales.


                                       6
<PAGE>

COMPETITION

     The restaurant industry is intensely competitive with respect to price,
service, location, food quality and variety, and there are many
well-established competitors with substantially greater financial and other
resources than the Company. Such competitors include national, regional and
local full-service casual dining chains, many of which specialize in or offer
seafood products. Some of the Company's competitors have been in existence for
substantially longer periods than the Company and may be better established in
the markets where the Company's restaurants are, or may be, located. The
Company believes that the full-service casual dining segment is likely to
attract a significant number of new entrants, some offering seafood products.
The Company can also be expected to face competition from a broad range of
other restaurants and foodservice establishments, including full-service,
quick-service and fast food restaurants which specialize in a variety of
cuisines. While the Company believes that it offers a broad variety of quality
seafood products, there can be no assurance that consumers will regard the
Company's product as sufficiently distinguishable from competitive products,
that substantially equivalent food products will not be introduced by the
Company's competitors or that the Company will be able to compete successfully.
 
     The Company has positioned its restaurants to take advantage of a niche in
the casual dining industry. Multi-unit restaurant operators generally avoid the
seafood segment because of the difficult and unique requirements of seafood
procurement; consequently, only a limited number of national and regional
restaurant chains currently emphasize seafood offerings. Shells restaurants are
positioned between most fast food and full service seafood restaurants in terms
of both dining atmosphere and menu pricing. The Company believes that by
emphasizing casual dining, high quality, large portions, and relatively low
prices, Shells restaurants offer an attractive alternative to existing chain
establishments as well as to most local seafood restaurants.

GOVERNMENT REGULATION

     The Company is subject to extensive federal, state and local government
regulation by various governmental agencies, including state and local
licensing, zoning, land use, construction and environmental regulations and
various regulations relating to the sale of food and alcoholic beverages,
sanitation, disposal of refuse and waste products, public health, safety and
fire standards. The Company's restaurants are subject to periodic inspections
by governmental agencies to ensure conformity with such regulations.
Difficulties or failure in obtaining required licensing or other regulatory
approvals could delay or prevent the opening of a new restaurant, and the
suspension of, or inability to renew, a license at an existing restaurant,
which could adversely affect the operations of the Company. Restaurant
operating costs are also affected by other government actions which are beyond
the Company's control, including increases in the minimum hourly wage
requirements, workers compensation insurance rates, health care insurance costs
and unemployment and other taxes.

                                       7
<PAGE>

     Approximately 11% of the Company's revenue is attributable to the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of the
Company's restaurants to apply to a state authority and, in certain locations,
county or municipal authorities for a license or a permit to sell alcoholic
beverages on the premises. Typically, licenses must be renewed annually and may
be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of daily operations of the Company's
restaurants, including minimum age of patrons and employees, hours of
operation, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The failure of a restaurant to obtain or
retain liquor or food service licenses would adversely affect the restaurant's
operations.

     The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance
beverage and has never been named as a defendant in a lawsuit involving
"dram-shop" statutes.

     The Company's restaurants are also subject to federal and state minimum
wage laws governing such matters as working conditions, overtime and tip
credits. A significant number of the Company's restaurant personnel are paid at
rates related to the federal minimum wage and, accordingly, further increases
in the minimum wage rate could increase the Company's labor costs.

     The Americans with Disabilities Act prohibits discrimination in employment
and public accommodations on the basis of disability. Under the Act, which
became effective in 1992, the Company could be required to expend funds to
modify its restaurants to provide service to, or make reasonable accommodations
for the employment of, disabled persons.

SERVICEMARKS AND PROPRIETARY INFORMATION

     The Company has registered the servicemark "Shells" with the Secretary of
State of Florida and the United States Patent and Trademark Office. The Company
has also registered its "jumping fish" logo with the United States Patent and
Trademark Office. The Company believes that its servicemarks have significant
value and are essential to its ability to create demand for, and awareness of,
its restaurants. There can be no assurance, however, that the Company's
servicemarks do not or will not violate the proprietary rights of others, that
they would be upheld if challenged or that the Company would, in such an event,
not be prevented from using its servicemarks, any of which could have a
material adverse effect on the Company. Although there can be no assurance that
the Company will have the financial resources necessary to enforce or defend
its servicemarks, the Company has, and intends to continue to oppose vigorously
any infringement of its servicemarks.

     The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect its concepts and recipes. However, these
methods may not

                                       8
<PAGE>

afford complete protection and there can be no assurance that others will not
independently develop similar know-how or obtain access to the Company's
know-how, concepts and recipes.

EMPLOYEES

     As of January 3, 1999, the Company employed approximately 2,950 persons,
of whom approximately 250 were management or administrative personnel and 2,700
were employed in non-management restaurant positions. Approximately 1,600 of
these individuals were employed by the Company on a full-time basis. As of
January 3, 1999, approximately 250 persons were employed on a salaried basis
and 2,700 persons were employed in an hourly basis. The Company considers its
employee relations to be good. None of the Company's employees are covered by a
collective bargaining agreement.

EXECUTIVE OFFICERS OF THE COMPANY

     The Company's executive officers are as follows:


NAME                   AGE   POSITION
----                   ---   --------
William E. Hattaway    55    President and Director

Warren R. Nelson       47    Vice President of Finance, Chief Financial Officer,
                             Treasurer and Secretary

John R. Ritchey        53    Vice President of Operations

Frank C. Roehl, III    43    Vice President of Marketing

     William E. Hattaway has served as President and as a director of the
Company since its inception in April 1993. Mr. Hattaway also serves as
President, Chief Executive Officer and as a director of Shells, Inc., positions
he has held since February 1993. From December 1989 through January 1993, Mr.
Hattaway was a principal in Todays Food Service Concepts, a developer of a
three-location restaurant chain in Orlando, Florida called Outlaws Steakhouse.
From April 1987 through December 1989, Mr. Hattaway was Executive Vice
President of General Mills' Restaurant Group and President of General Mills'
International Restaurant Operations. Mr. Hattaway served as Chairman and Chief
Executive Officer of Red Lobster from March 1986 to April 1987. From January
1979 through March 1986, he served as President of Red Lobster which he joined
in January 1974 as a seafood buyer.

     Warren R. Nelson currently serves as Vice President of Finance, Chief
Financial Officer, Treasurer, and Secretary of the Company, positions he has
held since June 1993. From June 1983 to May 1993, Mr. Nelson was employed by
the Eckerd Corporation, a national drug store chain, where he held the
positions of Assistant Controller, Subsidiary Controller and Manager of
Planning and Analysis. From March 1977 to June 1983, Mr. Nelson was employed by
Red Lobster where his responsibilities included strategic


                                       9
<PAGE>

planning, acquisitions, corporate development,
procurement/distribution/operations analysis, and controller for seafood
purchasing and processing operations of a subsidiary of Red Lobster.

     John R. Ritchey currently serves as Vice President of Operations of the
Company, a position he has held since October 1993. From May 1990 through
September 1993, Mr. Ritchey was a principal in Todays Food Service Concepts.
From November 1986 to May 1990, Mr. Ritchey owned and operated a sports fishing
center located in Welaka, Florida. From 1972 through January 1986, Mr. Ritchey
was employed by Red Lobster, where he held positions of Vice President of
Corporate Development, Divisional Vice President of Operations and Regional
Vice President of the Chicago Division.

     Frank C. Roehl, III currently serves as Vice President of Marketing of the
Company, a position he has held since April 1993. Mr. Roehl also served as an
officer and as a director of Shells, Inc., positions he held from October 1987
to December 1994. From October 1982 through October 1987, Mr. Roehl was
employed by CMA Advertising Agency, the Talmadge, Roehl, and Magee Agency and
the Roehl Group.

     RISK FACTORS RELATING TO THE BUSINESS OF THE COMPANY. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE. IN ADDITION TO
THE FOLLOWING RISK FACTORS, WE REFER YOU TO THOSE RISK FACTORS DESCRIBED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K AND IN VARIOUS OF OUR PUBLICLY
REPORTED DOCUMENTS. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL COULD ALSO IMPAIR OUR BUSINESS
OPERATIONS.

     KEEP THESE RISK FACTORS IN MIND WHEN YOU READ "FORWARD-LOOKING" STATEMENTS
ELSEWHERE IN THIS FORM 10-K REPORT. THESE ARE STATEMENTS THAT RELATE TO OUR
EXPECTATIONS FOR FUTURE EVENTS AND TIME PERIODS. GENERALLY, THE WORDS
"ANTICIPATE," "EXPECT," "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. FUTURE EVENTS AND CIRCUMSTANCES COULD DIFFER SIGNIFICANTLY FROM
THOSE ASSOCIATED WITH THE FORWARD-LOOKING STATEMENTS.

     WE HAVE SIGNIFICANT CAPITAL REQUIREMENTS AND MAY NEED ADDITIONAL
FINANCING. Our capital requirements have been and will continue to be
significant. To date, our cash requirements have exceeded our cash flow from
operations. This is mainly due to costs associated with developing and opening
new restaurants. At January 3, 1999, we had a working capital deficiency of
$4,047,000. We rely substantially on our cash flow from operations, equipment
leases and real estate loans to finance our expansion. We believe that
projected cash flow from operations will satisfy our contemplated cash
requirements for at least the next 12 months. This is based on our current
plans and assumptions relating to our operations, including assumptions
regarding the rate of proposed expansion and costs of developing and opening
new restaurants. These plans may change and our assumptions may prove to be
inaccurate.

     Our expansion strategy depends on our ability to continue to obtain third
party financing and to achieve projected cash flow from operations. Third party
financing may include

                                       10
<PAGE>

traditional lending sources like bank lines of credit, equipment leases and
restaurant sale/ leaseback arrangements. We may have to seek additional
financing from other sources if:

     /bullet/ our expansion plans change;

     /bullet/ our projections or assumptions are inaccurate because of
              unanticipated expenses of construction or other delays or
              difficulties;

     /bullet/ third party financing is unavailable in sufficient amounts or at
              all; and

     /bullet/ projected cash flows are not sufficient to cover costs of
              expansion.

     We cannot assure you that third party financing will be available to us
when we need it or available on acceptable terms, if at all. If we cannot
obtain third party financing or other financing when we need it, this could
materially and adversely affect our results of operations and our expansion
plans. If we have to raise additional capital through the sale of our equity,
our existing stockholders could be substantially diluted.

     WE MAY HAVE AN AGGRESSIVE EXPANSION PLAN. We may pursue a strategy of
aggressive growth by significantly increasing the number of Shells restaurants.
Our proposed expansion is dependent on, among other things:

     /bullet/ the availability of third party financing;

     /bullet/ achieving projected cash flows from operations;

     /bullet/ market acceptance of the Shells concept in new markets;

     /bullet/ timely development and construction of restaurants;

     /bullet/ securing of required governmental permits and approvals;

     /bullet/ the hiring, training and retention of skilled management and
              other personnel;

     /bullet/ the ability to integrate new restaurants into our operations; and
 
     /bullet/ the general ability to successfully manage growth.

     Successfully managing growth includes successfully completing the
installation of a point-of-sale accounting and cash management system,
monitoring restaurants, controlling costs, and maintaining effective quality
controls. We cannot assure you that our proposed expansion will be successful.

     We initially may not be able to achieve economies of scale for
advertising, marketing, costs of goods and other expenses in new markets that
we experience in our established markets. Therefore, our per restaurant costs
may initially be higher in new markets than in established markets. We cannot
assure you that we will be successful in opening enough restaurants in any new
market to generate economies of scale.


                                       11
<PAGE>

     To date, the operating performance of the Midwest stores has been below
that of the Florida stores. Although we anticipate that operating performance
will improve in the Midwest as advertising efficiency is achieved in the
various markets, we cannot assure you that the Midwest stores will attain the
same levels of profitability as the Florida stores.

     In addition, if we experience prolonged periods of unfavorable operating
results at existing or future restaurants, we may have to close or relocate
restaurants. The lack of success or closing of any of our restaurants, or the
unsuccessful operation of a new restaurant, could have an adverse effect upon
our financial condition and results of operations.

     OUR OPERATING RESULTS FLUCTUATE SEASONALLY BECAUSE OF OUR GEOGRAPHIC
CONCENTRATION. The majority of our restaurants are located in primarily
residential areas in Florida. We have experienced fluctuations in our
quarter-to-quarter operating results because of factors including:

     /bullet/ the seasonal nature of our business;

     /bullet/ weather conditions in Florida; and

     /bullet/ the health of Florida's economy in general and tourism industry
              in particular.

     Our restaurant sales generally increase from January through April and
June through August, the peaks of the Florida tourism season, and generally
decrease from September through mid-December. In addition, because of our
present geographic concentration, adverse publicity relating to our restaurants
or adverse weather conditions could have a more pronounced adverse effect on
our operating results than if our restaurants were more geographically
dispersed. Adverse weather conditions or a decline in tourism in Florida, or in
general economic conditions, which would likely affect the Florida economy or
tourism industry, particularly during the time of peak sales, could materially
adversely affect our operations and prospects. Our expansion plans include
expansion into new markets in the Midwest. We believe that operations in the
Midwest will offset some of the seasonal effects on our operating results due
to our concentration in the Florida market. However, we cannot assure you that
our expansion outside of the Florida area will have a positive effect on the
seasonal nature of our operating results. Because of the seasonality of our
business, our results for any quarter are not necessarily indicative of the
results that may be achieved for a full year.

     THE SUPPLY AND QUALITY OF OUR SEAFOOD MAY FLUCTUATE. In recent years, the
availability of certain types of seafood has fluctuated. This has resulted in a
corresponding fluctuation in prices. We do not maintain contracts with any of
our suppliers. We generally purchase products based on purchase orders placed
from time-to-time in the ordinary course of business. We also depend on U.S.
Foods. U.S. Foods distributes and warehouses our frozen seafood supply and
procures, distributes and stores other supplies for us. We believe that our
relationships with our suppliers and U.S. Foods are satisfactory and that
alternative sources are readily available. However, the loss of some suppliers
or of our relationship with


                                       12
<PAGE>

U.S. Foods could materially and adversely affect us. Also, substantial price
increases imposed by these suppliers in the absence of alternative sources of
supply in a timely manner, would have a material adverse effect on us.

     Some species of seafood have become subject to adverse publicity because
of claims of contamination by lead or other chemicals disposed of in the ocean.
This can adversely affect both market demand and supply for these food
products. Customer demand may also be negatively impacted by reports of medical
or other risks resulting from eating seafood. We maintain a continuous
inspection program for our seafood purchases. We believe that we have not
experienced any adverse effect from contaminated seafood. However, we cannot
assure you that seafood contamination or consumer perception of inadequate
seafood quality, in the industry in general or as to us specifically, will not
have a material adverse effect on us. Our failure to obtain adequate supplies
of seafood or problems or difficulties resulting from the contamination of
seafood, in general or at any of our restaurants in particular, could have a
material adverse effect on our operations and profitability.

