================================================================================
                                 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 (52 WEEKS) ENDED JANUARY 2, 2000

                                       OR

         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE 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, $.01 PAR VALUE.


     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 8, 2000 and the assumption for this
computation only that all directors and executive officers are affiliates of
the Registrant) was $5,040,544.

     As of March 8, 2000, 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)

     The Proxy Statement of Shells Seafood Restaurants, Inc. (the "Company") to
be filed with the Securities and Exchange Commission in connection with
solicitations of proxies for the Company's 1999 Annual Meeting of Stockholders
scheduled to be held on May 17, 2000 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, was merged
with and into the Company (the "Merger") and became a wholly-owned subsidiary
of the Company.

CONCEPT AND STRATEGY

     As of January 2, 2000, 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, nine were located in Ohio, five were located in Illinois,
two were located in Indiana and one was located in Kentucky. The Company opened
one restaurant during Fiscal 1999. In September 1999, the Company closed a
Cincinnati, Ohio (Western Hills) restaurant, which was opened in February 1998.

     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, crawfish, 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 39 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.

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. The Company continued its expansion in the Midwest
markets by opening 10 new restaurants in 1998 and one in 1999 in these markets.
The decision to expand into

                                       2
<PAGE>

the Midwest markets was made in an attempt to diversify and minimize the
seasonal effect of the Florida market. At the present time, the Company intends
to continue to focus its efforts on increasing the financial performance of its
existing restaurants and the Company as a whole, and does not have plans to
open additional restaurants in Fiscal 2000.

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 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 six of its sites, which are financed real estate purchases.

RESTAURANT LOCATIONS

     As of March 2000, the Company managed and operated 49 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 four owned restaurants, including two
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 three owned restaurants which are
located in 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,


                                       3
<PAGE>

(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.

RESTAURANT OPERATIONS

     MANAGEMENT AND EMPLOYEES. The Company currently employs 10 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 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 a 12 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. From time-to-time, the Company
alternatively utilizes a seven week training program for new managers who
already have significant general manager or multi-unit experience. 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


                                       4
<PAGE>

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 generally 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.

     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") 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 Manager of Quality
Control and 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


                                       5
<PAGE>

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 visibility and name
recognition through the use of billboards, radio and television advertisements.
The Company's strategy has been to develop a significant number of restaurants
in a market to provide for the Company's cost-effective use of television and
radio advertising and other marketing efforts. The Company has been unable to
achieve advertising efficiencies in selected markets based on the existing
number of restaurants.

JOINT VENTURE AND THIRD-PARTY OWNED RESTAURANTS

     The Shells restaurant system consists of (i) 44 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


                                       6
<PAGE>

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.

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


                                       7
<PAGE>

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, 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.

     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,


                                       8
<PAGE>

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 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 2, 2000, the Company employed approximately 2,550 persons,
of whom approximately 250 were management or administrative personnel employed
on a salaried basis and 2,300 were employed in non-management restaurant
positions on an hourly basis. The Company employed approximately 1,000
employees on a full-time 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     56   President and Director
Arthur J. DeAngelis     45   Vice President of Operations
Norma C. Karter         49   Vice President of Marketing
Warren R. Nelson        48   Vice President of Finance, Chief Financial Officer,
                             Treasurer and Secretary

     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.

                                       9
<PAGE>

     Arthur J. DeAngelis joined Shells Seafood Restaurants in April 1999 as
Vice President of Operations. Mr. DeAngelis previously served as Market Partner
with P.F. Changs China Bistro from October 1996 until December 1998. From
November 1995 until October 1996, Mr. DeAngelis was employed with Quality
Dining Inc. as Vice President / Concept Head of Grady's American Grill. From
July 1988 until November 1995, Mr. DeAngelis was employed with Brinker
International where he held positions of Senior Vice-President / Concept Head
of Grady's American Grill, Vice-President of Operations and Area Director.

     Norma C. Karter joined Shells Seafood Restaurants in March 2000 as Vice
President of Marketing. From April 1995 to June 1999, Ms. Karter served as Vice
President of Marketing for Eateries, Inc. a $100 million restaurant chain
located in Oklahoma City. Eateries is the parent company of Garfield's
Restaurant & Pub, Garcia's and Pepperoni Grill. From January 1980 until August
1995, Ms. Karter was employed by Metromedia Restaurant Group, owners of
Bennigan's, Ponderosa and Steak and Ale, where she held positions of Director
of Marketing, Marketing Manager, and Promotion Manager.

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

     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. Historically, our cash requirements have exceeded our cash flow from
operations. This has mainly been due to costs associated with developing and
opening new restaurants. At January 2, 2000, we had a working capital
deficiency of $3,925,000. We believe that projected cash flow from operations
will satisfy our contemplated cash requirements for at least the next 12
months. These plans may change and our assumptions may be faulty.


                                       10
<PAGE>

     We may have to seek additional financing from other sources if:

     o  our expansion plans change;

     o  our projections or assumptions are inaccurate because of unanticipated
        expenses;

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

     o  projected cash flows are not sufficient to cover costs of operations,
        remodeling or 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 adversely affect our results of operations. If we have to raise
additional capital through the sale of our equity, our existing stockholders
could be substantially diluted.

     WE HAVE HAD DIFFICULTY WITH OUR MIDWEST EXPANSION AND MANAGING OUR GROWTH.
We initially will 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 costs per restaurant 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. In addition, successfully managing growth includes
maintaining point-of-sale accounting and cash management systems, monitoring
restaurants, controlling costs, tracking inventory usage, and maintaining
effective quality controls. We cannot assure you that our recent historical or
any future expansion will be successful.

     To date, the operating performance of the Midwest stores has been below
that of the Florida stores. Many of these stores have been and continue to be
unprofitable. Although we anticipate that operating performance will improve in
the Midwest as operational execution and advertising efficiency is achieved in
the various markets, we cannot assure you that the Midwest stores will attain
the same levels of operating performance as the Florida stores, or that they
will be profitable.

     In addition, if we experience prolonged periods of unfavorable operating
results at existing or future restaurants or view the prospects for a
restaurant to be less than satisfactory, we may elect 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. In September 1999, the
Company closed one of its restaurants in the Midwest and is continually
monitoring the operations and financial performance with respect to certain of
its other existing restaurants.


                                       11
<PAGE>

     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:

     o  the seasonal nature of our business;

     o  weather conditions in Florida; and

     o  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. 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 U.S. Foods could materially adversely affect us.
Also, substantial price increases imposed by these suppliers in the absence of
alternative sources of supply in a timely manner, could 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


                                       12
<PAGE>

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:

     o  adjusting selected menu prices;

     o  purchasing seafood directly from numerous suppliers; and

     o  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 supply and price fluctuations or that we will not be
subject to significantly increased costs. A shortage of available seafood could
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:

     o  price;

     o  service;

     o  food quality, including taste, freshness, healthfulness and nutritional
        value; and

     o  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.