     OUR EXPENSES FOR FOOD AND OTHER COSTS FLUCTUATE. Our profitability depends
on our ability to anticipate and to react to increases in food, labor, employee
benefits, and similar costs. We have limited control over these costs.
Specifically, our dependence on frequent deliveries of seafood, produce and
other products means we are at greater risk of shortages or interruptions in
supply because of adverse weather or other conditions. This could adversely
affect the availability and cost of these items. We have been able to
anticipate and react to fluctuations in food costs by:

     /bullet/ adjusting selected menu prices;

     /bullet/ purchasing seafood directly from numerous suppliers; and

     /bullet/ promoting alternative menu selections in response to price and
              availability of supply.

     However, we cannot assure you that we will be able to continue to
anticipate and respond to these supply and price fluctuations or that we will
not be subject to significantly increased costs. A shortage of available
seafood would cause our cost of sales to increase. Because of our low pricing
structure, this could materially adversely affect our operations and
profitability. In addition, seafood suppliers and processors are subject to a
program of inspection by the Food and Drug Administration. This program may
increase our seafood costs because seafood suppliers' and processors' costs in
complying with this program may increase.

     OUR INDUSTRY IS HIGHLY COMPETITIVE. The restaurant industry, particularly
the full-service casual dining segment, is highly competitive. We compete in
the areas of:

     /bullet/ price;

     /bullet/ service;


                                       13
<PAGE>

     /bullet/ food quality, including taste, freshness, healthfulness and
              nutritional value; and

     /bullet/ location.

     We have numerous well-established competitors, some of which dominate the
industry. These competitors possess substantially greater financial, marketing,
personnel and other resources than we do. Many of our competitors have achieved
significant national, regional and local brand name and product recognition.
They also engage in extensive advertising and promotional programs, both
generally and in response to efforts by additional competitors to enter new
markets or introduce new products. These competitors include national, regional
and local full-service casual dining chains, many of which specialize in or
offer seafood products.

     We believe that the full-service casual dining segment is likely to
attract a significant number of new entrants, some offering seafood products.
We also expect to face competition from a broad range of other restaurants and
food service establishments. These include full-service, quick-service and fast
food restaurants which specialize in a variety of cuisines. In addition, the
full-service restaurant industry is characterized by the frequent introduction
of new food products which are accompanied by substantial promotional
campaigns. In recent years, numerous companies in the full-service restaurant
industry have introduced products, including seafood, intended to capitalize on
growing consumer preference for food products which are, or are perceived to
be, healthful, nutritious, low in calories and low in fat content. You can
expect that we will be subject to increasing competition from companies whose
products or marketing strategies address these consumer preferences. While we
believe that we offer a broad variety of quality seafood products, we cannot
assure you:

     /bullet/ that consumers will be able to distinguish our products from
              competitive products;

     /bullet/ that substantially equivalent food products will not be introduced
              by our competitors; or

     /bullet/ that we will be able to compete successfully.

     MANY FACTORS AFFECT OUR INDUSTRY. We must respond to various factors
affecting the restaurant industry including:

     /bullet/ changes in consumer preferences, tastes and eating habits;

     /bullet/ demographic trends and traffic patterns;

     /bullet/ increases in food and labor costs;

     /bullet/ inflation; and

     /bullet/ national, regional and local economic conditions.

     Recently, a number of full-service restaurant companies have experienced
declining growth rates due to general market saturation. In response to this
situation, some of these


                                       14
<PAGE>

companies have adopted "value pricing" strategies. These strategies could draw
customers away from restaurants that do not engage in discount pricing. They
could also negatively affect the operating margins of competitors which do
attempt to match competitors' price reductions. We believe that our products
are generally lower in price than most competitive full-service and
quick-service offerings. However, continuing or sustained price discounting in
the restaurant industry could adversely affect our results of operations.

     WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATION. We are subject to
extensive state and local government regulation by various agencies, including:
 

     /bullet/ state and local licensing, zoning, land use, construction and
              environmental regulations;

     /bullet/ various regulations relating to the sale of food and alcoholic
              beverages;

     /bullet/ regulations relating to sanitation, disposal of refuse and waste
              products;

     /bullet/ regulations relating to public health; and

     /bullet/ safety and fire standards.

     Our restaurants are inspected periodically by governmental agencies to
ensure conformity with these regulations. If we experience difficulty or fail
to obtain required licensing or other regulatory approvals, new restaurant
openings could be delayed or prevented. In addition, the suspension of, or
inability to renew a license at an existing restaurant would adversely affect
our operations. A significant percentage of our revenue comes from the sale of
alcoholic beverages. State and local regulation of the sale of alcoholic
beverages requires us to obtain a license or permit for each of our
restaurants. The failure of a restaurant to obtain or retain a license to serve
liquor would materially adversely affect our operations.

     Restaurant operating costs are also affected by other government actions
which are beyond our control, including increases in:

     /bullet/ the minimum hourly wage requirements;

     /bullet/ workers compensation insurance rates;

     /bullet/ health care insurance costs; and

     /bullet/ unemployment and other taxes.

     Furthermore, the Americans with Disabilities Act may require us to make
certain modifications to certain of our restaurants to meet specified access
and use requirements. These and other initiatives could adversely affect us, as
well as the restaurant industry in general.

     WE MAY HAVE LIABILITY FOR SALES OF ALCOHOLIC BEVERAGES. We are also
subject to "dram-shop" statutes. These statutes generally provide a person
injured by an intoxicated person


                                       15
<PAGE>

the right to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. In certain states, statutes also
provide that a vendor of alcoholic beverages may be held liable in a civil
cause of action for injury or damage caused by or resulting from the
intoxication of a minor if the vendor willfully, knowingly and unlawfully sells
or furnishes alcoholic beverages to the minor and knows that the minor will
soon after that be driving a motor vehicle. A vendor can be similarly held
liable if it knowingly provides alcoholic beverages to a person who is in a
noticeable state of intoxication, knows that the person will soon after that be
driving a motor vehicle and injury or damage is caused by such person. In
addition, significant national attention is currently focused on the problem of
drunk driving, which could result in the adoption of additional legislation.
This could increase our potential liability for damage or injury caused by our
customers.

     WE MAY NOT BE ABLE TO PROTECT OUR SERVICEMARKS AND PROPRIETARY
INFORMATION. We own three United States registrations for the servicemarks that
we use, including the name "SHELLS." We believe that our servicemarks have
significant value and are essential to our ability to create demand for and
awareness of our restaurants. We cannot assure you, however, that our
servicemarks:

     /bullet/ do not or will not violate the proprietary rights of others;

     /bullet/ would be upheld if challenged; or

     /bullet/ that we would not be prevented from using our servicemarks.

Any of these occurrences could materially adversely affect us. In addition, we
cannot assure you that we will have the financial resources necessary to
enforce or defend our servicemarks.

     We also rely on trade secrets and proprietary know-how. We employ various
methods to protect our concepts and recipes. However, these methods may not
completely protect us. We cannot assure you that others will not independently
develop similar know-how or obtain access to our know-how, concepts and
recipes. Although we generally enter into confidentiality and non-competition
agreements with our executives and key management personnel, we cannot assure
you that these agreements will adequately protect our trade secrets.

     OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE. We maintain insurance,
including insurance relating to personal injury, in amounts which we currently
consider adequate. Nevertheless, a partially or completely uninsured claim
against us, if successful, could materially adversely affect us.

     WE DEPEND ON KEY PERSONNEL. Our success is largely dependent upon William
E. Hattaway, our President and Chief Executive Officer, and other key
personnel. We have entered into a one-year employment agreement with Mr.
Hattaway expiring in August 1999 which is renewed automatically on the
respective anniversary date unless either party


                                       16
<PAGE>

provides notice of intent not to renew. The loss of his services or of the
services of other key personnel could materially adversely affect us. We have
obtained and are the beneficiary of a $1,700,000 key man life insurance policy
on the life of Mr. Hattaway. Our success may also depend on our ability to
attract and retain qualified management restaurant industry personnel,
particularly as we expand into new markets.

     CONTROL BY MANAGEMENT. Our executive officers and directors beneficially
own, in the aggregate, approximately 41% of our outstanding common stock. As a
result, such persons, acting together, will be able to exert control over us,
elect all of our directors, cause an increase in our capital stock or cause the
dissolution, merger or sale of our assets, and generally direct our affairs.

     WE HAVE NEVER PAID DIVIDENDS. We have never paid cash dividends on our
common stock and do not anticipate paying any cash dividends in the foreseeable
future. In addition, our debt financings prohibit the payment of cash dividends
and any future financing agreements may also prohibit the payment of cash
dividends.

     EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF
SHELLS. Our certificate of incorporation provides that we may issue up to
2,000,000 shares of preferred stock from time to time in one or more series.
The Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to and imposed upon any wholly unissued
series of preferred stock. The Board also is authorized to fix the number of
shares of any series of preferred stock and the designation of any such series,
without any vote or action by our stockholders. The board of directors may
authorize and issue preferred stock with voting, dividend, liquidation,
conversion or other rights that could adversely affect the voting power or
other rights of the holders of common stock. In addition, the potential
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control, may discourage bids for our common stock at a
premium over the market price of the common stock and may adversely affect the
market price of the common stock. We have no present intention to issue any
shares of our preferred stock.  However, we cannot assure you that we will not
do so in the future.

ITEM 2. PROPERTIES

     The Company leases 8,100 square feet of space in Tampa, Florida for its
executive offices. The lease, although renewable, expires in November 1999, and
is terminable by either party upon four months prior written notice. The annual
rent payable under the lease is approximately $117,000.

     All but four of the Company's existing restaurants in operation are leased
properties. In the future, the Company intends to lease most of its properties
but may from time-to-time acquire restaurant locations based on individual site
evaluation. Each of the Company leases provides for a minimum annual rent and
certain of these leases require additional rental payments to the extent sales
volumes exceed specified amounts. Generally, the Company is required to pay the
cost of insurance, taxes and a portion of the landlord's

                                       17
<PAGE>

operating costs to maintain common areas. Restaurant leases generally have
initial terms ranging from five to 20 years and renewal options ranging from
five to 20 years.

ITEM 3. LEGAL PROCEEDINGS

     In the ordinary course of business, the Company is a party to several
legal proceedings, the outcome of which, individually or in the aggregate, is
not expected to be material to the Company's financial position, results of
operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     None.


                                       18
<PAGE>

                                    PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
        MATTERS

     The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market under
the symbol "SHLL". Prior to February 1998, the common stock was traded on the
Nasdaq Small Cap System. The following table sets forth, since April 23, 1996,
the date the Company's common stock commenced trading, the high and low per
share price of the Company's common stock as reported by Nasdaq. The Common
Stock was originally sold to the public at an initial public offering price of
$5.00 per share on April 23, 1996.

                                COMMON STOCK
                           -----------------------
                              HIGH          LOW
                           ----------   ----------
Fiscal 1996
-----------
Second quarter .........    $  9.00      $  5.00
Third quarter ..........    $  8.25      $  6.50
Fourth quarter .........    $  9.38      $  6.25

FISCAL 1997
-----------
First quarter ..........    $  9.37      $  8.37
Second quarter .........    $ 11.00      $  7.87
Third quarter ..........    $ 14.75      $ 10.12
Fourth quarter .........    $ 14.37      $  8.87

FISCAL 1998
-----------
First quarter ..........    $ 11.63      $  7.56
Second quarter .........    $ 11.75      $  9.63
Third quarter ..........    $ 11.50      $  4.38
Fourth quarter .........    $  6.00      $  3.25

     The number of stockholders of record of the Company's Common Stock on
March 19, 1999 was approximately 250.

     The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $0.01 per share, and 2,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock").

DIVIDEND POLICY

     The Company has never declared or paid any cash dividends on its Common
Stock. The Company anticipates that all future earnings will be retained by the
Company for the development of its business. Accordingly, the Company does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The Company is subject to loan covenants containing certain provisions
restricting the Company's ability to pay dividends.

                                       19
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following table sets forth selected historical and pro forma
consolidated financial data for the Company ("SSRI") and Shells, Inc., a wholly
owned subsidiary of the Company. The historical consolidated financial data for
the Company is for the year (53 weeks) ended January 3, 1999, and the years (52
weeks) ended December 28, 1997, December 29, 1996, December 31, 1995, and
January 1, 1995 (historical and Pro forma). The pro forma consolidated
financial data for the Company for the year (52 weeks) ended January 1, 1995
gives effect to the Merger. This consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. (The amounts are presented in
thousands, except per share and number of restaurants data).

<TABLE>
<CAPTION>
                                                                 YEAR (52 WEEKS) ENDED
                                    YEAR (53 WEEKS)  --------------------------------------------
                                         ENDED                                                    
                                      JANUARY 3,      DECEMBER 28,   DECEMBER 29,   DECEMBER 31, 
                                         1999             1997           1996           1995     
                                    ---------------- -------------- -------------- --------------
<S>                                     <C>            <C>            <C>            <C>     
Statment of Operations Data:                          
Revenues
 Restaurant sales ................      $ 83,734       $ 64,914       $ 39,405       $ 28,269
 Management fees .................           415            398            388            352
                                        --------       --------       --------       --------
 Total revenues ..................        84,149         65,312         39,793         28,621
                                        --------       --------       --------       --------
Costs and expenses
 Cost of sales ...................        29,342         22,967         14,017         11,220
 Labor and other related
  expenses .......................        23,749         17,674         10,221          7,680
 Other restaurant operating
  expenses .......................        17,317         13,432          8,266          6,301
 General and
  administrative expenses ........         6,210          4,940          3,351          2,316
 Depreciation and amortization ...         2,702          1,788            927            664
 Pre-opening expenses ............         2,306          1,646            347            295
 Provision for impairment
 of assets .......................           620             --             --             -- 
                                        --------       --------       --------       --------
Income (loss) from operations ....         1,903          2,865          2,664            145
Other income (expense):
 Interest expense, net ...........          (341)          (148)          (170)          (409)
 Other income (expense), net .....           (18)           (44)          (233)           (33)
                                        --------       --------       --------       --------
Income (loss) before elimination
 of minority partner interest,
 and benefit (provision) for
 income taxes ....................         1,544          2,673          2,261           (297)
Elimination of minority
 partner interest ................          (179)          (174)          (169)          (106)
                                        --------       --------       --------       --------
Income (loss) before benefit
 (provision) for income taxes ....         1,365          2,499          2,092           (403)
Income tax benefit (provision) (1)           158           (849)          (648)            -- 
Cumulative effect of change in
 accounting for pre-opening
 costs, net of income tax benefit           (692)            --             --             -- 
                                        --------       --------       --------       --------
Net income (loss) ................           831          1,650          1,444           (403)
Preferred shares accretion .......          (111)           (74)          (117)          (167)
                                        --------       --------       --------       --------
Net income (loss) applicable to
common stock .....................      $    720       $  1,576       $  1,327       $   (570)
                                        ========       ========       ========       ========

<CAPTION>
                                                             YEAR (52 WEEKS) ENDED
                                                  ------------------------------------------
                                                     JANUARY 1,    JANUARY 1,    JANUARY 1,
                                                        1995          1995          1995
                                                    PRO FORMA(2)      SSRI      SHELLS, INC.
                                                   -------------- ------------ -------------
<S>                                                 <C>            <C>          <C>    
Statment of Operations Data:
Revenues
 Restaurant sales .....................             $ 21,878       $5,768       $16,110
 Management fees ......................                  327        1,384            --
                                                    --------       ------       -------
 Total revenues .......................               22,205        7,152        16,110
                                                    --------       ------       -------
Costs and expenses
 Cost of sales ........................                9,088        2,292         6,796
 Labor and other related
  expenses ............................                5,830        1,523         4,307
 Other restaurant operating
  expenses ............................                5,002        1,429         4,630
 General and
  administrative expenses .............                2,243        2,012           231
 Depreciation and amortization ........                  507          112           189
 Pre-opening expenses .................                  422          344            78
 Provision for impairment
 of assets ............................                   --           --            --
                                                    --------       ------       -------
Income (loss) from operations .........                 (887)        (560)         (121)
Other income (expense):
 Interest expense, net ................                 (236)         (91)         (145)
 Other income (expense), net ..........                   35           40            (5)
                                                    --------       ------       --------
Income (loss) before elimination
 of minority partner interest,
 and benefit (provision) for
 income taxes .........................               (1,088)        (611)         (271)
Elimination of minority
 partner interest .....................                  (67)         (67)           --
                                                    --------       ------       --------
Income (loss) before benefit
 (provision) for income taxes .........               (1,155)        (678)         (271)
Income tax benefit (provision) (1).....                   --           --            --
Cumulative effect of change in
 accounting for pre-opening
 costs, net of income tax benefit......                   --           --            --
                                                    --------       ------       --------
Net income (loss) .....................               (1,155)        (678)         (271)
Preferred shares accretion ............                   --           --            --
                                                    --------       ------       --------
Net income (loss) applicable to
common stock ..........................             $ (1,155)      $ (678)      $ (271)
                                                    ========       ======       ========
</TABLE>


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                    FISCAL YEARS ENDED
                                                        -----------------------------------------
                                                        JANUARY 3,     DECEMBER 28,   DECEMBER 29,
                                                          1999            1997           1996
                                                        ------------ --------------   -----------
<S>                                                       <C>            <C>              <C>
Basic net income per share .......................       $  0.16        $  0.42        $  0.49
Diluted net income per share .....................       $  0.15        $  0.33        $  0.40

Operating Data:
System-wide sales:
 Company-owned restaurants(3) ....................       $83,734        $64,914        $39,405
 Licensed restaurants ............................        10,385          9,947          9,660
                                                         -------        -------        -------
                                                         $94,119        $74,861        $49,065
                                                         =======        =======        =======
Number of restaurants (at end of period):
 Company-owned restaurants(3) ....................            45             36             27
 Licensed restaurants ............................             4              4              4
                                                         -------        -------        -------
                                                              49             40             31
                                                         -------        -------        -------
Average annual sales per Company-owned and
  joint venture restaurant open for full period(4)       $ 2,156        $ 2,110        $ 2,188

Increase in Company-owned and joint
  venture restaurant same store sales(4) .........           2.5%           2.5%          14.7%
</TABLE>
<TABLE>
<CAPTION>
                                               JANUARY 3,     DECEMBER 28,     DECEMBER 29,     DECEMBER 31,     JANUARY 1,
                                                  1999            1997             1996             1995            1995
                                              ------------   --------------   --------------   --------------   -----------
<S>                                           <C>            <C>              <C>              <C>              <C>
Balance sheet data:
Working capital (deficiency) ..............     $ (4,047)        $   484         $ (1,418)        $ (4,722)      $ (3,298)
Total assets ..............................       34,895          26,566           18,373           10,438          9,078
Long-term debt ............................        5,189           1,449            1,161            1,706          2,098
Minority partner interest .................          519             514              512              574            467
Redeemable preferred shares ...............           --           1,372            1,668            1,551          1,385
Stockholders' equity (deficiency) .........       16,460          14,521            7,472             (889)          (354)
<FN>
----------------
(1) The effective tax rates for 1998, 1997 and 1996 include the effect of
    recognizing tax benefits that were fully reserved prior to 1996. The
    effect of recognizing these benefits, primarily related to net operating
    loss carryforwards from prior years, is to reduce the effective income tax
    rate for the fiscal years 1998, 1997 and 1996 to 36%, 34% and 31%,
    respectively. The effective tax rate for fiscal 1998 was also affected by
    a $650,000 benefit related to the reduction in the tax asset valuation
    allowance.
(2) Gives effect to the Merger, which is accounted for as a purchase, as if it
    occurred at the beginning of the year. All material intercompany balances
    and transactions between the entities have been eliminated. The pro forma
    data is presented for the year ended January 1, 1995 to allow for a more
    appropriate and meaningful comparison to the operating results of all
    subsequent years presented.
(3) Includes one joint venture restaurant in which the Company has a 51% equity
    interest.
(4) Includes only restaurants open during the full fiscal year shown and open
    for a full comparable fiscal year and at least the full six months prior
    thereto.
</FN>
</TABLE>


                                       21
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

     As of January 3, 1999, the Company owned 44 Shells restaurants and a 51%
ownership interest in the Melbourne Restaurant. In addition, the Company
managed and operated four Managed Restaurants. The Company's restaurants
average approximately 6,600 square feet in size and have an average seating
capacity of approximately 220 seats. Average annual restaurant sales during the
year (53 weeks) ended January 3, 1999 for the 35 restaurants open for the full
year were approximately $2,156,000. The Company's food sales and liquor sales
accounted for 89% and 11% of revenues, respectively, for the year (53 weeks)
ended January 3, 1999.

     The following table sets forth, for the periods indicated, the percentages
which the items in the Company's Consolidated Statements of Operations bear to
total revenues, or where indicated, restaurant sales. The Company's fiscal year
is the 52 or 53 weeks ending the Sunday nearest to December 31.

<TABLE>
<CAPTION>
                                                                      FISCAL YEARS ENDED
                                                         ---------------------------------------------
                                                          JANUARY 3,     DECEMBER 28,     DECEMBER 29,
                                                             1999            1997             1996
                                                         ------------   --------------   -------------
<S>                                                      <C>            <C>              <C>
REVENUES:
 Restaurant sales ....................................       99.5%           99.4%           99.0%
 Management fees from related parties ................        0.5             0.6             1.0
                                                            ------          ------          ------
                                                            100.0           100.0           100.0
                                                            ------          ------          ------
COST AND EXPENSES:
 Cost of restaurant sales(1) .........................       35.0            35.4            35.6
 Labor and other related expenses(1) .................       28.4            27.2            25.9
 Other restaurant operating expenses(1) ..............       20.7            20.7            21.0
                                                            ------          ------          ------
 Total restaurant costs and expenses(1) ..............       84.1            83.3            82.5
                                                            ------          ------          ------
 General and administrative expenses .................        7.4             7.6             8.4
 Depreciation and amortization .......................        3.2             2.7             2.3
 Pre-opening expenses ................................        2.7             2.5             0.9
 Provision for impaired assets .......................        0.7             0.0             0.0

 Income from operations ..............................        2.3             4.4             6.7
 Interest expense, net ...............................       -0.4            -0.2            -0.4
 Other expense, net ..................................       -0.1            -0.1            -0.6
 Elimination of minority partner interest ............       -0.2            -0.3            -0.5
                                                            ------          ------          ------
 Income before benefit (provision) for taxes .........        1.6             3.8             5.2
 Benefit (provision) for income taxes ................        0.2            -1.3            -1.6
Cumulative effect of a change in accounting
 principle, net of income tax benefit ................       -0.8             0.0             0.0
                                                            ------          ------          ------
Net income ...........................................        1.0%            2.5%            3.6%
                                                            ======          ======          ======
<FN>
----------------
(1) As a percentage of restaurant sales.
</FN>
</TABLE>

                                       22
<PAGE>

RESULTS OF OPERATIONS

FISCAL 1998 VERSUS FISCAL 1997

     Total revenues increased by 29.0% between Fiscal 1997 and Fiscal 1998.
Most of the year-to-year increase was attributable to new restaurant openings,
53 weeks included in Fiscal 1998 versus 52 weeks in Fiscal 1997, as well as a
2.5% increase in same store sales. The Company opened 10 restaurants during
Fiscal 1998, five of which opened in the fourth quarter, and closed one
restaurant in January 1998. The increase in same store sales was due to
selected menu price adjustments in the beginning of Fiscal 1998 which were
offset by slight decreases in customer traffic.

     The Company's revenues consist of restaurant sales of the Company-owned
restaurants and management fees equal to 4% of sales of the Managed
Restaurants. Comparisons of same store sales include only stores which were
open during the entire periods being compared and, due to the time needed for a
restaurant to become established and fully operational, at least six months
prior to the beginning of that period.

     Cost of restaurant sales were 35.0% of restaurant sales in Fiscal 1998 as
compared with 35.4% in Fiscal 1997. The availability of certain types of
seafood fluctuates from time-to-time, resulting in corresponding fluctuations
in the cost of restaurant sales. The slight improvement over Fiscal 1997 is
attributed to selected menu price adjustments which occurred during January
1998, the implementation of software in the restaurants which allowed
management to identify and react to product usage variances, and the Company's
ability to anticipate and react to fluctuations in food costs, in particular,
increases in its dairy costs, and to offer or promote alternative inventory
items or menu selections in response to such fluctuations. The cost of
restaurant sales generally consists of the cost of food, beverages, freight,
and paper and plastic goods used in food preparation and carry-out orders.

     Labor and other related expenses were 28.4% of restaurant sales for Fiscal
1998 as compared to 27.2% in Fiscal 1997. This increase is primarily
attributable to higher wage rates outside of the state of Florida as well as
increased staffing at the manager levels to meet planned expansion. The Company
had four restaurant locations (formerly Chi Chi's) which were expected to open
in the third quarter of Fiscal 1998 which did not open until the fourth quarter
due to unanticipated legal complications involved in the completion of the
acquisitions. As a result, the Company paid additional salaries and related
expenses in the third quarter for management and other personnel awaiting
assignment to these new restaurants without receipt of offsetting revenues from
those stores. Labor and other related expenses generally consist of restaurant
hourly and management payroll, benefits and taxes.

     Other restaurant operating expenses remained unchanged at 20.7% of
restaurant sales in both Fiscal 1998 and Fiscal 1997. Other restaurant
operating expenses actually increased slightly during Fiscal 1998 when
considering Fiscal 1997 included a $197,000


                                       23
<PAGE>

one-time charge related to the closure of a restaurant. The increase in Fiscal
1998 reflected increases in advertising expenses as a percentage of sales due
to increased advertising in selected markets. The increase in advertising
expenses was offset in part by a reduction in excise taxes as the Company
continued its expansion outside the state of Florida. Other restaurant
operating expenses generally consist of advertising, supervision, operating
supplies, repairs and maintenance, rent and other occupancy costs and
utilities.

     General and administrative expenses were 7.4% of revenues in Fiscal 1998
as compared with 7.6% in Fiscal 1997. The 0.2% decrease in general and
administrative expenses as a percentage of revenues was attributable to the
economies of scale gained through the increase in chain-wide restaurant sales.
The efficiencies were partially offset by increased costs of management
training and recruiting. General and administrative expenses relate to the
operations of all Shells restaurants owned by the Company and management
services that the Company provides to the Managed Restaurants.

     Depreciation and amortization expense was 3.2% of revenues for Fiscal 1998
as compared with 2.7% for Fiscal 1997. The increases are due to the higher
investment levels for the units outside the state of Florida as well as the
renovations occurring at several of the existing units.

     Pre-opening expenses were 2.7% of revenues for Fiscal 1998 as compared
with 2.5% for Fiscal 1997. The 2.7% in Fiscal 1998 is exclusive of the one-time
charge of $692,000, net of income tax benefit, related to the Company's early
adoption of a new accounting standard which requires that pre-opening and other
start-up costs be expensed as incurred rather than capitalized. The increases
for Fiscal 1998 exclusive of the one-time charge were attributed to the ten
units that were opened in Fiscal 1998 as compared with nine units opened during
Fiscal 1997.

     Provision for impaired assets was $620,000 or 0.7% of revenues for Fiscal
1998. In the fourth quarter, the Company recorded the pre-tax charge relating
to the write-down of impaired assets to their estimated fair value in
accordance with Statement of Financial Accounting Standards No. 121. The
write-down is related to one restaurant. Although at the current time the
Company intends to continue operating this restaurant, it has not, nor is it
projected to, contribute positively to the Company's cash flow in the
foreseeable future.

     Income from operations decreased $962,000 from $2,865,000 in Fiscal 1997
to $1,903,000 in Fiscal 1998. This decline was attributable to the provision
for impaired assets as well as the increase in pre-opening expenses recognized
during Fiscal 1998. The income from operations as a percentage of restaurant
sales decreased by 2.1%, from 4.4% of revenues in Fiscal 1997 to 2.3% of
revenues in Fiscal 1998, primarily due to the increased labor and related
expenses as well as the provision for impaired assets.

     Net interest expense increased $193,000 from $148,000 in Fiscal 1997 to
$341,000 in Fiscal 1998. The increase was attributable to the $5,054,000 in new
borrowings during 1998 resulting from the purchase of two restaurant properties
as well as the financing related to new restaurant equipment.


                                       24
<PAGE>

     The income tax expense (benefit) improved from an expense of 1.3% of
revenues to a benefit of 0.2% of revenues in Fiscal 1998. The fluctuation was
attributed to the reduction in the valuation allowance related to the deferred
tax asset, thereby providing a $650,000 benefit during Fiscal 1998 to offset
the provision for income taxes. The Company carried the valuation allowance
until Fiscal 1998 due to the uncertainty of its taxable income upon multiple
state expansion.

     The cumulative effect of a change in accounting principle resulted in the
Company recognizing a $1,081,000 pre-tax charge, $692,000 net of income tax
benefits, relating to the write-off of pre-opening costs. This change resulted
from the early adoption of a new accounting standard, Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," which requires that
pre-opening and other start-up costs be expensed as incurred rather than
capitalized. The adoption has been made effective as of the beginning of the
Company's 1998 fiscal year. As a result of the adoption, the Company will begin
reporting pre-opening costs as incurred, which in turn will result in lower
future amortization expense. Since the Company has amortized pre-opening costs
over a one-year period following the opening of its restaurants, the impact of
the accounting change is not expected to materially affect the Company's future
net operating results, although the quarterly fluctuations may be magnified
based upon the timing of restaurant openings.

     The net income decreased $819,000 to $831,000 for Fiscal 1998 as compared
with $1,650,000 for Fiscal 1997.

FISCAL 1997 VERSUS FISCAL 1996

     Total revenues increased by 64.1% between Fiscal 1996 and Fiscal 1997.
Most of the year-to-year increase was attributable to new restaurant openings
coupled with increases in same store sales of 2.5% for Fiscal 1997. The Company
opened nine restaurants during Fiscal 1997 as compared with 10 new restaurants
during Fiscal 1996, nine of which opened during the fourth quarter of Fiscal
1996. The increases in same store sales were attributable to increases in the
number of customers served resulting from expanded advertising and remodeling
of certain restaurants, and to a lesser extent from menu price adjustments.