                                       13
<PAGE>

     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 entree offerings. 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 that:

     o  consumers will be able to distinguish our products from competitive
        products;

     o  substantially equivalent food products will not be introduced by our
        competitors; or

     o  we will be able to compete successfully.

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

     o  changes in consumer preferences, tastes and eating habits;

     o  demographic trends and traffic patterns;

     o  increases in food and labor costs;

     o  inflation; and

     o  national, regional and local economic conditions.

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

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

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

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

     o  regulations relating to public health; and

     o  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


                                       14
<PAGE>

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 sales of alcoholic beverages.
State and local regulation of the sale of alcoholic beverages require 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:

     o  the minimum hourly wage requirements;

     o  workers compensation insurance rates;

     o  health care insurance costs; and

     o  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 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 under certain
conditions. A vendor can be held liable under certain conditions for damage
caused by a person who was served alcoholic beverages by that vendor. 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 two 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:

     o  do not or will not violate the proprietary rights of others;

     o  would be upheld if challenged; or

     o  that we would not be prevented from using our servicemarks.

                                       15
<PAGE>

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 agreements with our
executives and managers, 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 our
executive management and other key personnel. We have entered into employment
agreements with our executives. The loss of the services of one of our
executives or 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 38% of our outstanding common stock. As a
result, such persons, acting together, will be able to exert significant
influence and control over us, including the election of our directors,
regarding any proposed dissolution, merger or sale of our assets, and generally
in the direction of our affairs.

     ABSENCE OF 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.

     PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT. 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 our common
stock. In addition, the potential issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control,


                                       16
<PAGE>

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 is terminable by either party upon four months
prior written notice. The annual rent payable under the lease is approximately
$117,000.

     All but six 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 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, singly 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.

                                       17
<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 the high and low per
share price of the Company's common stock as reported by Nasdaq.

                                COMMON STOCK
                           -----------------------
                              HIGH          LOW
                           ----------   ----------
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

FISCAL 1999
-----------
First quarter ..........    $  5.50      $  3.50
Second quarter .........    $  4.75      $  3.50
Third quarter ..........    $  4.25      $  2.63
Fourth quarter .........    $  3.75      $  2.06

     The number of stockholders of record of the Company's common stock on
March 8, 2000 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.

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.


                                       18
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following table sets forth selected historical consolidated financial
data for the Company. The historical consolidated financial data for the
Company is for the year (52 weeks) ended January 2, 2000 ("Fiscal 1999"), the
year (53 weeks) ended January 3, 1999 ("Fiscal 1998"), and the years (52 weeks)
ended December 28, 1997 ("Fiscal 1997"), December 29, 1996 ("Fiscal 1996"), and
December 31, 1995 ("Fiscal 1995"). 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)   YEAR (53 WEEKS)            YEAR (52 WEEKS) ENDED
                                                   ENDED             ENDED      -------------------------------------------
                                                 JANUARY 2,       JANUARY 3,     DECEMBER 28,   DECEMBER 29,   DECEMBER 31,
                                                    2000             1999            1997           1996           1995
                                             ----------------- ---------------- -------------- -------------- -------------
<S>                                          <C>               <C>              <C>            <C>            <C>
Statement of Operations Data:
Revenues
 Restaurant sales ..........................     $94,798           $83,734         $64,914        $39,405        $28,269
 Management fees ...........................         407               415             398            388            352
                                                 -------           -------         -------        -------        -------
 Total revenues ............................      95,205            84,149          65,312         39,793         28,621
                                                 -------           -------         -------        -------        -------
Costs and expenses
 Cost of sales .............................      34,356            29,342          22,967         14,017         11,220
 Labor and other related
   expenses ................................      27,839            23,749          17,674         10,221          7,680
 Other restaurant operating
   expenses ................................      20,623            17,317          13,432          8,266          6,301
 General and administrative
   expenses ................................       7,438             6,210           4,940          3,351          2,316
 Depreciation and amortization .............       3,320             2,702           1,788            927            664
 Pre-opening expenses ......................         215             2,306           1,646            347            295
 Provision for impairment of
   assets ..................................       4,595               620              --             --             --
                                                 -------           -------         -------        -------        -------
Income (loss) from operations ..............      (3,181)            1,903           2,865          2,664            145
Other income (expense):
 Interest expense, net .....................        (789)             (341)           (148)          (170)          (409)
 Other expense, net ........................          (6)              (18)            (44)          (233)           (33)
                                                 -------           -------         -------        -------        -------
Income (loss) before elimination of
 minority partner interest and
 income taxes ..............................      (3,976)            1,544           2,673          2,261           (297)
Elimination of minority partner
 interest ..................................        (250)             (179)           (174)          (169)          (106)
                                                 -------           -------         -------        -------        -------
Income (loss) before benefit
 (provision) for income taxes ..............      (4,226)            1,365           2,499          2,092           (403)
Income tax benefit (provision) (1) .........       1,512               158            (849)          (648)            --
Cumulative effect of change in
 accounting principle for pre-
 opening costs, net of income tax
 benefit ...................................          --              (692)             --             --             --
                                                 -------           -------         -------        -------        -------
Net income (loss) ..........................      (2,714)              831           1,650          1,444           (403)
Preferred shares accretion .................          --              (111)            (74)          (117)          (167)
                                                 -------           -------         -------        -------        -------
Net income (loss) applicable to
 common stock ..............................     $(2,714)          $   720         $ 1,576        $ 1,327        $  (570)
                                                 =======           =======         =======        =======        =======
</TABLE>

                                      19
<PAGE>
<TABLE>
<CAPTION>
                                                            FISCAL YEARS ENDED
                                                -------------------------------------------
                                                 JANUARY 2,     JANUARY 3,     DECEMBER 28,
                                                    2000           1999            1997
                                                ------------   ------------   -------------
<S>                                             <C>            <C>            <C>
Basic net income (loss) per share ...........     $ (0.61)        $ 0.16         $ 0.42
Diluted net income (loss) per share .........     $ (0.61)        $ 0.15         $ 0.33
</TABLE>


<TABLE>
<CAPTION>
                                                                           FISCAL YEARS ENDED
                                                               -------------------------------------------
                                                                JANUARY 2,     JANUARY 3,     DECEMBER 28,
                                                                   2000           1999            1997
                                                               ------------   ------------   -------------
<S>                                                            <C>            <C>            <C>
Operating Data:
System-wide sales:
 Company-owned restaurants (2) .............................    $  94,798       $ 83,734       $ 64,914
 Licensed restaurants ......................................       10,166         10,385          9,947
                                                                ---------       --------       --------
                                                                $ 104,964       $ 94,119       $ 74,861
                                                                =========       ========       ========
Number of restaurants (at end of period):
 Company-owned restaurants (2) .............................           45             45             36
 Licensed restaurants ......................................            4              4              4
                                                                ---------       --------       --------
                                                                       49             49             40
                                                                ---------       --------       --------
Average annual sales per Company-owned and
 joint venture restaurant open for full period (3) .........    $   2,197       $  2,156       $  2,110
Increase in Company-owned and joint venture
 restaurant same store sales (3) ...........................          3.9%           2.5%           2.5%
</TABLE>