     Cost of restaurant sales were 35.4% of restaurant sales in Fiscal 1997 as
compared with 35.6% in Fiscal 1996. The slight improvement over Fiscal 1996 is
attributed to the Company having been able to anticipate and react to
fluctuations in food costs through purchasing seafood directly from numerous
suppliers, promoting certain alternative menu selections in response to price
and availability of supply and adjusting its menu prices accordingly.

     Labor and other related expenses were 27.2% of restaurant sales for Fiscal
1997 as compared to 25.9% in Fiscal 1996. This increase was primarily
attributed to higher wage rates outside of the state of Florida as well as
increased staffing at the manager levels to meet planned expansion.

     Other restaurant operating expenses were 20.7% of restaurant sales in
Fiscal 1997 as compared to 21.0% in Fiscal 1996. The decreases in these
expenses as a percentage of


                                       25
<PAGE>

sales was due to the efficiencies realized through the higher sales volumes at
the stores coupled with increased operational efficiencies. For Fiscal 1997,
other restaurant operating expenses also included a $197,000 one-time charge
related to the closure of a restaurant. There were also decreases in
advertising production costs in Fiscal 1997 as a percentage of sales.

     General and administrative expenses were 7.6% of revenues in Fiscal 1997
as compared with 8.4% in Fiscal 1996. The 0.8% decrease in general and
administrative expenses as a percentage of revenues was attributable to the
economies of scale gained through the increase in chain-wide restaurant sales.
The efficiencies were partially offset by increased management training and
recruiting costs, increased staffing to facilitate expansion, and increased
travel related to site selection evaluations for out of state locations.

     Depreciation and goodwill amortization expense was 2.7% of revenues for
Fiscal 1997 as compared with 2.3% for Fiscal 1996. The increase was due to the
higher investment levels for the units outside the state of Florida as well as
the renovations occurring at several of the existing units.

     Pre-opening expenses were 2.5% of revenues for Fiscal 1997 as compared
with 0.9% for Fiscal 1996. The increases for Fiscal 1997 were attributed to the
nine units that were opened in the fourth quarter of Fiscal 1996 as well as the
nine units opened during Fiscal 1997, compounded by the higher pre-opening
costs being incurred in new markets outside of Florida.

     Net interest expense decreased slightly from $170,000 in Fiscal 1996 to
$148,000 in Fiscal 1997. The reduction was attributable to the increase in
interest income generated from $5,474,000 in net proceeds received from the
exercise of warrants, as well as the increase in cash flow generated from
operations.

     Income from operations improved $201,000 from $2,664,000 in Fiscal 1996 to
$2,865,000 in Fiscal 1997. This improvement was due to the higher sales levels
chain-wide. The income from operations as a percentage of restaurant sales
decreased by 2.3%, from 6.7% of revenues in Fiscal 1996 to 4.4% of revenues in
Fiscal 1997, primarily due to the increased depreciation and amortization
expenses. The net income before taxes improved $407,000 to $2,499,000 for
Fiscal 1997 as compared with $2,092,000 for Fiscal 1996. The net income for
Fiscal 1997 was $1,650,000 as compared with $1,444,000 for Fiscal 1996
reflecting income tax provisions of $849,000 and $648,000, respectively. The
income tax provisions were based on effective tax rates of 34% and 31% for
Fiscal 1997 and Fiscal 1996, respectively, which reflects the valuation
allowance adjustment of tax benefits as well as the 1997 benefits of net
operating loss carryforwards and tax credits that were previously unrealized.


                                       26
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES


     The following table presents a summary of the Company's cash flows for the
last three fiscal years (in thousands):


<TABLE>
<CAPTION>
                                                           1998           1997          1996
                                                       ------------   -----------   -----------
<S>                                                    <C>            <C>           <C>
Net cash provided by operating activities ..........    $   6,285      $  5,184      $  2,639
Net cash used in investing activities ..............      (11,050)       (7,233)       (5,799)
Net cash provided by financing activities ..........        4,173         4,330         5,417
                                                        ---------      --------      --------
Net (decrease) increase in cash ....................    $    (592)     $  2,281      $  2,257
                                                        =========      ========      ========
</TABLE>

     As of January 3, 1999, the Company's current liabilities of $11,153,000
exceeded its current assets of $7,106,000, resulting in a working capital
deficiency of $4,047,000. With the exception of 1997, consistent with industry
practice, the Company has generally operated with negative working capital as a
result of costs associated with new restaurants and remodeling existing
restaurants, as well as the turnover of restaurant inventory relative to more
favorable vendor terms in accounts payable. The use of current assets for
investment in leasehold improvements, land and buildings, and equipment has
also contributed to a deficiency in working capital.

     The Company received $1,218,000 and $5,474,000 in net proceeds from the
exercise of warrants and options to purchase common stock during 1998 and 1997,
respectively. During 1996, the Company received $6,125,000 in net proceeds from
the completion of the Company's initial public offering (the "Offering") and
the exercise of the underwriter's over-allotment option. During 1996, the
Company repaid the $1,310,000 in shareholder loans, plus accrued interest of
approximately $300,000, from the proceeds of the Offering. In addition, upon
the consummation of the Offering, (i) $750,000 of indebtedness borrowed in 1995
and (ii) $159,000 principal amount of indebtedness owed to WLH Investments were
converted into equity.

     There were warrants and options to purchase an aggregate of 226,953 shares
of the Company's common stock exercised during 1998, generating net proceeds to
the Company of $1,218,000. The proceeds from the exercise of these warrants was
required to be used to retire outstanding Shells, Inc. Preferred Shares. The
Company used the warrant proceeds as well as other funds to retire all
outstanding preferred shares during 1998 for an aggregate redemption price of
$1,482,000. The Company redeemed $371,000 in preferred shares during 1997.

     On June 16, 1997, the Company gave notice to the holders of all of its
outstanding publicly registered Common Stock Purchase Warrants (the "Public
Warrants") that the Company would redeem the Public Warrants on July 16, 1997
(the "Redemption Date"), at a redemption price of $0.10 per Public Warrant. In
addition, simultaneous with the delivery of notice to the holders of the Public
Warrants, the Company gave notice of redemption to holders of warrants to
purchase an additional 112,376 shares of Common Stock at an exercise price of
$6.00 per share (the "Private Warrants" and together with the Public


                                       27
<PAGE>

Warrants, the "Warrants"). The Warrants were exercisable at any time up to and
including 5:00 p.m., Eastern Standard Time, on July 16, 1997 (the "Exercise
Termination Time"), and were also redeemable at a redemption price of $0.10 per
Warrant. There were 917,276 warrants exercised during 1997, which represented
all but 100 of the warrants subject to redemption.

     During Fiscal 1998, the Company's cash position decreased by $592,000. Net
cash provided by operating activities totaled $6,285,000, while cash used in
investing activities was $11,050,000 which related to capital expenditures in
connection with the opening of 10 new restaurants, the remodeling of certain
existing restaurants, and the investment of $300,000 in software and accounting
systems. The net cash provided by financing activities was $4,173,000, which
primarily consisted of the $5,054,000 in borrowings, $1,218,000 in net proceeds
from the exercise of warrants and options to purchase Common Stock, less net
repayments of debt ($616,000) and the retirement of preferred shares
($1,482,000).

     During Fiscal 1997, the Company's cash position increased by $2,281,000.
Net cash provided by operating activities totaled $5,184,000, while cash used
in investing activities was $7,233,000, which related to capital expenditures
in connection with the opening of nine new restaurants and the remodeling of
certain existing restaurants. The net cash provided by financing activities was
$4,330,000, which primarily consisted of $5,474,000 in proceeds from the
issuance of common stock, $704,000 in borrowings, less the repayment of debt
($1,477,000), and the retirement of preferred shares ($371,000).

     The Company believes that cash flows from operations coupled with the
funds available from anticipated third party financing and cash balances at
January 3, 1999, will be sufficient to satisfy its contemplated cash
requirements for at least 12 months. The Company's expansion strategy is
dependent upon achieving projected cash flow from operations and to a lesser
extent, obtaining third party financing. Third party financing may include, but
is not limited to, traditional lending sources such as bank lines of credit,
equipment leasing, and/or restaurant sale/leaseback arrangements that may be
available to the Company.

     The Company from time-to-time may utilize third party financing as
necessary to facilitate expansion. In the event that the Company's plans change
or its assumptions prove to be inaccurate (due to unanticipated expenses or
construction or other delays or difficulties or otherwise), projected cash flow
or third party financing otherwise prove to be insufficient to fund operations
and fully implement the Company's expansion strategy, the Company could be
required to seek additional financing from sources not currently anticipated or
reduce its expansion plans. There can be no assurance that third party
financing will be available to the Company when needed, on acceptable terms, or
at all. The Company has $912,000 of principal indebtedness due in 1999 which is
expected to be repaid out of the Company's cash flow from operations.


                                       28
<PAGE>

QUARTERLY FLUCTUATION OF FINANCIAL RESULTS

     The restaurant industry in general is seasonal, depending on restaurant
location and the type of food served. The Company has experienced fluctuations
in its quarter to quarter operating results due to its high concentration of
restaurants in Florida. Business in Florida is influenced by seasonality due to
various factors which include but are not limited to weather conditions in
Florida relative to other areas of the U.S. and the health of Florida's economy
in general and the tourism industry in particular. The Company's restaurant
sales are generally highest from January through April and June through August,
the peaks of the Florida tourism season, and generally lower from September
through mid-December. In many cases, locations are in coastal cities, where
sales are significantly dependent on tourism and its seasonality patterns. It
is anticipated that implementation of the Company's expansion program into the
Midwest markets will, over time, reduce some of the existing seasonal
fluctuations.

     In addition, quarterly results have been, and in the future are likely to
be, substantially affected by the timing of new restaurant openings both in and
outside of Florida. Because of the seasonality of the Company's business and
the impact of new restaurant openings, results for any quarter are not
generally indicative of the results that may be achieved for a full fiscal year
on an annualized basis and cannot be used to indicate financial performance for
the entire year.

YEAR 2000 ISSUE

     The Year 2000 compliance software issues will affect the Company as well
as most other companies. Historically, certain computer programs and certain
microprocessors were designed using two digits rather than four to define the
applicable year. As a result, software programs may recognize a date using the
two digits "00" as 1900 rather than the year 2000. Computer programs that do
not recognize the proper date could generate erroneous data or cause systems to
fail. The Company has established a Year 2000 task force to analyze the
Company's Year 2000 compliance. The Year 2000 project covers both the store
level systems as well as the corporate systems. The various phases of the
project include identification of systems, assessment of Year 2000 exposure,
validation, implementation, and contingency planning. Based on its assessment
of its major information technology systems, the Company expects that all
necessary modifications and / or replacements will be completed in a timely
manner to insure that each of its systems are Year 2000 compliant.

     The Company has incurred approximately $35,000 of Year 2000 project
expenses through January 3, 1999. Future expenses are expected to approximate
$25,000 as the Company's current hardware systems and software, with minor
modifications, have been represented by their vendors to be either Year 2000
compliant or have a Year 2000 compliant upgrade available at no charge.

     The Company's Year 2000 project also considers the readiness of
significant vendors. The Company believes that if certain vendors were not Year
2000 compliant, then alternate


                                       29
<PAGE>

arrangements could be made that would alleviate any material impact on
operations. The contingency plans for material systems such as general ledger,
payroll, fixed assets, and cash management systems involve manual workarounds
and extra staffing. The contingency plans for distribution or vendor related
issues entail alternative suppliers and distributors.

     The Company is in the process of identifying and contacting its critical
suppliers and service providers to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000
issues. To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to change suppliers to those who have demonstrated Year
2000 readiness. The Company can give no assurances that the responses it
receives will be accurate, or if changes are necessary, that the Company will
be successful in finding such compliant suppliers and service providers. The
Company currently has formal information concerning the Year 2000 status of
most of its major suppliers and service providers. The Company will continue to
contact and assess Year 2000 readiness of its suppliers and vendors.

     Achieving Year 2000 compliance is dependent on many factors, some of which
are not completely within the Company's control. There can be no assurance that
the Company will be able to identify all aspects of its business that are
subject to Year 2000 problems of suppliers that affect the Company's business.
There can also be no assurance that the Company's software vendors are correct
in their assertions that the software is year 2000 compliant, or that the
Company's estimate of the costs of systems preparation for Year 2000 compliance
will prove ultimately to be accurate. Should either the Company's internal
systems or internal systems of one or more significant suppliers fails to
achieve Year 2000 compliance, or the Company's estimate of the costs of
becoming Year 2000 compliant prove to be materially inaccurate, the Company's
business and results of operations could be adversely affected.

IMPACT OF INFLATION AND PRICE CHANGES

     The Company has not operated in a highly inflationary period and its
management does not believe that inflation has had a material effect on sales
or expenses. As expenses increase, the Company expects to recover increased
costs by increasing prices, to the extent permitted by competition or by
modifying its menu and promoting other less cost sensitive products. Due to the
fact that the Company's business is somewhat dependent on tourism in Florida,
any significant decrease in tourism due to inflation would likely have a
material adverse effect on revenues and profitability.

NEW ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, Acounting
for Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative


                                       30
<PAGE>

(that is gains and losses) depends upon the intended use of the derivative and
the resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company has not evaluated the
effect, if any, that the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements.

                                       31
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                    INDEX TO
                        CONSOLIDATED FINANCIAL STATEMENTS
                                       AND
                               SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                -----
<S>                                                                             <C>
Independent Auditors' Report ................................................     33

Consolidated Balance Sheets as of January 3, 1999 and December 28, 1997 .....     34

Consolidated Statements of Operations for the year (53 weeks) ended
  January 3, 1999 and the years (52 weeks) ended December 28, 1997 and
  December 29, 1996 .........................................................     35

Consolidated Statements of Stockholders' Equity (Deficiency) for the the year
  (53 weeks) ended January 3, 1999 and the years (52 weeks) ended
  December 28, 1997 and December 29, 1996 ...................................     36

Consolidated Statements of Cash Flows for the year (53 weeks) ended
  January 3, 1999 and the years (52 weeks) ended December 28, 1997 and
  December 29, 1996 .........................................................     37

Notes to Consolidated Financial Statements ..................................     38
</TABLE>


                                       32
<PAGE>

                         INDEPENDENT AUDITORS' REPORT


To the Stockholders
Shells Seafood Restaurants, Inc.
Tampa, Florida

     We have audited the accompanying consolidated balance sheets of Shells
Seafood Restaurants, Inc. and subsidiaries (the "Company") as of January 3,
1999 and December 28, 1997 and the related consolidated statements of
operations, stockholders' equity (deficiency) and cash flows for the year (53
weeks) ended January 3, 1999 and the years (52 weeks) ended December 28, 1997
and December 29, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at January 3, 1999 and December 28, 1997 and the results of its operations and
its cash flows for the year (53 weeks) ended January 3, 1999 and the years (52
weeks) ended December 28, 1997 and December 29, 1996 in conformity with
generally accepted accounting principles.

     As discussed in Note 15 to the consolidated financial statements, the
Company changed its method of accounting for pre-opening costs in 1998.


DELOITTE & TOUCHE LLP
Tampa, Florida
February 19, 1999
 
                                       33
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           JANUARY 3, 1999     DECEMBER 28, 1997
                                                          -----------------   ------------------
<S>                                                       <C>                 <C>
                        ASSETS
Cash ..................................................      $ 4,723,121          $ 5,314,771
Inventories ...........................................          954,066              861,247
Other current assets ..................................        1,282,641            1,663,867
Receivables from related parties ......................           35,261              139,948
Deferred tax asset, net ...............................          110,551                   --
                                                             -----------          -----------
   Total current assets ...............................        7,105,640            7,979,833
Property and equipment, net ...........................       22,240,255           14,306,138
Prepaid rent ..........................................          622,368              324,321
Other assets ..........................................          690,571              450,155
Goodwill ..............................................        3,299,191            3,505,387
Deferred tax asset, net ...............................          937,449                   --
                                                             -----------          -----------
   TOTAL ASSETS .......................................      $34,895,474          $26,565,834
                                                             ===========          ===========

           LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................      $ 6,318,544          $ 3,805,633
Accrued expenses ......................................        3,432,332            2,881,404
Sales tax payable .....................................          489,688              318,223
Income taxes payable ..................................               --              275,216
Current portion of long-term debt .....................          912,333              215,235
                                                             -----------          -----------
   Total current liabilities ..........................       11,152,897            7,495,711
Deferred rent .........................................        1,574,092            1,214,143
Long-term debt, less current portion ..................        5,189,481            1,449,092
                                                             -----------          -----------
   Total liabilities ..................................       17,916,470           10,158,946
Minority partner interest .............................          519,257              514,047
                                                             -----------          -----------
Shells, Inc. preferred shares subject to redemption,
 $10 par value; authorized 10,000,000 shares;
 148,249 shares issued and outstanding at
 December 28, 1997 ....................................               --            1,371,852
                                                             -----------          -----------

STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized
 2,000,000 shares; none issued or outstanding .........               --                   --
Common stock, $.01 par value; authorized
 20,000,000 shares; 4,454,015 and 4,227,062 shares
 issued and outstanding, respectively .................           44,540               42,270
Additional paid-in-capital ............................       14,161,010           12,944,995
Retained earnings .....................................        2,254,197            1,533,724
                                                             -----------          -----------
   Total stockholders' equity .........................       16,459,747           14,520,989
                                                             -----------          -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............      $34,895,474          $26,565,834
                                                             ===========          ===========
</TABLE>

                 See notes to Consolidated Financial Statements.


                                       34
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                FISCAL YEARS ENDED
                                                   ---------------------------------------------
                                                     JANUARY 3,    DECEMBER 28,    DECEMBER 29,
                                                        1999           1997            1996
                                                   -------------- -------------- ---------------
<S>                                                <C>            <C>            <C>
REVENUES:
 Restaurant sales ................................  $83,733,831    $64,914,358     $39,405,304
 Management fees from related parties ............      415,383        398,106         387,519
                                                    -----------    -----------     -----------
                                                     84,149,214     65,312,464      39,792,823
                                                    -----------    -----------     -----------
COST AND EXPENSES:
 Cost of restaurant sales ........................   29,341,688     22,967,259      14,017,163
 Labor and other related expenses ................   23,749,450     17,673,808      10,220,280
 Other restaurant operating expenses .............   17,317,281     13,431,530       8,266,403
 General and administrative expenses .............    6,210,113      4,940,173       3,350,765
 Depreciation and amortization ...................    2,701,969      1,788,358         927,017
 Pre-opening expenses ............................    2,305,944      1,646,271         347,100
 Provision for impaired assets ...................      620,000             --              --
                                                    -----------    -----------     -----------
                                                     82,246,445     62,447,399      37,128,728
                                                    -----------    -----------     -----------
INCOME FROM OPERATIONS ...........................    1,902,769      2,865,065       2,664,095
                                                    -----------    -----------     -----------
OTHER INCOME (EXPENSE):
 Interest expense ................................     (550,267)      (364,645)       (337,347)
 Interest income .................................      209,583        216,654         167,718
 Other expense, net ..............................      (17,711)       (44,500)       (233,051)
                                                    -----------    -----------     -----------
                                                       (358,395)      (192,491)       (402,680)
                                                    -----------    -----------     -----------
INCOME BEFORE ELIMINATION OF MINORITY PARTNER
  INTEREST AND INCOME TAXES ......................    1,544,374      2,672,574       2,261,415
ELIMINATION OF MINORITY PARTNER INTEREST .........     (179,257)      (174,047)       (169,450)
                                                    -----------    -----------     -----------
INCOME BEFORE BENEFIT (PROVISION) FOR
  INCOME TAXES ...................................    1,365,117      2,498,527       2,091,965
BENEFIT (PROVISION) FOR INCOME TAXES .............      158,000       (849,000)       (648,000)
                                                    -----------    -----------     -----------
INCOME BEFORE THE CUMULATIVE EFFECT OF A
  CHANGE IN ACCOUNTING PRINCIPLE .................    1,523,117      1,649,527       1,443,965
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
  PRINCIPLE, NET OF INCOME TAX BENEFIT ...........     (692,000)            --              --
                                                    -----------    -----------     -----------
NET INCOME .......................................      831,117      1,649,527       1,443,965
PREFERRED SHARES ACCRETION .......................     (110,644)       (74,000)       (117,000)
                                                    -----------    -----------     -----------
NET INCOME APPLICABLE TO COMMON STOCK ............  $   720,473    $ 1,575,527     $ 1,326,965
                                                    ===========    ===========     ===========
BASIC NET INCOME PER SHARE OF COMMON STOCK
  BEFORE CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE ..............................  $      0.32    $      0.42     $      0.49
 CUMULATIVE EFFECT OF ACCOUNTING CHANGE ..........        (0.16)            --              --
                                                    -----------    -----------     -----------
 BASIC NET INCOME PER SHARE OF COMMON STOCK ......  $      0.16    $      0.42     $      0.49
                                                    ===========    ===========     ===========
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
  OF COMMON STOCK OUTSTANDING ....................    4,447,881      3,726,949       2,729,417
                                                    ===========    ===========     ===========
DILUTED NET INCOME PER SHARE OF COMMON STOCK
  BEFORE CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE ..............................  $      0.29    $      0.33     $      0.40
 CUMULATIVE EFFECT OF ACCOUNTING CHANGE ..........        (0.14)            --              --
                                                    -----------    -----------     -----------
DILUTED NET INCOME PER SHARE OF COMMON STOCK .....  $      0.15    $      0.33     $      0.40
                                                    ===========    ===========     ===========
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF
  COMMON STOCK OUTSTANDING .......................    4,958,052      4,750,620       3,312,651
                                                    ===========    ===========     ===========
</TABLE>

                 See notes to Consolidated Financial Statements.

                                       35
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)


<TABLE>
<CAPTION>
                                                   COMMON STOCK         ADDITIONAL       RETAINED
                                              ----------------------     PAID-IN         EARNINGS
                                                 SHARES     AMOUNT       CAPITAL         (DEFICIT)         TOTAL
                                              ----------- ---------- --------------- ---------------- --------------
<S>                                           <C>         <C>        <C>             <C>              <C>
Balance at December 31, 1995 ................  1,462,684   $14,627     $   581,841     $ (1,485,768)   $  (889,300)

 Net income .................................                                             1,443,965      1,443,965

 Shells Inc. preferred shares accretion .....                             (117,000)                       (117,000)

 Issuance of common stock and warrants.......  1,834,852    18,348       7,015,707                       7,034,055
                                               ---------   -------     -----------     ------------    -----------

Balance at December 29, 1996 ................  3,297,536    32,975       7,480,548          (41,803)     7,471,720

 Net income .................................                                             1,649,527      1,649,527

 Shells Inc. preferred shares accretion .....                                               (74,000)       (74,000)

 Issuance of common stock ...................    929,526     9,295       5,464,447                       5,473,742
                                               ---------   -------     -----------      -----------    -----------

Balance at December 28, 1997 ................  4,227,062    42,270      12,944,995        1,533,724     14,520,989

 Net income .................................                                               831,117        831,117

 Shells Inc. preferred shares accretion .....                                              (110,644)      (110,644)

 Issuance of common stock ...................    226,953     2,270       1,216,015                       1,218,285
                                               ---------   -------     -----------     ------------    -----------

Balance at January 3, 1999 ..................  4,454,015   $44,540     $14,161,010     $  2,254,197    $16,459,747
                                               =========   =======     ===========     ============    ===========
</TABLE>

                         See notes to Consolidated Financial Statements.


                                       36
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            FISCAL YEARS ENDED
                                                       ------------------------------------------------------------
                                                        JANUARY 3, 1999     DECEMBER 28, 1997     DECEMBER 29, 1996
                                                       -----------------   -------------------   ------------------
<S>                                                    <C>                 <C>                   <C>
OPERATING ACTIVITIES:
 Net income ........................................     $     831,117        $  1,649,527          $  1,443,965
 Adjustments to reconcile net income to net
    cash provided by operating activities:
  Depreciation and amortization ....................         2,495,773           1,788,358               927,017
  Pre-opening expenses .............................         2,512,140           1,646,271               347,100
  Loss on impairment of assets .....................           620,000                  --                    --
  Cumulative effect of accounting change ...........           692,000                  --                    --
  Minority partner interest ........................             5,210               2,237                96,519
  Changes in assets and liabilities:
   Increase in inventories .........................           (92,819)           (197,684)             (266,444)
   Decrease (increase) in receivables from
      related parties ..............................           104,687              (7,900)              (69,054)
   Increase in other assets ........................        (2,857,134)         (1,958,181)             (868,137)
   Increase in deferred tax assets .................        (1,048,000)                 --                    --
   (Increase) decrease in prepaid rent .............          (298,047)             50,400                50,399
   Increase (decrease) in accounts
      payable ......................................         2,512,911           1,318,690               (36,230)
   Increase in accrued expenses ....................           550,928             721,616               356,585
   Decrease in payable to related parties ..........                --                  --               (98,927)
   Increase in sales tax payable ...................           171,465              35,257                53,435
   (Decrease) increase in income taxes
      payable ......................................          (275,216)           (221,000)              496,216
   Increase in deferred rent .......................           359,949             356,313               206,696
                                                         -------------        ------------          ------------
    Total adjustments ..............................         5,453,847           3,534,377             1,195,175
                                                         -------------        ------------          ------------
    Net cash provided by operating
       activities ..................................         6,284,964           5,183,904             2,639,140
                                                         -------------        ------------          ------------
INVESTING ACTIVITIES:
 Purchase of property and equipment ................       (11,049,890)         (7,233,151)           (5,798,872)
                                                         -------------        ------------          ------------
 Net cash used in investing activities .............       (11,049,890)         (7,233,151)           (5,798,872)
                                                         -------------        ------------          ------------
FINANCING ACTIVITIES:
 Proceeds from debt financing ......................         5,053,545             703,884               839,340
 Repayment of debt .................................          (616,058)         (1,476,835)           (1,547,591)
 Redemption of preferred shares ....................        (1,482,496)           (370,624)                   --
 Proceeds from the issuance of
   common stock and warrants........................         1,218,285           5,473,742             6,125,055
                                                         -------------        ------------          ------------
 Net cash provided by financing activities .........         4,173,276           4,330,167             5,416,804
                                                         -------------        ------------          ------------
 Net (decrease) increase in cash ...................          (591,650)          2,280,920             2,257,072
CASH AT BEGINNING OF PERIOD ........................         5,314,771           3,033,851               776,779
                                                         -------------        ------------          ------------
CASH AT END OF PERIOD ..............................     $   4,723,121        $  5,314,771          $  3,033,851
                                                         =============        ============          ============
</TABLE>

                          See notes to Consolidated Financial Statements.

                                       37
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation -- As of January 3, 1999 Shells Seafood Restaurants,
Inc. and subsidiaries (the "Company") managed and operated 49 full service,
casual dining seafood restaurants in Florida, Illinois, Indiana, Kentucky, and
Ohio under the name "Shells". The Company was incorporated on April 29, 1993
and began operations in August 1993.

     In August 1993, the Company purchased from Shells, Inc. the servicemarks
"Shells" and "Shells Seafood, ShellFish and Whatnot," as well as all other
intangible and tangible assets necessary to operate a restaurant chain under
the name "Shells". The Company subsequently acquired Shells, Inc. effective
December 29, 1994.

     Principles of Consolidation -- The consolidated financial statements
include the accounts and operations of the Company and its wholly-owned
subsidiaries as well as a joint venture partnership in which the Company is a
general partner owning a 51% equity interest. All material intercompany
balances and transactions between the consolidated entities have been
eliminated in consolidation.

     Fiscal Year -- The Company's Fiscal year is the 52 or 53 weeks ending the
Sunday nearest to December 31. The Fiscal years ended January 3, 1999, December
28, 1997 and December 29, 1996 were 53, 52 and 52 weeks, respectively.

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

     Inventories -- Inventories consist of food (primarily seafood), beverages
and supplies and are recorded at the lower of cost or market. Cost is
determined using the first-in, first out (FIFO) method. The Company utilizes a
third party to hold and distribute certain products. The inventory is not
recorded by the Company nor is the risk of ownership transferred to the Company
until its individual restaurants receive the product.

     Pre-opening costs -- Pre-opening costs, consisting of direct costs
associated with the opening of restaurants, were amortized over the 12-month
period following the restaurant opening date prior to Fiscal 1998. Effective
Fiscal 1998, pre-opening costs are expensed as incurred (See Note 15).

     Property and Equipment -- Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements and buildings are depreciated over the
shorter of the lease term or


                                       38
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

the estimated useful life and range from five to 30 years. Useful lives for
equipment, furniture and fixtures, and signs range from five to 10 years.

     Construction in Progress -- The Company capitalizes all direct costs
incurred in the construction of its restaurants. Upon opening, these costs are
depreciated or amortized and charged to expense based on their proper
classification. The amount of interest capitalized is insignificant in all
periods presented.

     Goodwill -- The excess of the Company's cost over the fair value of the
net assets resulting from the acquisition of Shells, Inc. is being amortized on
the straight-line basis over 20 years. The use of a 20 year estimated life was
based on the upper and lower limits considering among other factors the lease
terms of restaurants acquired and the cash flow projections of the restaurants.
 
     Impairment of Long-Lived Assets -- Property and equipment, goodwill and
other intangible assets are reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable by comparing the carrying values to the estimated future
undiscounted cash flows. A deficiency in the cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of those assets. A loss due to impairment
would be recognized by a charge to earnings. (See Note 14)

     Income Taxes -- The Company uses the asset and liability method which
recognizes the amount of current and deferred income taxes payable or
refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted tax laws.

     Net income per share of common stock -- Earnings per common share are
computed in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share", which requires companies to present
basic earnings per share and diluted earnings per share. The basic net income
per share of common stock is computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock
outstanding. Diluted net income per share of common stock is computed by
dividing net income applicable to common stock by the weighted average number
of shares of common stock and common stock equivalents outstanding.