<TABLE>
<CAPTION>
                                               JANUARY 2,     JANUARY 3,     DECEMBER 28,     DECEMBER 29,     DECEMBER 31,
                                                  2000           1999            1997             1996             1995
                                              ------------   ------------   --------------   --------------   -------------
<S>                                           <C>            <C>            <C>              <C>              <C>
Balance sheet data:
Working capital (deficiency) ..............     $ (3,925)      $ (4,047)        $   484         $ (1,418)       $ (4,722)
Total assets ..............................       30,668         34,895          26,566           18,373          10,438
Long-term debt ............................        5,656          5,189           1,449            1,161           1,706
Minority partner interest .................          590            519             514              512             574
Redeemable preferred shares ...............           --             --           1,372            1,668           1,551
Stockholders' equity (deficiency) .........       13,746         16,460          14,521            7,472            (889)
</TABLE>

----------------
(1) The effective tax rates for fiscal years 1999, 1998 and 1997 include the
    effect of recognizing tax benefits that were fully reserved prior to 1997.
    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 1999, 1998 and 1997 to 36%, 36% and
    34%, 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) Includes one Company owned restaurant which until July 14, 1995 was owned
    by a joint venture and one joint venture restaurant in which the Company
    has a 51% equity interest.

(3) 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.


                                       20
<PAGE>

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

GENERAL

     As of January 2, 2000, 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 6,700 square feet in size and have an average seating
capacity of approximately 220 seats. Average annual restaurant sales during the
year (52 weeks) ended January 2, 2000 for the 30 restaurants open for the full
year were approximately $2,197,000. The Company's food sales and liquor sales
accounted for 89% and 11% of revenues, respectively, for the year (52 weeks)
ended January 2, 2000.

     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 2,     JANUARY 3,     DECEMBER 28,
                                                                           2000           1999            1997
                                                                       ------------   ------------   -------------
<S>                                                                    <C>            <C>            <C>
REVENUES:
 Restaurant sales ..................................................        99.6%          99.5%           99.4%
 Management fees ...................................................         0.4%           0.5%            0.6%
                                                                           -----          -----           -----
                                                                           100.0%         100.0%          100.0%
                                                                           -----          -----           -----
COST OF EXPENSES:
 Cost of sales (1) .................................................        36.2%          35.0%           35.4%
 Labor and other related expenses (1) ..............................        29.4%          28.4%           27.2%
 Other restaurant operating expenses (1) ...........................        21.8%          20.7%           20.7%
                                                                           -----          -----           -----
 Total restaurant costs and expenses (1) ...........................        87.4%          84.1%           83.3%
                                                                           -----          -----           -----
 General and administrative expenses ...............................         7.8%           7.4%            7.6%
 Depreciation and amortization .....................................         3.5%           3.2%            2.7%
 Pre-opening expenses ..............................................         0.2%           2.7%            2.5%
 Provision for impairment of assets ................................         4.8%           0.7%            0.0%
                                                                           -----          -----           -----
 Income (loss) from operations .....................................        -3.3%           2.3%            4.4%
 Interest expense, net .............................................        -0.8%          -0.4%           -0.2%
 Other income (expense), net .......................................        -0.1%          -0.1%           -0.1%
 Elimination of minority partner interest ..........................        -0.3%          -0.2%           -0.3%
                                                                          ------         ------          ------
 Income (loss) before benefit (provision) for income taxes .........        -4.5%           1.6%            3.8%
 Income tax benefit (expense) ......................................         1.6%           0.2%           -1.3%
Cumulative effect of change in accounting for pre-opening
 costs, net of income tax benefit ..................................         0.0%          -0.8%            0.0%
                                                                          ------         ------          ------
Net income (loss) ..................................................        -2.9%           1.0%            2.5%
                                                                          ======         ======          ======
</TABLE>

----------------
(1)  As a percentage of restaurant sales.

                                       21
<PAGE>

RESULTS OF OPERATIONS

FISCAL 1999 VERSUS FISCAL 1998

     Total revenues for the 52 weeks ended January 2, 2000 ("Fiscal 1999") were
$95,205,000 as compared to $84,149,000 for the 53 weeks ended January 3, 1999
("Fiscal 1998"). The $11,056,000 or 13.1% increase in revenues primarily was
due to the opening of one new restaurant during 1999, the opening of 10
restaurants at various times during 1998, the addition of lunch in 24
restaurants, and, to a lesser extent, a 3.9% increase in same store sales and
selective menu price increases, offset in part by an additional week of
revenues for Fiscal 1998 and the closing of one restaurant in September 1999.

     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.

     The cost of restaurant sales as a percentage of restaurant sales increased
to 36.2% for Fiscal 1999 from 35.0% for Fiscal 1998. This increase was due to
the addition of free bread service, the effect of combination platters that
were added to the menu in January 1999 to enhance value, and an increase in
purchase costs related to mahi and crab products. 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 as a percentage of restaurant sales
increased to 29.4% during Fiscal 1999 as compared to 28.4% for Fiscal 1998.
This increase was primarily attributable to labor inefficiencies in the
Company's Midwest restaurants caused by lower unit sales volumes as compared to
its Florida restaurants, coupled with higher hourly wage rates, and the
addition of lunch service in 24 restaurants which resulted in reduced labor
efficiency in certain restaurants. Labor and other related expenses generally
consist of restaurant hourly and management payroll, benefits and taxes.

     Other restaurant operating expenses as a percentage of restaurant sales
increased to 21.8% for Fiscal 1999 as compared with 20.7% for Fiscal 1998. The
increase was due to increased advertising expenses in certain markets where the
Company has not achieved media efficiencies as well as higher operating
expenses as a percentage of sales in the Midwest restaurants due to lower unit
sales volumes. 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 as a percentage of revenues increased
to 7.8% for Fiscal 1999 as compared with 7.4% for Fiscal 1998. The increase was
due to $330,000 in severance expense in the fourth quarter of Fiscal 1999 as
well as increased salaries related to two additional area supervisors in the
Midwest during Fiscal 1999. General and


                                       22
<PAGE>

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 expenses as a percentage of revenues
increased to 3.5% for Fiscal 1999 as compared with 3.2% for Fiscal 1998. The
increase was primarily due to new restaurant development in 1998 including the
depreciation of higher capitalized build-out costs of the Midwest restaurants
as well as renovations of existing restaurants.

     Pre-opening expenses decreased from 2.7% of revenues in Fiscal 1998 to
0.2% in Fiscal 1999. This decrease was attributed to 10 restaurant openings
during Fiscal 1998 as compared with one restaurant opening during Fiscal 1999.

     The provision for impaired assets was $4,595,000 or 4.8% of revenues for
Fiscal 1999 as compared to $620,000 or 0.7% of revenues for Fiscal 1998. In the
fourth quarters of Fiscal 1999 and Fiscal 1998, 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 asset impairment charge in Fiscal 1999 related to 11 restaurants,
eight restaurants in the Midwest and three restaurants in Florida and in Fiscal
1998 related to one Midwest restaurant which was closed in September 1999. The
write-downs were necessitated by the current period operating losses as well as
the projected cash flows of the restaurants, certain of which are negative. The
Company currently intends to continue operating these restaurants.

     The net interest expense increased $448,000 to $789,000 for Fiscal 1999
from $341,000 for Fiscal 1998. The increase was due to mortgage financing of
two properties acquired in each of Fiscal 1998 and Fiscal 1999, finance charges
relating to equipment from Fiscal 1998 new restaurant openings and increased
finance charges relating to the Company's forward purchases of inventory
holdings by U.S. Foodservice. The interest income was lower during Fiscal 1999
as compared with Fiscal 1998 due to the higher average cash balance during
Fiscal 1998 resulting from income from operations and the proceeds from the
exercise of warrants to purchase common stock.

     A benefit for income taxes of $1,512,000 was recognized for Fiscal 1999 as
compared to $158,000 during Fiscal 1998. The increased benefit was attributable
to the $4,595,000 asset impairment charge as well as reduced income from
operations exclusive of the non-recurring charges. In Fiscal 1998, the Company
recognized a $650,000 reduction in the valuation allowance which offset the
provision for income taxes.

     The Company's operating results were adversely affected by performance
issues primarily in the Midwest. As a result of the performance of the Midwest
restaurants coupled with the other factors discussed above, the Company's
income from operations decreased $5,084,000 to a loss from operations of
$3,181,000 for Fiscal 1999 as compared with income from operations of
$1,903,000 for Fiscal 1998. This decrease in income from operations was
$3,200,000, excluding the effect of pre-opening expenses and asset


                                       23
<PAGE>

impairment charges. The Company's incurred a net loss of $2,714,000 for Fiscal
1999 in comparison to net income of $831,000 for Fiscal 1998.

FISCAL 1998 VERSUS FISCAL 1997

     Total revenues increased by $18,837,000 or 28.8% from $65,312,000 in
Fiscal 1997 to $84,149,000 in 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.

     Cost of restaurant sales were 35.0% of restaurant sales in Fiscal 1998 as
compared with 35.4% in Fiscal 1997. 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.

     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.

     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 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.

     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.


                                       24
<PAGE>

     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 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 10 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 was related to one restaurant.

     Income from operations decreased $963,000 from $2,865,000 in Fiscal 1997
to $1,902,000 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 $5,053,000 in new
borrowings during 1998 resulting from the purchase of two restaurant properties
as well as the financing related to new restaurant equipment.

     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 taxes,
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 Fiscal
1998. As a result of the adoption, the Company began reporting pre-opening
costs as part of its restaurant operating expenses, which in turn resulted in
lower future amortization expense. Since the Company has amortized pre-opening
costs over a one-year


                                       25
<PAGE>

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.

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>
                                                           1999          1998           1997
                                                       -----------   ------------   -----------
<S>                                                    <C>           <C>            <C>
Net cash provided by operating activities ..........    $  1,529      $   6,285      $  5,184
Net cash used in investing activities ..............      (3,783)       (11,050)       (7,233)
Net cash provided by financing activities ..........         472          4,173         4,330
                                                        --------      ---------      --------
Net (decrease) increase in cash ....................    $ (1,782)     $    (592)     $  2,281
                                                        ========      =========      ========
</TABLE>

     As of January 2, 2000, the Company's current liabilities of $8,885,000
exceeded its current assets of $4,960,000, resulting in a working capital
deficiency of $3,925,000. 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.

     During Fiscal 1999, the Company's cash position decreased by $1,782,000.
Net cash provided by operating activities totaled $1,529,000, while cash used
in investing activities was $3,783,000 which related to capital expenditures in
connection with the opening of one new restaurant, the remodeling of certain
existing restaurants, and the purchases of two previously leased sites at an
aggregate cost of $1,650,000. The net cash provided by financing activities was
$472,000, which consisted of $1,355,000 in borrowings less repayments of debt
($883,000).

     The Company believes that cash flows from operations coupled with the
funds available from anticipated third party financing and cash balances at
January 2, 2000, will be sufficient to satisfy its contemplated cash
requirements for at least 12 months. The Company does not plan to open any new
restaurants during fiscal year 2000, as it focuses on taking corrective actions
aimed at mitigating factors that management believes contributed to the
operating losses in many of the Midwest units.

     The Company from time-to-time may utilize real estate mortgage and
restaurant equipment financing with various banks or financing institutions as
necessary to facilitate expansion. In the event that the Company's plans change
or its assumptions prove to be


                                       26
<PAGE>

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, the Company could be
required to seek additional financing from sources not currently anticipated.
There can be no assurance that third party financing will be available to the
Company when needed, on acceptable terms, or at all. Effective November 16,
1999, the Company has a $1,000,000 line of credit available until January 31,
2001 through its Chairman, Frederick R. Adler. As consideration for granting
the Company this line of credit, the expiration date of certain outstanding
warrants to purchase common stock held by Mr. Adler or related parties was
extended to January 31, 2001. The Company has $918,000 of principal
indebtedness due in 2000 which is expected to be repaid out of the Company's
cash flow from operations.

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, in large measure, 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 the Company's Midwest markets
will, over time, reduce some of the existing seasonal fluctuations.

     In addition, quarterly results have been 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 Company incurred approximately $60,000 of Year 2000 project expenses
through January 2, 2000. The Company did not experience any adverse effects on
its financial condition or results of operations as a result of any Year 2000
problems.

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


                                       27
<PAGE>

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, "Accounting
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 (that is gains and
losses) depends upon the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended, will be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS
No. 133 is not expected to materially affect the Company's consolidated
financial statements.