     Statement of Cash Flows -- non-cash investing and financing activities --
During Fiscal 1996, concurrent with the initial public offering, there were
200,000 shares of common stock and 100,000 warrants issued upon the conversion
of $750,000 of related party debt and


                                       39
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

$159,000 of minority partner interest. Additionally, the Company recognized
discounts of $48,586, $53,094 and $57,081 as interest expense for the fiscal
years ended January 3, 1999, December 28, 1997 and December 29, 1996,
respectively, related to non-interest bearing notes.

     Fair Value of Financial Instruments -- The estimated fair value of amounts
reported in the consolidated financial statements have been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates fair
value because of their short-term nature. The carrying value of long-term debt
approximates fair value based upon quoted market information as available. As
judgement is involved, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange.

     Comprehensive Income -- The Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" in the first quarter of 1998. SFAS No.
130 requires disclosure of comprehensive income including per share amounts in
addition to the existing statements of earnings. Comprehensive income is
defined as the change in equity during a period, from transactions and other
events, excluding charges resulting from investments by owners (e.g.
supplemental stock offerings) and distributions to owners (e.g. dividends). For
each of the years presented, there are no items requiring separate disclosure
in accordance with this statement.

     Operating Segments -- The Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in the
first quarter of 1998. SFAS No. 131 requires disclosure of certain information
about operating segments and about products and services, geographic areas in
which the Company operates, and their major customers. The Company has
evaluated the effect of this statement and has determined that currently they
operate within one segment, as defined in this statement.

     Accounting for Derivative Instruments and Hedging Activities -- SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
(that is gains and losses) depends upon the intended use of the derivative and
the resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company has not evaluated the
effect, if any, that the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements.

     Reclassifications -- Certain reclassifications of prior year balances have
been made to conform to the current presentation.


                                       40
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. OTHER CURRENT ASSETS

   Other current assets consist of the following:

                                       JANUARY 3,     DECEMBER 28,
                                          1999            1997
                                      ------------   -------------
   Accounts receivable ............   $  660,566     $  170,707
   Prepaid expenses ...............      616,643        400,344
   Other current assets ...........        5,432         11,640
   Pre-opening costs, net .........           --      1,081,176
                                      ----------     ----------
                                      $1,282,641     $1,663,867
                                      ==========     ==========

3. PROPERTY AND EQUIPMENT

   Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                 JANUARY 3,       DECEMBER 28,
                                                                    1999              1997
                                                              ---------------   ---------------
<S>                                                           <C>               <C>
   Leasehold improvements .................................   $ 9,415,479       $ 6,438,300
   Equipment ..............................................     8,329,204         6,312,696
   Furniture and fixtures .................................     5,341,091         2,994,259
   Land and buildings .....................................     4,228,492         1,478,512
   Signage ................................................     1,003,951           752,014
   Construction in progress ...............................       520,829           479,062
                                                              -----------       -----------
                                                               28,839,046        18,454,843
   Less accumulated depreciation and amortization .........    (6,598,791)       (4,148,705)
                                                              -----------       -----------
                                                              $22,240,255       $14,306,138
                                                              ===========       ===========
</TABLE>

4. ACCRUED EXPENSES

   Accrued expenses consist of the following:


                                  JANUARY 3,     DECEMBER 28,
                                     1999            1997
                                 ------------   -------------
   Accrued payroll ...........   $1,195,863     $  958,376
   Accrued insurance .........      930,459        718,833
   Unearned revenue ..........      630,865        524,242
   Other .....................      675,145        679,953
                                 ----------     ----------
                                 $3,432,332     $2,881,404
                                 ==========     ==========


                                       41
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. LONG-TERM DEBT

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                           JANUARY 3,     DECEMBER 28,
                                                                              1999            1997
                                                                          ------------   -------------
<S>                                                                       <C>            <C>
Finance agreements, collateralized by equipment, principal and
 interest due monthly through April 2002, interest rates ranging
 from 6.8% - 11.0% ....................................................   $2,330,988        $343,031

$1,000,000 promissory note with a bank collateralized by real
 property owned by the Company. Interest is payable monthly
 based on the Wall Street Journal published prime rate minus
 0.50%. Principal is payable monthly based on a 15 year
 amortization with unpaid principal due January, 2001. The
 interest rate was 7.25% at January 3, 1999 ...........................      970,000              --

$915,000 promissory note with a bank collateralized by real
 property owned by the Company. Interest is payable monthly
 based on the Wall Street Journal published prime rate minus
 0.50%. Principal is payable monthly based on a 15 year
 amortization with unpaid principal due July, 2001. The interest
 rate was 7.25% at January 3, 1999 ....................................      901,000              --

$850,000 promissory note with a bank collateralized by equipment
 owned by the Company. Interest is payable monthly based on the
 Wall Street Journal published prime rate minus 0.50%. Principal
 payments of $14,167 payable monthly through January 2003.
 The interest rate was 7.25% at January 3, 1999 .......................      694,167              --

$447,500 promissory note with a bank collateralized by real
 property owned by the Company. Interest is payable monthly
 based on the one month LIBOR rate plus 2.25%. Principal is
 payable monthly based on a twelve year amortization with unpaid
 principal due November, 2001. The interest rates were 7.87%
 and 8.22%, respectively ..............................................      385,000         415,000

$453,000 promissory note with a bank collateralized by real
 property owned by the Company. Interest is payable monthly
 based on the prime rate plus 1%. Principal is payable $2,520
 monthly with all unpaid principal due in September, 2001. The
 interest rates were 8.75% and 9.50%, respectively ....................      382,695         410,415

$540,000 non-interest bearing note, principal payable in variable
 monthly installments through December 2004, net of imputed
 interest of $97,375 and $126,403, respectively, at 11%,
 collateralized by a leasehold interest in certain property and fixed
 assets of the Company ................................................      249,119         276,186
</TABLE>


                                       42
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


5. LONG-TERM DEBT--(CONTINUED)

<TABLE>
<CAPTION>
                                                                           JANUARY 3,      DECEMBER 28,
                                                                              1999             1997
                                                                         --------------   -------------
<S>                                                                      <C>              <C>
$500,000 non-interest bearing note, principal payable in variable
 annual installments with a balloon payment due in the amount of
 $116,000 in 2002, net of imputed interest of $52,617 and
 $72,175, respectively, at 9%, collateralized by a leasehold interest
 in certain property and fixed assets of the Company .................        188,845         219,695
                                                                             --------         -------

                                                                            6,101,814       1,664,327

Less current portion .................................................       (912,333)       (215,235)
                                                                            ---------       ---------

                                                                           $5,189,481      $1,449,092
                                                                           ==========      ==========
</TABLE>

     The annual maturities of debt as of January 3, 1999 are as follows:


                           1999 ...........   $  912,333
                           2000 ...........      835,647
                           2001 ...........    3,109,274
                           2002 ...........      889,762
                           2003 ...........      354,798
                                              ----------
                                              $6,101,814
                                              ==========

6. COMMITMENTS AND CONTINGENCIES

     Prior to January 1, 1995, the Company agreed to pay $520,000 and $540,000
over ten-year periods as inducements to obtain leases for certain restaurant
sites. These amounts, net of interest imputed at 9% and 11%, respectively, have
been recorded as prepaid rent and are being amortized over the terms of the
leases.

     With the exception of four sites, the Company conducts all of its
operations and maintains its administrative offices in leased facilities.
Certain leases provide for the Company to pay for common area maintenance
charges, insurance, and its proportionate share of real estate taxes. In
addition, certain leases have escalation clauses and/or require additional rent
based upon a percentage of the restaurant's sales in excess of stipulated
amounts. Total rent expense under these leases was $3,916,000, $3,112,000 and


                                       43
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)

$1,710,000 for the fiscal years ended January 3, 1999, December 28, 1997, and
December 29, 1996, respectively, and includes contingent rent of $431,000,
$365,000 and $140,000 for the fiscal years ended January 3, 1999, December 28,
1997, and December 29, 1996, respectively. The approximate future minimum
rental payments under such operating leases as of January 3, 1999 are as
follows:


                      1999 .........................   $ 3,791,000
                      2000 .........................     3,588,000
                      2001 .........................     3,171,000
                      2002 .........................     3,186,000
                      2003 .........................     2,676,000
                      Thereafter ...................     9,805,000
                                                       -----------
                                                       $26,217,000
                                                       ===========

     These leases expire at various dates through the year 2015 but contain
renewal options for additional periods.

     The Company has entered into employment agreements with four officers that
include salaries ranging from $121,000 to $195,000 per year for each of the
officers. The employment agreements are annual and are renewed automatically on
the respective anniversary dates, unless either party provides notice of intent
not to renew.

     During 1996, the Company entered into an agreement to purchase the
leasehold interest in six sites, as well as the leasehold improvements,
fixtures and equipment, from Islands Florida, LP, a Delaware limited
partnership, in exchange for $500,000 plus, in general, an aggregate amount
equal to 1% of the gross sales, as defined ("royalty"), of each of the
restaurants opened and continued to be operated by the Company at each of the
six sites through the end of the initial terms of the respective leases. The
base terms expire at various dates between 2003 and 2015. These restaurants
were opened during December 1996 and the royalty expense related to these
restaurants was $116,000, $126,000 and $4,000 for the fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996, respectively. During
1998, the Company paid a $12,000 royalty settlement related to the Miami
restaurant which was closed in January, 1998.

     The Company is subject to legal proceedings, claims and liabilities which
arose in the ordinary course of business. In the opinion of management, the
amount of the ultimate liability with respect to these actions will not
materially affect the Company's financial position, results of operations or
cash flows.


                                       44
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. MINORITY PARTNER INTEREST

     The Company has a 51% equity interest in a joint venture partnership (the
"Joint Venture") which owns and operates the Shells restaurant located in
Melbourne, Florida. The Company entered into the Joint Venture with WLH
Investments, Inc. ("WLH Investments"), a corporation owned by the wife of the
Company's President, on March 1, 1994. The Company has a 51% equity interest
and WLH Investments has the remaining 49%. As a condition of the Joint Venture,
WLH Investments contributed $400,000 in capital on March 1, 1994. The profits,
as defined in the Joint Venture agreement, of the Joint Venture are allocated
as follows: (i) 100% of the first $60,000 annually is allocated to WLH
Investments, (ii) 100% of the next $60,000 is allocated to the Company, (iii)
any excess over the $120,000 is allocated 51% to the Company and 49% to WLH
Investments. All losses are allocated in accordance with the ownership
percentages.

     The Joint Venture had profits of $358,000, $350,000 and $342,000 during
the fiscal years ended January 3, 1999, December 28, 1997, and December 29,
1996, respectively. The Joint Venture paid the Company $157,000, $150,000 and
$154,000 in management and license fees for the fiscal years ended January 3,
1999, December 28, 1997, and December 29, 1996, respectively.

     The Joint Venture agreement, which was effective March 1994, as amended
March 1995, contains a purchase option for the Company to purchase the WLH
Investments interest in the Joint Venture, or conversely, for WLH Investments
to put their interest in the Joint Venture to the Company, for a purchase price
of $750,000 payable by the issuance of the Company's common stock having a
value of $750,000. The option is exercisable at any time following the date the
Company's common stock equals or exceeds $20 per share for a period of 20
consecutive trading days.

     During Fiscal 1996, the minority partner agreed to convert $159,000 of
amounts owed to it for 34,984 shares of the Company's common stock and warrants
to purchase 17,492 shares of the Company's common stock. The conversion of the
$159,000 from the minority partner represents the payment of undistributed
earnings and does not affect the minority partner ownership interest. The
minority partner exercised the warrants to purchase 17,492 shares of the
Company's common stock during Fiscal 1997.

8. REDEEMABLE PREFERRED SHARES

     Shells, Inc. had 148,250 outstanding shares of 5% non-cumulative preferred
shares ("Shells, Inc. Preferred Shares") as of December 28, 1997. The Company
had agreed that it would use the proceeds received from the exercise of the
Shells, Inc. Warrants (Note 9) to redeem the Shells, Inc. Preferred Shares, at
a redemption price of $10.00 per share. The Company redeemed all issued and
outstanding Shells Inc. Preferred Shares during Fiscal 1998.


                                       45
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. REDEEMABLE PREFERRED SHARES--(CONTINUED)

     The carrying amount of Shells, Inc. Preferred Shares was recorded at its
estimated fair market value and was periodically accreted using the interest
method, so that the carrying amount would equal the total redemption value as
of the anticipated redemption dates. Each increase in the carrying amount of
preferred shares subject to redemption was treated in the calculation of
earnings per share in the same manner as preferred share dividends. Shells,
Inc. Preferred Shares accretion during the fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996 were $111,000 $74,000, and $117,000,
respectively.

9. STOCKHOLDERS' EQUITY

     The stockholders of Shells, Inc. were granted warrants (the "Shells, Inc.
Warrants") to purchase 229,904 shares of the Company's common stock at $5.50
per share pursuant to the merger into Shells Seafood Restaurants, Inc. dated
December 29, 1994. Warrants to purchase approximately 226,000 shares were
exercised generating proceeds, net of expenses, of approximately $1,215,000
during Fiscal 1998. The warrants were exercisable until April 22, 1998.

     On June 16, 1997, the Company gave notice to the holders of all of its
outstanding publicly registered Common Stock Purchase Warrants (the "Public
Warrants") that the Company would redeem the Public Warrants on July 16, 1997
(the "Redemption Date"), at a redemption price of $0.10 per Public Warrant. In
addition, simultaneous with the delivery of notice to the holders of the Public
Warrants, the Company gave notice of redemption to holders of warrants to
purchase an additional 112,376 shares of Common Stock at an exercise price of
$6.00 per share (the "Private Warrants" and together with the Public Warrants,
the "Warrants"). Warrants to purchase approximately 917,000 shares were
exercised generating proceeds, net of expenses, of $5,427,000 during Fiscal
1997. The Warrants were exercisable until July 16, 1997.