                                       28
<PAGE>

ITEM 8. FINANCIAL STATEMENTS


                                   INDEX TO

                       CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              -----
<S>                                                                             <C>
Independent Auditors' Report ................................................   30

Consolidated Balance Sheets as of January 2, 2000 and January 3, 1999 .......   31

Consolidated Statements of Operations for the year (52 weeks) ended
 January 2, 2000, the year (53 weeks) ended January 3, 1999 and the
 year (52 weeks) ended December 28, 1997 ....................................   32

Consolidated Statements of Stockholders' Equity for the year (52 weeks) ended
 January 2, 2000, the year (53 weeks) ended January 3, 1999 and the
 year (52 weeks) ended December 28, 1997 ....................................   33

Consolidated Statements of Cash Flows for the year (52 weeks) ended
 January 2, 2000, the year (53 weeks) ended January 3, 1999 and
 the year (52 weeks) ended December 28, 1997 ................................   34

Notes to Consolidated Financial Statements ..................................   35
</TABLE>


                                       29
<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 2,
2000 and January 3, 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year (52 weeks) ended January 2,
2000, the year (53 weeks) ended January 3, 1999 and the year (52 weeks) ended
December 28, 1997. 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 2, 2000 and January 3, 1999 and the results of its operations and
its cash flows for the year (52 weeks) ended January 2, 2000, the year (53
weeks) ended January 3, 1999 and the year (52 weeks) ended December 28, 1997 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.


/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
Tampa, Florida
February 18, 2000


                                       30
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                            JANUARY 2, 2000     JANUARY 3, 1999
                                                           -----------------   ----------------
<S>                                                        <C>                 <C>
                      ASSETS
Cash ...................................................      $ 2,940,919         $ 4,723,121
Inventories ............................................        1,029,324             954,066
Other current assets ...................................          703,548           1,282,641
Receivables from related parties .......................          191,528              35,261
Deferred tax asset, net ................................           94,551             110,551
                                                              -----------         -----------
   Total current assets ................................        4,959,870           7,105,640
Property and equipment, net ............................       18,314,555          22,240,255
Prepaid rent ...........................................          544,093             622,368
Other assets ...........................................          691,894             690,571
Goodwill ...............................................        3,092,995           3,299,191
Deferred tax asset, net ................................        3,064,449             937,449
                                                              -----------         -----------
    TOTAL ASSETS .......................................      $30,667,856         $34,895,474
                                                              ===========         ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable .......................................      $ 3,755,225         $ 6,318,544
Accrued expenses .......................................        3,742,582           3,432,332
Sales tax payable ......................................          469,061             489,688
Current portion of long-term debt ......................          917,728             912,333
                                                              -----------         -----------
   Total current liabilities ...........................        8,884,596          11,152,897
Deferred rent ..........................................        1,791,625           1,574,092
Long-term debt, less current portion ...................        5,656,493           5,189,481
                                                              -----------         -----------
   Total liabilities ...................................       16,332,714          17,916,470
Minority partner interest ..............................          589,583             519,257
                                                              -----------         -----------
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 shares issued
  and outstanding ......................................           44,540              44,540
Additional paid-in-capital .............................       14,161,010          14,161,010
Retained earnings (deficit) ............................         (459,991)          2,254,197
                                                              -----------         -----------
   Total stockholders' equity ..........................       13,745,559          16,459,747
                                                              -----------         -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............      $30,667,856         $34,895,474
                                                              ===========         ===========
</TABLE>

                 See notes to Consolidated Financial Statements.


                                       31
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       FISCAL YEARS ENDED
                                                          --------------------------------------------
                                                             JANUARY 2,     JANUARY 3,    DECEMBER 28,
                                                                2000           1999           1997
                                                          --------------- -------------- -------------
<S>                                                       <C>             <C>            <C>
REVENUES: ...............................................    95,204,840     84,149,214     65,312,464
                                                             ----------     ----------     ----------
COST AND EXPENSES:
 Cost of sales ..........................................    34,355,725     29,341,688     22,967,259
 Labor and other related expenses .......................    27,839,524     23,749,450     17,673,808
 Other restaurant operating expenses ....................    20,622,781     17,317,281     13,431,530
 General and administrative expenses ....................     7,437,718      6,210,113      4,940,173
 Depreciation and amortization ..........................     3,320,289      2,701,969      1,788,358
 Pre-opening expenses ...................................       214,864      2,305,944      1,646,271
 Provision for impairment of assets .....................     4,595,000        620,000             --
                                                             ----------     ----------     ----------
                                                             98,385,901     82,246,445     62,447,399
                                                             ----------     ----------     ----------
INCOME (LOSS) FROM OPERATIONS ...........................    (3,181,061)     1,902,769      2,865,065
                                                             ----------     ----------     ----------
OTHER INCOME (EXPENSE):
 Interest expense .......................................      (921,227)      (550,267)      (364,645)
 Interest income ........................................       131,773        209,583        216,654
 Other expense, net .....................................        (6,090)       (17,711)       (44,500)
                                                             ----------     ----------     ----------
                                                               (795,544)      (358,395)      (192,491)
                                                             ----------     ----------     ----------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY PARTNER
 INTEREST AND INCOME TAXES ..............................    (3,976,605)     1,544,374      2,672,574
ELIMINATION OF MINORITY PARTNER INTEREST ................      (249,583)      (179,257)      (174,047)
                                                             ----------     ----------     ----------
INCOME (LOSS) BEFORE BENEFIT (PROVISION) FOR
 INCOME TAXES ...........................................    (4,226,188)     1,365,117      2,498,527
BENEFIT (PROVISION) FOR INCOME TAXES ....................     1,512,000        158,000       (849,000)
                                                             ----------     ----------     ----------
INCOME (LOSS) BEFORE THE CUMULATIVE EFFECT OF
 CHANGE IN ACCOUNTING PRINCIPLE .........................    (2,714,188)     1,523,117      1,649,527
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
 PRE-OPENING COSTS, NET OF INCOME TAX BENEFIT ...........            --       (692,000)            --
                                                             ----------     ----------     ----------
NET INCOME (LOSS) .......................................    (2,714,188)       831,117      1,649,527
PREFERRED SHARES ACCRETION ..............................            --       (110,644)       (74,000)
                                                             ----------     ----------     ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ............  $ (2,714,188)   $   720,473    $ 1,575,527
                                                           ============    ===========    ===========
BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK
 BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ..........  $      (0.61)   $      0.32    $      0.42
 CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................            --          (0.16)            --
                                                           ------------    -----------    -----------
 BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK ......  $      (0.61)   $      0.16    $      0.42
                                                           ============    ===========    ===========
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF
 COMMON STOCK OUTSTANDING ...............................     4,454,015      4,447,881      3,726,949
                                                           ============    ===========    ===========
DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK
 BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ..........  $      (0.61)   $      0.29    $      0.33
 CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................            --          (0.14)            --
                                                           ------------    -----------    -----------
DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK .....  $      (0.61)   $      0.15    $      0.33
                                                           ============    ===========    ===========
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF
 COMMON STOCK OUTSTANDING ...............................     4,454,015      4,958,052      4,750,620
                                                           ============    ===========    ===========
</TABLE>

                 See notes to Consolidated Financial Statements.

                                       32
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   COMMON STOCK        ADDITIONAL      RETAINED
                                              ----------------------    PAID-IN        EARNINGS
                                                 SHARES     AMOUNT      CAPITAL       (DEFICIT)         TOTAL
                                              ----------- ---------- ------------- --------------- ---------------
<S>                                           <C>         <C>        <C>           <C>             <C>
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 and warrants ......    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

 Net loss ...................................                                         (2,714,188)     (2,714,188)
                                                                                    ------------    ------------
Balance at January 2, 2000 ..................  4,454,015   $44,540    $14,161,010   $   (459,991)   $ 13,745,559
                                               =========   =======    ===========   ============    ============
</TABLE>

                         See notes to Consolidated Financial Statements.


                                       33
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              FISCAL YEARS ENDED
                                                          ----------------------------------------------------------
                                                           JANUARY 2, 2000     JANUARY 3, 1999     DECEMBER 28, 1997
                                                          -----------------   -----------------   ------------------
<S>                                                       <C>                 <C>                 <C>
OPERATING ACTIVITIES:
 Net income (loss) ....................................     $ (2,714,188)       $     831,117        $  1,649,527
 Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
  Depreciation and amortization .......................        3,320,289            2,701,969           1,788,358
  Amortization of Pre-opening expenses ................               --            2,305,944           1,646,271
  Loss on impairment of assets ........................        4,595,000              620,000                  --
  Cumulative effect of accounting change ..............               --              692,000                  --
  Minority partner interest ...........................           70,326                5,210               2,237
  Changes in assets and liabilities:
   Increase in inventories ............................          (75,258)             (92,819)           (197,684)
   (Increase) decrease in receivables from related
     parties ..........................................         (156,267)             104,687              (7,900)
   Decrease (increase) in other assets ................          577,770           (2,857,134)         (1,958,181)
   Increase in deferred tax assets ....................       (2,111,000)          (1,048,000)                 --
   Decrease (increase) in prepaid rent ................           78,275             (298,047)             50,400
   (Decrease) increase in accounts payable ............       (2,563,319)           2,512,911           1,318,690
   Increase in accrued expenses .......................          310,250              550,928             721,616
   (Decrease) increase in sales tax payable ...........          (20,627)             171,465              35,257
   Decrease in income taxes payable ...................               --             (275,216)           (221,000)
   Increase in deferred rent ..........................          217,533              359,949             356,313
                                                            ------------        -------------        ------------
    Total adjustments .................................        4,242,972            5,453,847           3,534,377
                                                            ------------        -------------        ------------
    Net cash provided by operating activities .........        1,528,784            6,284,964           5,183,904
                                                            ------------        -------------        ------------
INVESTING ACTIVITIES:
 Purchase of property and equipment ...................       (3,783,393)         (11,049,890)         (7,233,151)
                                                            ------------        -------------        ------------
 Net cash used in investing activities ................       (3,783,393)         (11,049,890)         (7,233,151)
                                                            ------------        -------------        ------------
FINANCING ACTIVITIES:
 Proceeds from debt financing .........................        1,355,000            5,053,545             703,884
 Repayment of debt ....................................         (882,593)            (616,058)         (1,476,835)
 Redemption of preferred shares .......................               --           (1,482,496)           (370,624)
 Proceeds from the issuance of common stock ...........               --            1,218,285           5,473,742
                                                            ------------        -------------        ------------
 Net cash provided by financing activities ............          472,407            4,173,276           4,330,167
                                                            ------------        -------------        ------------
 Net (decrease) increase in cash ......................       (1,782,202)            (591,650)          2,280,920
CASH AT BEGINNING OF PERIOD ...........................        4,723,121            5,314,771           3,033,851
                                                            ------------        -------------        ------------
CASH AT END OF PERIOD .................................     $  2,940,919        $   4,723,121        $  5,314,771
                                                            ============        =============        ============
Supplemental disclosure of cash flow information:
 Cash paid for interest ...............................     $    877,188        $     524,671        $    377,865
 Cash paid for income taxes ...........................     $    599,000        $     932,813        $  1,070,000
</TABLE>

                 See notes to Consolidated Financial Statements.

                                       34
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation -- Shells Seafood Restaurants, Inc. and subsidiaries
(the "Company") manages and operates 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 servicemark
"Shells" 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 2, 2000 ("Fiscal
1999"), January 3, 1999 ("Fiscal 1998"), and December 28, 1997 ("Fiscal 1997")
were 52, 53 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.

                                       35
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Leasehold improvements and buildings are depreciated over the shorter of the
lease term or 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 quarterly 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. If the total of future
undiscounted cash flows were less than the carrying amount of the property,
fixtures and equipment, the carrying amount is written down to the fair value,
and a loss resulting from value impairment is recognized by a charge to
earnings.

     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 (loss) per share of common stock -- Net income (loss) per
common share is 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 (loss) 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 (loss) per share of common stock is
computed by dividing net income (loss) applicable to common stock by the
weighted average number of shares of common stock and common stock equivalents

                                       36
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
outstanding. The diluted net loss per common share is computed by dividing net
loss by the weighted average common shares outstanding excluding common stock
equivalents as they would be anti-dilutive.

     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
judgment 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 Fiscal 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 Fiscal 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 it operates within one segment, as defined in this statement.

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
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 (that is gains and
losses) depends upon the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended, will be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS
No. 133 is not expected to materially affect the Company's consolidated
financial statements.

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

                                       37
<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 2,      JANUARY 3,
                                        2000            1999
                                    ------------   -------------
   Prepaid expenses .............     $499,653     $  616,643
   Accounts receivable ..........      181,251        660,566
   Other current assets .........       22,644          5,432
                                      --------     ----------
                                      $703,548     $1,282,641
                                      ========     ==========

3. PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                                 JANUARY 2,        JANUARY 3,
                                                                    2000              1999
                                                              ---------------   ---------------
<S>                                                           <C>               <C>
   Leasehold improvements .................................   $ 8,338,690       $ 9,415,479
   Equipment ..............................................     7,876,853         8,329,204
   Furniture and fixtures .................................     4,790,375         5,341,091
   Land and buildings .....................................     6,011,552         4,228,492
   Signage ................................................       900,604         1,003,951
   Construction in progress ...............................            --           520,829
                                                              -----------       -----------
                                                               27,918,074        28,839,046
   Less accumulated depreciation and amortization .........    (9,603,519)       (6,598,791)
                                                              -----------       -----------
                                                              $18,314,555       $22,240,255
                                                              ===========       ===========
</TABLE>

4. ACCRUED EXPENSES


     Accrued expenses consist of the following:



<TABLE>
<CAPTION>
                                  JANUARY 2,      JANUARY 3,
                                     2000            1999
                                 ------------   -------------
<S>                              <C>            <C>
   Accrued payroll ...........   $1,288,458     $1,195,863
   Accrued insurance .........      869,079        930,459
   Unearned revenue ..........      753,859        630,865
   Other .....................      831,186        675,145
                                 ----------     ----------
                                 $3,742,582     $3,432,332
                                 ==========     ==========
</TABLE>