                                       46
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES

     The components of the provision (benefit) for income taxes for the years
ended January 3, 1999, December 28, 1997 and December 29, 1996 are as follows:

<TABLE>
<CAPTION>
                                                           FISCAL YEARS ENDED
                                             -----------------------------------------------
                                               JANUARY 3,      DECEMBER 28,     DECEMBER 29,
                                                  1999             1997             1996
                                             --------------   --------------   -------------
<S>                                          <C>              <C>              <C>
   Federal
    Current ..............................     $  571,000        $678,000         $537,000
    Deferrred ............................       (124,000)             --               --
                                               ----------        --------         --------
                                                  447,000         678,000          537,000
                                               ----------        --------         --------
   State
    Current ..............................        149,000         171,000          111,000
    Deferrred ............................       (104,000)             --               --
                                               ----------        --------         --------
                                                   45,000         171,000          111,000
                                               ----------        --------         --------
   Tax asset valuation allowance .........       (650,000)             --               --
                                               ----------        --------         --------
                                               $ (158,000)       $849,000         $648,000
                                               ==========        ========         ========
</TABLE>

     The Company's effective tax rate is composed of the following for the
years ended January 3, 1999, December 28, 1997 and December 29, 1996,
respectively:

<TABLE>
<CAPTION>
                                                                     FISCAL YEARS ENDED
                                                        ---------------------------------------------
                                                         JANUARY 3,     DECEMBER 28,     DECEMBER 29,
                                                            1999            1997             1996
                                                        ------------   --------------   -------------
<S>                                                     <C>            <C>              <C>
   Federal statutory rate ...........................        34.0%           34.0%           34.0%
   State income tax, net of federal benefit .........         2.2             4.5             3.6
   FICA tip credits .................................       (14.7)           (7.7)           (5.3)
   Goodwill amortization ............................         5.1             2.8             3.3
   Valuation allowance adjustment ...................       (47.6)           (5.3)           (3.0)
   Provision for asset impairment ...................        15.4              --              --
   Other ............................................       ( 6.0)            5.7            (1.6)
                                                            -----            ----            ----
                                                            (11.6)%          34.0%           31.0%
                                                            =====            ====            ====
</TABLE>

     As of January 3, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,902,000 which expire
between Fiscal 2006 and Fiscal 2009. The Company also had approximately
$395,000 of general business credit carryforwards which expire by 2013. The
Company had an ownership change in both Fiscal 1994 and Fiscal 1996 as defined
by Internal Revenue Code Section 382, which limits the amount of net operating
loss and credit carryforwards that may be used against taxable income to
approximately $25,000 per year. Any portion of the $25,000 amount not utilized
in


                                       47
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES--(CONTINUED)

any year will carry forward to the following year subject to the 15 year
limitation on carryforward of net operating losses and credits. All of the
Company's net operating loss carryforwards and approximately $71,000 of credits
are subject to the annual limitation. For financial reporting purposes, a
valuation allowance of $827,000 as of January 3, 1999 has been recognized to
offset the deferred tax assets.

     During Fiscal 1998, the deferred tax asset valuation allowance was reduced
by $650,000, based primarily upon estimates of future taxable income. Although
realization is not assured, management believes that the net deferred tax asset
represents management's best estimate, based upon the weight of available
evidence as prescribed in SFAS No. 109, of the amount which is more likely than
not to be realized. If such evidence were to change, based upon near-term
operating results and longer-term projections, the amount of the valuation
allowance recorded against the gross deferred tax asset may be increased or
decreased. Also, if certain substantial changes in the Company's ownership
should occur, there could be a further limitation on the amount of loss
carryforwards or tax credits which could be utilized.

     Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred income tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
                                                                JANUARY 3, 1999
                                                  -------------------------------------------
                                                    CURRENT     NON-CURRENT         TOTAL
                                                  ----------   -------------   --------------
<S>                                               <C>          <C>             <C>
   Pre-opening costs and other assets .........   $    --      $  68,000         $   68,000
   Accrued liabilities ........................   415,000        248,000            663,000
   Net operating loss carryforwards ...........        --        749,000            749,000
   General business credits ...................   395,000             --            395,000
                                                  -------      ---------         ----------
                                                  810,000      1,065,000          1,875,000
   Valuation allowance ........................                                    (827,000)
                                                                                 ----------
                                                                                 $1,048,000
                                                                                 ==========
</TABLE>


                                       48
<PAGE>


               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES--(CONTINUED)

<TABLE>
<CAPTION>
                                                               DECEMBER 28, 1997
                                                  -------------------------------------------
                                                    CURRENT     NON-CURRENT         TOTAL
                                                  ----------   -------------   --------------
<S>                                               <C>          <C>             <C>
   Pre-opening costs and other assets .........   $    --       $ (582,000)    $ (582,000)
   Accrued liabilities ........................   404,000          497,000        901,000
   Net operating loss carryforwards ...........        --          752,000        752,000
   General business credits ...................        --          290,000        290,000
                                                  -------       ----------     ----------
                                                  404,000          957,000      1,361,000
   Valuation allowance ........................                                (1,361,000)
                                                                               ----------
                                                                               $       --
                                                                               ==========

<CAPTION>
                                                               DECEMBER 29, 1996
                                                  -------------------------------------------
                                                    CURRENT     NON-CURRENT         TOTAL
                                                  ----------   -------------   --------------
<S>                                               <C>          <C>             <C>
   Pre-opening costs and other assets .........   $    --      $(203,000)      $ (203,000)
   Accrued liabilities ........................   289,000        360,000          649,000
   Net operating loss carryforwards ...........        --        788,000          788,000
   General business credits ...................        --        261,000          261,000
                                                  -------      ---------       ----------
                                                  289,000      1,206,000        1,495,000
   Valuation allowance ........................                                (1,495,000)
                                                                               ----------
                                                                               $       --
                                                                               ==========
</TABLE>

11. RELATED PARTY TRANSACTIONS

     On October 16, 1995, a $750,000 loan (the "1995 Loan") was provided to the
Company, consisting of $650,000 from various persons including the Company's
Chairman and $100,000 from an unrelated third party, (the "1995 Lenders"). This
loan bore interest at 12% and was payable on the earlier of March 30, 1996 or
at the time of the Offering. In addition, the loan agreement provided for the
granting of warrants to purchase 200,000 shares of the Company's common stock
at an exercise price of $3.50 per share. In connection with the Offering, the
1995 Lenders agreed to convert the $750,000 owed to them into 165,016 shares of
the Company's common stock and warrants to purchase 82,508 shares of the
Company's common stock (the "Debt Conversion"). The amounts owed were converted
into stock and warrants at $4.50 per share and $0.09 per warrant which
represents the Offering price per share and per warrant, net of underwriters
discount. In connection with the Debt Conversion, the 1995 Lenders were granted
an option (the "Adler option") which gave the 1995 Lenders the right to
purchase an aggregate of up to 24,752 unregistered shares of common stock and
warrants to purchase up to 12,376 shares of the Company's common stock at a
purchase price of $4.50 per share and $0.09 per warrant, respectively,
simultaneously with and in the same proportion to which the underwriter
exercised its over-allotment option. The Debt Conversion was completed

                                       49
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. RELATED PARTY TRANSACTIONS--(CONTINUED)

concurrently with the Offering, and the Adler option was exercised concurrently
with the underwriter's over-allotment option. The warrants to purchase common
stock related to both the Debt Conversion and the Adler option were exercised
during Fiscal 1997.

     Effective February 1, 1996, the 1995 Loan and a $1,000,000 loan which
originated in Fiscal 1993 were extended from February 29, 1996 to May 15, 1996
and effective with the consummation of the Offering, the two $500,000 loans
originated in 1994 were extended from May 15, 1996, to a date 18 months
following the consummation of the Offering (October 23, 1997). As consideration
for these extensions, the Company issued warrants to purchase 150,000 shares of
common stock at a price of $3.50 per share. The Company recognized $112,500 in
compensatory expense during Fiscal 1996 related to the issuance of these
warrants.

     The Company manages three restaurants pursuant to a management and license
agreement which became effective July 1993. These entities are deemed to be
related parties based on the Company's ability to influence the management and
operating policies of the managed restaurants. The Company provides management
services and licenses the Company's proprietary information required to operate
the restaurant for a management fee of 4% of restaurant sales. The management
agreements outline the respective owners ("licensees") responsibility for
funding all restaurant expenses, including food and beverage costs, staffing,
training, recruiting, inventories and working capital. A fourth restaurant is
operated by the Company, for a management fee of 4%, pursuant to an oral
agreement requiring the restaurant to be operated in conformance with the
policies and procedures established by the Company for Shells restaurants. The
management fees paid under these agreements were approximately $415,000,
$398,000 and $388,000 for each of the fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996, respectively.

     The Company has also entered into option agreements with three of the
licensees, effective July 1993, which were amended in August 1995, documenting
the terms by which the Company can acquire the restaurants assets in exchange
for a purchase price of six times the restaurants cash flow, less any
liabilities assumed. The purchase price is to be paid in the form of shares of
the Company's common stock at the prevailing market price. The option is
exercisable by either party upon the Company averaging a market capitalization,
as defined, of $100,000,000 for 20 consecutive trading dates.

12. STOCK COMPENSATION PLAN

     On September 11, 1995, the Company's Board of Directors approved two
employee stock option plans. The options generally vest over three years, one
third annually on the


                                       50
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. STOCK COMPENSATION PLAN--(CONTINUED)

anniversary date of the grant and, under both plans, have a maximum term of ten
years. The weighted average remaining contractual life for the options
outstanding at January 3, 1999 for both plans is approximately seven years. The
1995 Employee Stock Option Plan provided for the issuance of options to
purchase a total of 240,000 shares which, effective May 20, 1997, was increased
to 340,000 shares. The 1996 Employee Stock Option Plan provided for the
issuance of options to purchase a total of 101,000 shares.

     As of January 3, 1999, options to purchase 326,126 shares had been granted
with 165,751 exercisable. There were 10,333 shares purchased through the
exercise of these options through 1998. The exercise prices of the outstanding
options ranged from $5.00 to $5.75. Effective November 3, 1998, 62,000 options
were reissued at the market price on that date, $5.75, for certain option
holders who were previously issued options at market prices above $5.75.

     On May 20, 1997, the stockholders approved the Stock Option Plan for
Non-employee Directors. The plan authorized a total of 100,000 shares to be
reserved for issuance under this director's compensation plan. The Company
granted options to purchase 35,000 and 10,000 during Fiscal 1998 and Fiscal
1997, respectively, at the market price on the date of grant, 12,000 of which
were exercisable as of January 3, 1999. Certain of the 35,000 options granted
in 1998, as well as the repricing of certain of the 45,000 options granted, are
contingent upon stockholder approval of the issuance.

     The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans;
accordingly, no compensation cost has been recognized for the Company's stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per share applicable to
common stock on a pro forma basis would have been as follows for Fiscal 1998,
Fiscal 1997 and Fiscal 1996:

<TABLE>
<CAPTION>
                                                           1998             1997             1996
                                                      -------------   ---------------   -------------
<S>                                                   <C>             <C>               <C>
   Net income applicable to common stock ..........     $ 580,851       $ 1,530,540       $ 945,542
   Basic net income per share .....................     $    0.14       $      0.41       $    0.35
   Diluted net income per share ...................     $    0.13       $      0.32       $    0.29
</TABLE>



                                       51
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. STOCK COMPENSATION PLAN--(CONTINUED)

     The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following assumptions used for grants: ( i) no
dividend yield; (ii) expected volatility of 44%, 54% and 35% for Fiscal 1998,
Fiscal 1997 and Fiscal 1996, respectively; (iii) a risk-free interest rate of
5.3%, 5.5% and 6.4% for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively;
(iv) an estimated option life of three and a half years. The results reported
above may vary depending on the assumptions applied within the model.

     Option activity is summarized below:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                 NUMBER OF         OPTION         AVERAGE
                                                   SHARES           PRICE          PRICE
                                                -----------   ----------------   ---------
<S>                                             <C>           <C>                <C>
   Outstanding at December 31, 1995 .........     159,960      $         5.00     $  5.00
    Granted .................................     101,000           5.00-5.75        5.15
    Exercised ...............................          --                  --          --
    Cancelled ...............................      (2,000)               5.00        5.00
                                                  -------

   Outstanding at December 29, 1996 .........     258,960           5.00-5.75        5.05
    Granted .................................      45,000           5.75-9.50        7.76
    Exercised ...............................      (9,332)          5.00-6.63        5.06
    Cancelled ...............................      (1,667)               5.00        5.00
                                                  -------

   Outstanding at December 28, 1997 .........     292,961           5.00-9.50        5.41
    Granted .................................      87,500          3.50-11.00        5.81
    Exercised ...............................      (1,001)               5.00        5.00
    Cancelled ...............................     (18,667)         5.00-11.25        8.04
                                                  -------

   Outstanding at January 3, 1999 ...........     360,793      $  5.00-$11.00     $  5.50
                                                  =======
</TABLE>



                                       52
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. EARNINGS PER SHARE

     The following table represents the computation of basic and diluted
earnings per share of common stock as required by SFAS No. 128:

<TABLE>
<CAPTION>
                                                                    FISCAL YEARS ENDED
                                                       ---------------------------------------------
                                                        JANUARY 3,     DECEMBER 28,     DECEMBER 29,
                                                           1999            1997             1996
                                                       ------------   --------------   -------------
<S>                                                    <C>            <C>              <C>
   Net Income ......................................   $ 831,117        $1,649,527      $1,443,965
   Preferred shares accretion ......................    (110,644)          (74,000)       (117,000)
                                                       ----------       ----------      ----------
   Net income applicable to common stock ...........   $ 720,473        $1,575,527      $1,326,965
                                                       ==========       ==========      ==========
   Weighted common shares outstanding ..............   4,447,881         3,726,949       2,729,417
   Basic net income per share of common stock ......   $    0.16        $     0.42      $     0.49

   Effect of dilutive securities:
   Warrants ........................................     481,428           897,103         529,631
   Stock options ...................................      28,743           126,568          53,603
                                                       ----------       ----------      ----------
   Diluted weighted common shares outstanding ......   4,958,052         4,750,620       3,312,651
                                                       ----------       ----------      ----------
   Diluted net income per share of common stock.....   $    0.15        $     0.33      $     0.40
                                                       ==========       ==========      ==========
</TABLE>

     Diluted earnings per common share excludes anti-dilutive stock options and
warrants of 90,000, 15,500, and 61,000 during 1998, 1997 and 1996,
respectively.

14. PROVISION FOR IMPAIRMENT OF ASSETS

     In the fourth quarter of 1998, the Company recorded a provision of
$620,000 for the write-down of certain impaired assets related to one
restaurant.

     In accordance with SFAS No. 121, the Company identified certain long-lived
assets as impaired. The impairment was recognized when the future undiscounted
cash flows of certain assets were estimated to be less than the assets' related
carrying value. As such, the carrying values were written down to the Company's
estimates of fair value based on the best information available making whatever
estimates, judgments, and projections were deemed necessary.

15. ADOPTION OF STATEMENT OF POSITION 98-5, "REPORTING ON THE COSTS OF START-UP
    ACTIVITIES"

     The Company chose early adoption of a new accounting standard, Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that pre-opening and other start-up costs be expensed as incurred
rather than capitalized. The adoption has been made effective as of the
beginning of the Company's current fiscal year.


                                       53
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


15. ADOPTION OF STATEMENT OF POSITION 98-5, "REPORTING ON THE COSTS OF START-UP
    ACTIVITIES--(CONTINUED)"

As a result of the adoption, the Company has begun to report pre-opening costs
as incurred and not through amortization expense over the subsequent 12 month
period as was done historically. The cumulative effect of the change in
accounting which totaled $692,000 net of income tax benefits or $0.14 per share
diluted, was recorded as a one-time charge in the Company's results of
operations.

16. DEFINED CONTRIBUTION PLAN

     The Company has a defined contribution plan which meets the requirements
of Section 401(k) of the Internal Revenue Code. All salaried employees of the
Company with more than 90 days of service who are at least 21 years of age are
eligible to participate in the plan. The plan allows for a discretionary
matching contribution from the Company. The Company, which pays the plan
expenses, has not contributed any discretionary contributions to date.

17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following table presents the selected quarterly financial data for the
periods indicated (in thousands except per share data). The quarterly data has
been restated to reflect the early adoption of a new accounting standard,
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires that pre-opening and other start-up costs be expensed as
incurred rather than capitalized. The adoption has been


                                       54
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)

made effective as of the beginning of the Company's 1998 fiscal year. The
quarterly results for Fiscal 1998 reflect the restatement of previously issued
quarterly results to reflect the change in accounting standard:

<TABLE>
<CAPTION>
                                                                          QUARTER ENDED
                                           ----------------------------------------------------------------------------
                                            MARCH 29, 1998     JUNE 28, 1998     SEPTEMBER 27, 1998     JANUARY 3, 1999
                                           ----------------   ---------------   --------------------   ----------------
<S>                                        <C>                <C>               <C>                    <C>
 Revenues ..............................       $21,478           $ 21,812             $ 19,844             $ 21,015
 Income (loss) from operations .........         2,109              1,682                  375               (2,263)
 Income (loss) before benefit
  (provision) for income taxes .........         2,009              1,530                  271               (2,445)
 Cumulative effect of change in
  accounting for pre-opening
  costs, net of income tax
  benefit ..............................          (692)                --                   --                   --
 Net income (loss) .....................           594                979                  173                 (915)
 Net income (loss) applicable to
  common stock .........................           579                883                  173                 (915)
 Basic net income (loss)
  per share ............................       $  0.14           $   0.20             $   0.04             $  (0.21)
 Diluted net income (loss)
  per share ............................       $  0.12           $   0.17             $   0.03             $  (0.21)

<CAPTION>
                                                                           QUARTER ENDED
                                           ------------------------------------------------------------------------------
                                            MARCH 30, 1997     JUNE 29, 1997     SEPTEMBER 28, 1997     DECEMBER 28, 1997
                                           ----------------   ---------------   --------------------   ------------------
<S>                                        <C>                <C>               <C>                    <C>
Revenues ...............................       $ 16,976          $ 16,492             $ 16,596              $15,248
Income (loss) from operations ..........          1,523             1,241                  695                 (594)
Income (loss) before benefit
  (provision) for income taxes .........          1,392             1,145                  669                 (707)
Net income (loss) ......................            919               755                  442                 (466)
Net income (loss) applicable to
  common stock .........................            900               737                  423                 (484)
Basic net income (loss)
  per share ............................       $   0.27          $   0.22             $   0.10              $ (0.11)
Diluted net income (loss)
  per share ............................       $   0.21          $   0.17             $   0.08              $ (0.11)
</TABLE>

     The total of quarterly earnings per share do not equal the annual amount
as earnings per share is calculated independently for each quarter. The fourth
quarters of 1998 and 1997 reflect basic earnings per share, as the diluted
calculation was anti-dilutive.


                                       55
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   None

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The section entitled "Proposal -- Election of Directors" in the Company's
Proxy Statement for the Annual Meeting of Stockholders is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The section entitled "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.


                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K

     (a) Financial Statements

     (1) and (2) See "Index to Financial Statements" at Item 8 of this Annual
Report on Form 10-K.

     (3) Exhibits

       Exhibits Nos. 10.1, 10.2, 10.3, 10.4, 10.5, 10.6 and 10.7 are management
       contracts, compensatory plans or arrangements.


                                       56
<PAGE>

<TABLE>
<CAPTION>

 EXHIBIT
   NO.                                             DESCRIPTION
--------                                           -----------
<S>        <C>
 3.1       Certificate of Incorporation*

           Agreement and Plan of Merger, dated March 31, 1996, by and between Shells Seafood
           Restaurants, Inc., a Delaware Corporation, and Shells Seafood Restaurant, Inc., a Florida
           Corporation.*

 3.2       By-laws.*

 3.3       Specimen Common Stock Certificate.*

 4.1       Form of Warrant Agreement between Shells Seafood Restaurant, Inc. and Continental Stock
           Transfer & Trust Company and Paragon Capital Corporation.*

 4.2       Form of Warrant Agreement between Shells Seafood Restaurants, Inc. and Paragon Capital
           Corporation.*

10.1       Employment Agreement, dated September 1, 1995, between William E. Hattaway and Shells
           Seafood Restaurants, Inc.*

10.2       Employment Agreement, dated September 2, 1993, between Frank C. Roehl, III and Shells
           Seafood Restaurants, Inc.*

10.3       Employment Agreement, dated October 11, 1993, between John R. Ritchey and Shells
           Seafood Restaurants, Inc.*

10.4       Employment Agreement, dated May 18, 1993, between Warren R. Nelson and Shells
           Seafood Restaurants, Inc.*

10.5       1996 Employee Stock Option Plan.*

10.6       1995 Employee Stock Option Plan.*

10.7       1996 Stock Option Plan for Non-Employee Directors*

10.8       Agreement for Purchase and Sale of Assets, dated May 14, 1993, between Shells Seafood
           Restaurants, Inc. and Shells, Inc.*

10.9       Agreement for Assignment of Servicemarks, dated August 19, 1993, between Shells Seafood
           Restaurants, Inc. and Shells, Inc.*

10.10      Agreement and Plan of Merger, dated November 16, 1994, by and among Shells Seafood
           Restaurants, Inc., Shells Seafood Acquisition, Inc. and Shells, Inc.*

10.11      First Amendment of Agreement and Plan of Merger, dated December 13, 1995, by and
           among Shells Seafood Restaurants, Inc., Shells Seafood Acquisition, Inc. and Shells, Inc.*

10.12      Warrant Agreement, dated as of December 29, 1994, relating to warrants to purchase
           230,000 shares of Common Stock, adopted by the Board of Directors of Shells Seafood
           Restaurants, Inc.*

10.13      Registration Rights Agreement, effective as of December 29, 1994, by and among Frederick
           R. Adler, The MicroCap Fund, Inc. and Shells Seafood Restaurants, Inc.*

10.14      Warrant Agreement, dated December 29, 1994, relating to Warrants to purchase 20,000
           shares of Class A Preferred Stock, adopted by the Board of Directors of Shells Seafood
           Restaurants, Inc.*

10.15      Note and Warrant Purchase Agreement among Shells Seafood Restaurants, Inc., and
           Frederick R. Adler, as nominee, dated as of September 19, 1995.*

10.16      Warrant Agreement, dated as of September 19, 1995, relating to Warrants to purchase
           200,000 shares of Common Stock, adopted by the Board of Directors, of Shell Seafood
           Restaurants, Inc.*
</TABLE>


                                       57
<PAGE>

<TABLE>
<CAPTION>

 EXHIBIT
   NO.                                             DESCRIPTION
--------                                           -----------
<S>          <C>
10.17        Distributor Agreement, dated February 17, 1997, between U.S. Foodservice and Shells
             Seafood Restaurants, Inc.*

10.18        Joint Venture Agreement, dated March 1, 1994, between Shells of Melbourne, Inc. and WLH
             Investments, Inc.*

10.19        First Amendment to Joint Venture Agreement, effective as of March 31, 1995 between Shells
             of Melbourne, Inc. and WLH Investments, Inc.*

10.20        Promissory Note in the initial principal amount of $400,000, dated March 8, 1994, by Shells
             Seafood Restaurants, Inc. for the benefit of WLH Investments, Inc.*

10.21        Management and License Agreement, dated March 1, 1994, between Shells of Melbourne
             Joint Venture and Shells Seafood Restaurants, Inc.*

10.22        Management and License Agreement dated July 29, 1993, between Shells of Carrollwood
             Village, Inc. and Shells Seafood Restaurants, Inc., as amended.*

10.23        Management and License Agreement, dated July 28, 1993, between Shells of North Tampa,
             Inc. and Shells Seafood Restaurants, Inc., as amended.*

10.24        Management and License Agreement, dated July 29, 1993, between Shells of Sarasota
             South, Inc. and Shells Seafood Restaurants, Inc., as amended.*

10.25        Amended Option Agreement dated August 10, 1995 between Shells Seafood Restaurants,
             Inc. and Shells of Carrollwood Village, Inc.*

10.26        Amended Option Agreement, dated August 11, 1995 between Shells Seafood Restaurants,
             Inc. and Shells of North Tampa, Inc.*

10.27        Amended Option Agreement, dated August 16, 1995 by and between Shells Seafood
             Restaurants, Inc. and Shells of Sarasota South, Inc.*

10.28        Agreement for Consulting and Management Services and Licensing of Service Marks, dated
             October 4, 1989 by and between Ursula Collaud and Shells of Daytona Beach, Inc., as
             amended by the Stipulation of Settlement dated December 2, 1994.*

10.29        Asset Purchase Agreement, dated September 30, 1994 between Shells of St. Petersburg
             Beach, Inc. and the Bleckley Corporation.*

10.30        Assignment Agreement, dated September 30, 1994 between Shells of St. Pete Beach, Inc.
             and the Bleckley Corporation.*

10.31        Promissory Note in the initial principal amount of $540,000, dated September 30, 1994 by
             Shells of St. Pete Beach, Inc. for the benefit of the Bleckley Corporation.*

10.32        Continuing and Unconditional Guaranty by Shells Seafood Restaurants, Inc. for the benefit of
             the Bleckley Corporation.*

10.33        Security Agreement, dated September 30, 1995 between Shells of St. Pete Beach, Inc. and
             the Bleckley Corporation.*

10.34        Assignment Agreement, dated November 1, 1993 between Shells of Countryside Square,
             Inc. and Clearwater Food Service, Inc.*

10.35        Promissory Note in the initial principal amount of $500,000, dated November 1, 1993 by
             Shells of Countryside Square, Inc. for the benefit of Clearwater Food Service, Inc.*

10.36        Form of Directors Indemnification Agreement.*

10.37        Form of Amended and Restated Common Stock Warrant Agreement, effective as of
             February 1, 1996.*
</TABLE>


                                       58
<PAGE>

<TABLE>
<CAPTION>

 EXHIBIT
   NO.                                             DESCRIPTION
--------                                           -----------
<S>          <C>
10.38        Promissory Note in the principal amount of $453,000, dated September 4, 1996 by Shells
             Seafood Restaurants, Inc. for the benefit of Huntington National Bank of Florida.**

10.39        Line of Credit for $2,000,000 dated July 18, 1996 by Shells Seafood Restaurants, Inc. for the
             benefit of First Union National Bank of Florida.**

10.40        Agreement for the purchase and sale of leases, leasehold improvements, restaurant assets,
             assigned contracts and restaurant licenses by Shells Seafood Restaurants, Inc. for the
             benefit of Islands Florida LP**

10.41        Equipment lease agreement between Captec and Shells Seafood Restaurants, Inc. **

10.42        Loan agreement, dated January 15, 1998, between Shells Seafood Restaurants, Inc. and
             Manufacturers Bank of Florida, in the initial principal amount of $850,000.**

10.43        Loan agreement, dated February 3, 1998, between Shells Seafood Restaurants, Inc. and
             Manufacturers Bank of Florida, in the initial principal amount of $1,000,000.**

10.44        Purchase and Sale agreement, dated October 22, 1997, between Shells Seafood
             Restaurants, Inc. and Vicorp Restaurants, Inc.

10.45        First amendment to the Purchase and Sale agreement, dated October 22, 1997, between
             Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.

10.46        Second amendment to the Purchase and Sale agreement, dated October 22, 1997, between
             Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.

10.47        Asset Purchase and Sale agreement between Shells Seafood Restaurants, Inc. and Chi-
             Chi's, Inc. dated March 12, 1998

10.48        First amendment to the Asset Purchase and Sale agreement between Shells Seafood
             Restaurants, Inc. and Chi-Chi's, Inc.

10.49        Second amendment to the Asset Purchase and Sale agreement between Shells Seafood
             Restaurants, Inc. and Chi-Chi's, Inc.

10.50        Third amendment to the Asset Purchase and Sale agreement between Shells Seafood
             Restaurants, Inc. and Chi-Chi's, Inc.

10.51        Promissory Note, dated July 1, 1998, between Shells Seafood Restaurants, Inc. and
             Manufacturers Bank of Florida, in the initial principal amount of $915,000.

  11         Computation of Per Share Earnings.

  21         Subsidiaries of the Registrant.*

  27         Financial Data Schedule.
</TABLE>

----------------
 * Previously filed with the Securities and Exchange Commission as Exhibits to,
   and incorporated herein by reference from the Company's Registration
   Statement on Form S-1 (File No. 333-1600).
** Previously filed with the Securities and Exchange Commission as Exhibits to,
   and incorporated herein by reference from the Company's Form 10-K.

   (b) Reports on Form 8-K

       None.


   (c) Exhibits
 

                                       59
<PAGE>

                                  SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                 SHELLS SEAFOOD RESTAURANTS, INC.


                                 BY: /s/ WILLIAM E. HATTAWAY
                                    --------------------------------------------
                                     William E. Hattaway
                                     President


Dated: March 19, 1999

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report had been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
        NAME AND SIGNATURE                       TITLE                    DATE
        ------------------                       -----                    ----
<S>                                  <C>                            <C>
/s/  WILLIAM E. HATTAWAY             President and Director         March 19, 1999
---------------------------------
     William E. Hattaway

/s/  WARREN R. NELSON                Vice President of Finance,     March 19, 1999
---------------------------------    Chief Financial Officer,
     Warren R. Nelson                Treasurer and Secretary
                           
/s/  FREDERICK R. ADLER              Chairman of the Board          March 19, 1999
---------------------------------
     Frederick R. Adler

/s/  PHILIP R. CHAPMAN               Director                       March 19, 1999
---------------------------------
     Philip R. Chapman

/s/  CHRISTOPHER D. ILLICK           Director                       March 19, 1999
---------------------------------
     Christopher D. Illick

/s/  RICHARD A. MANDELL              Director                       March 19, 1999
---------------------------------
     Richard A. Mandell

/s/  KAMAL MUSTAFA                   Director                       March 19, 1999
---------------------------------
     Kamal Mustafa

/s/  JAY S. NICKSE                   Director                       March 19, 1999
---------------------------------
     Jay S. Nickse

/s/  EDWIN F. RUSSO                  Director                       March 19, 1999
---------------------------------
     Edwin F. Russo
</TABLE>



                                       60

<PAGE>


                                 EXHIBIT INDEX
<TABLE>
<CAPTION>

EXHIBIT
   NO.    DESCRIPTION
-------   -----------
<S>          <C>
10.44        Purchase and Sale agreement, dated October 22, 1997, between Shells Seafood
             Restaurants, Inc. and Vicorp Restaurants, Inc.

10.45        First amendment to the Purchase and Sale agreement, dated October 22, 1997, between
             Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.

10.46        Second amendment to the Purchase and Sale agreement, dated October 22, 1997, between
             Shells Seafood Restaurants, Inc. and Vicorp Restaurants, Inc.

10.47        Asset Purchase and Sale agreement between Shells Seafood Restaurants, Inc. and Chi-
             Chi's, Inc. dated March 12, 1998

10.48        First amendment to the Asset Purchase and Sale agreement between Shells Seafood
             Restaurants, Inc. and Chi-Chi's, Inc.

11           Computation of Per Share Earnings.

27           Financial Data Schedule.
</TABLE>