                                       38
<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 2,      JANUARY 3,
                                                                            2000            1999
                                                                        ------------   -------------
<S>                                                                     <C>            <C>
Finance agreements, collateralized by equipment, principal and
  interest due monthly through April 2002, interest rates ranging
  from 6.8% - 11.0%. ................................................   $1,815,608     $2,330,988

$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
  rates were 8.0% and 7.25% at January 2, 2000 and
  January 3 1999, respectively. .....................................      929,000        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
  rates were 8.0% and 7.25% at January 2, 2000 and
  January 3 1999, respectively. .....................................      865,000        901,000

$700,000 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 November 2004. The
  interest rate was 8.0% at January 2, 2000. ........................      698,164             --

$655,000 promissory note collateralized by real property owned by
  the Company. Payments are $8,000 monthly with unpaid principal
  due May 2008. The interet rate is fixed at 10.0%. .................      634,151             --

$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 rates were 8.0% and 7.25% at January 2, 2000 and
  January 3, 1999, respectively. ....................................      524,167        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 8.7125% and 7.87% at January 2, 2000 and
  January 3, 1999, respectively. ....................................      355,000        385,000
</TABLE>

                                      39
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


5. LONG-TERM DEBT--(CONTINUED)

<TABLE>
<CAPTION>
                                                                             JANUARY 2,       JANUARY 3,
                                                                                2000             1999
                                                                           --------------   -------------
<S>                                                                        <C>              <C>
$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 9.50% and 8.75% at January 2, 2000 and
 January 3, 1999, respectively. ........................................        357,495         382,695

$540,000 non-interest bearing note, principal payable in variable
  monthly installments through December 2004. The balances are
  net of imputed interest of $97,375 and $126,403 at January 2,
  2000 and January 3, 1999, respectively, at 11%. The note is
  collateralized by a leasehold interest in certain property and fixed
  assets of the Company. ...............................................        223,085         249,119

$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
  at January 2, 2000 and January 3, 1999, respectively, at 9%. The
  note is collateralized by a leasehold interest in certain property
  and fixed assets of the Company. .....................................        172,551         188,845
                                                                             ----------      ----------
                                                                              6,574,221       6,101,814
Less current portion ...................................................       (917,728)       (912,333)
                                                                             ----------      ----------
                                                                             $5,656,493      $5,189,481
                                                                             ==========      ==========
</TABLE>

     The annual maturities of debt as of January 2, 2000 are as follows:

              2000 .........................   $  917,728
              2001 .........................    3,193,311
              2002 .........................      983,074
              2003 .........................      499,875
              2004 .........................      563,076
              Thereafter ...................      417,157
                                               ----------
                                               $6,574,221
                                               ==========


                                       40
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. COMMITMENTS AND CONTINGENCIES

      Prior to January 1, 1995, the Company agreed to pay $520,000 and $540,000
over 10 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 six 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 $4,551,000, $3,916,000, and
$3,112,000 which includes contingent rent of $509,000, $431,000, and $365,000
for Fiscal 1999, Fiscal 1998, and Fiscal 1997, respectively. The approximate
future minimum rental payments under such operating leases as of January 2,
2000 are as follows:


            2000 ........................   $ 3,508,000
            2001 ........................     3,092,000
            2002 ........................     3,127,000
            2003 ........................     2,677,000
            2004 ........................     2,312,000
            Thereafter ..................     7,492,000
                                            -----------
                                            $22,208,000
                                            ===========

     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 $125,000 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 $120,000,

                                       41
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
$116,000, and $126,000 for Fiscal 1999, Fiscal 1998, and Fiscal 1997,
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.

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 $514,000, $358,000, and $350,000 during
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. The Joint Venture paid
the Company $185,000, $157,000, and $150,000 in management and license fees for
Fiscal 1999, Fiscal 1998, and Fiscal 1997, 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. The option has not been exercisable through January
2, 2000.

                                       42
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. 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 approximately $5,474,000
during Fiscal 1997. The Warrants were exercisable until July 16, 1997.

9. 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 8) 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.

     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 amounted to $110,644 and $74,000 during Fiscal
1998 and Fiscal 1997, respectively.

                                       43
<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 2, 2000, January 3, 1999 and December 28, 1997 are as follows:

<TABLE>
<CAPTION>
                                                            FISCAL YEARS ENDED
                                             ------------------------------------------------
                                                JANUARY 2,       JANUARY 3,      DECEMBER 28,
                                                   2000             1999             1997
                                             ---------------   --------------   -------------
<S>                                          <C>               <C>              <C>
   Federal
    Current ..............................    $    540,000       $  571,000        $678,000
    Deferrred ............................      (1,905,000)        (124,000)             --
                                              ------------       ----------        --------
                                                (1,365,000)         447,000         678,000
                                              ------------       ----------        --------
   State
    Current ..............................          59,000          149,000         171,000
    Deferrred ............................        (206,000)        (104,000)             --
                                              ------------       ----------        --------
                                                  (147,000)          45,000         171,000
                                              ------------       ----------        --------
   Tax asset valuation allowance .........              --         (650,000)             --
                                              ------------       ----------        --------
                                              $ (1,512,000)      $ (158,000)       $849,000
                                              ============       ==========        ========
</TABLE>

     The Company's effective tax rate is composed of the following for the
years ended January 2, 2000, January 3, 1999 and December 28, 1997,
respectively:



<TABLE>
<CAPTION>
                                                                    FISCAL YEARS ENDED
                                                        -------------------------------------------
                                                         JANUARY 2,     JANUARY 3,     DECEMBER 28,
                                                            2000           1999            1997
                                                        ------------   ------------   -------------
<S>                                                     <C>            <C>            <C>
   Federal statutory rate ...........................       (34.0)%         34.0%          34.0%
   State income tax, net of federal benefit .........       ( 3.5)           2.2            4.5
   FICA tip credits .................................       ( 7.1)         (14.7)          (7.7)
   Goodwill amortization ............................         1.7            5.1            2.8
   Valuation allowance adjustment ...................          --          (47.6)          (5.3)
   Other ............................................         7.1            9.4            5.7
                                                            -----          -----           ----
                                                            (35.8)%        (11.6)%         34.0%
                                                            =====          =====           ====
</TABLE>

     As of January 2, 2000, the Company has 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 has approximately
$743,000 of general business credit carryforwards which expire by 2018. 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 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

                                       44
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES--(CONTINUED)
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 2, 2000 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 2, 2000
                                                ------------------------------------------
                                                  CURRENT     NON-CURRENT        TOTAL
                                                ----------   -------------   -------------
<S>                                             <C>          <C>             <C>
   Basis difference in fixed assets and other
     assets .................................   $    --      $1,238,000       $1,238,000
   Accrued liabilities ......................   562,000         697,000        1,259,000
   Net operating loss carryforwards .........                   746,000          746,000
   General business credits .................                   743,000          743,000
                                                -------      ----------       ----------
                                                562,000       3,424,000        3,986,000
   Valuation allowance ......................                                   (827,000)
                                                                              ----------
                                                                              $3,159,000
                                                                              ==========
</TABLE>


                                       45
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES--(CONTINUED)

<TABLE>
<CAPTION>
                                                               JANUARY 3, 1999
                                                 -------------------------------------------
                                                   CURRENT     NON-CURRENT         TOTAL
                                                 ----------   -------------   --------------
<S>                                              <C>          <C>             <C>
   Preopening 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
                                                 -------      ---------         ----------
                                                 415,000      1,460,000          1,875,000
   Valuation allowance .......................                                    (827,000)
                                                                                ----------
                                                                                $1,048,000
                                                                                ==========
</TABLE>


<TABLE>
<CAPTION>
                                                              DECEMBER 28, 1997
                                                 -------------------------------------------
                                                   CURRENT     NON-CURRENT         TOTAL
                                                 ----------   -------------   --------------
<S>                                              <C>          <C>             <C>
   Preopening 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)
                                                                              ----------
                                                                              $       --
                                                                              ==========
</TABLE>

11. RELATED PARTY TRANSACTIONS

     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 earned under these agreements were approximately $407,000,
$415,000, and $398,000 for Fiscal 1999, Fiscal 1998, and Fiscal 1997,
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

                                       46
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


11. RELATED PARTY TRANSACTIONS--(CONTINUED)

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. The option has not been exercisable through
January 2, 2000.

     Effective March 23, 1999, the Company entered into a consulting agreement
with Richard A. Mandell, a Director of the Company's Board. The agreement,
which is renewable annually, requires payment of $5,000 quarterly as
compensation for consulting services. Additionally, Mr. Mandell was granted
options to purchase 20,000 shares of the Company's common stock at $2.00, the
market price on the date of grant. Mr. Mandell was paid $15,000 for consulting
services during Fiscal 1999.

     Effective November 16, 1999, Frederick R. Adler, the Company's Chairman,
extended a $1,000,000 line of credit to the Company until January 31, 2001. In
consideration for this line of credit, 425,000 warrants to purchase common
stock issued to The Adler Children Trust and 2001 Partners, L.P. and scheduled
to expire December 31, 1999, were extended until January 31, 2001. There were
no borrowings against this line of credit during 1999.

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 anniversary date of the grant and, under both plans, have
a maximum term of 10 years. The weighted average remaining contractual life for
the options outstanding at January 2, 2000 for both plans is approximately six
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 2, 2000, options to purchase 378,043 shares had been
granted, 264,709 of which were exercisable. There were 10,333 shares purchased
through the exercise of these options through 1999. The exercise prices of the
outstanding options ranged from $2.88 to $5.75. Effective November 3, 1998,
options were reissued at the market price on that date of $5.75, for certain
option holders who were previously issued options at market prices above $5.75.
A total of 62,000 options were repriced at $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

                                       47
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


12. STOCK COMPENSATION PLAN--(CONTINUED)

this director's compensation plan. The Company granted options to purchase
14,000, 35,000 and 10,000 shares during Fiscal 1999, Fiscal 1998 and Fiscal
1997, respectively, at the market price on the date of grant, 27,500 of which
were exercisable as of
January 2, 2000.

     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 (loss) and net income (loss) per share
applicable to common stock on a pro forma basis would have been as follows for
Fiscal 1999, Fiscal 1998 and Fiscal 1997:

<TABLE>
<CAPTION>
                                                         1999              1998             1997
                                                   ----------------   -------------   ---------------
<S>                                                <C>                <C>             <C>
   Net income (loss) applicable to common
     stock .....................................     $ (2,753,314)      $ 580,851       $ 1,530,540
   Basic net income (loss) per share ...........     $      (0.62)      $    0.14       $      0.41
   Diluted net income (loss) per share .........     $      (0.62)      $    0.13       $      0.32
</TABLE>

     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 55%, 44%, and 54% for Fiscal 1999,
Fiscal 1998 and Fiscal 1997, respectively; (iii) a risk-free interest rate of
6.5%, 5.3%, and 5.5% for Fiscal 1999, Fiscal 1998 and Fiscal 1997,
respectively; and (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.

                                       48
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


12. STOCK COMPENSATION PLAN--(CONTINUED)

     Option activity is summarized below:

<TABLE>
<CAPTION>
                                                 NUMBER OF      OPTION        AVERAGE
                                                   SHARES        PRICE         PRICE
                                                -----------   ------------   ----------
<S>                                             <C>           <C>            <C>
   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
    Granted .................................     107,500      2.88 - 5.13      3.86
    Cancelled ...............................     (31,250)     3.78 - 5.13      5.07
                                                  -------
   Outstanding at January 2, 2000 ...........     437,043   $2.88 - $11.00   $  4.97
                                                  =======
</TABLE>

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 2,       JANUARY 3,     DECEMBER 28,
                                                                2000             1999            1997
                                                          ----------------   ------------   -------------
<S>                                                       <C>                <C>            <C>
   Net Income (loss) ..................................     $ (2,714,188)    $ 831,117       $1,649,527
   Preferred share accretion ..........................               --      (110,644)         (74,000)
                                                            ------------     ----------      ----------
   Net income (loss) applicable to
     common stock .....................................     $ (2,714,188)    $ 720,473       $1,575,527
                                                            ============     ==========      ==========
   Weighted common shares outstanding .................        4,454,015     4,447,881        3,726,949
   Basic net income (loss) per share of
     common stock .....................................     $      (0.61)    $    0.16       $     0.42
   Effect of dilutive securities:
   Warrants ...........................................               --       481,428          897,103
   Stock options ......................................               --        28,743          126,568
                                                            ------------     ----------      ----------
   Diluted weighted common shares outstanding .........        4,454,015     4,958,052        4,750,620
                                                            ------------     ----------      ----------
   Diluted net income (loss) per share of
     common stock .....................................     $      (0.61)    $    0.15       $     0.33
                                                            ============     ==========      ==========
</TABLE>


                                       49
<PAGE>

               SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. EARNINGS PER SHARE--(CONTINUED)

     Diluted earnings per common share excludes anti-dilutive stock options and
warrants of 65,000, 90,000, and 15,500, during Fiscal 1999, Fiscal 1998 and
Fiscal 1997, respectively.

14. PROVISION FOR IMPAIRMENT OF ASSETS

     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.

     In the fourth quarters of Fiscal 1999 and Fiscal 1998, the Company
recorded provisions of $4,595,000 and $620,000, respectively, for the
write-down of certain impaired assets in accordance with SFAS No. 121. The 1999
write-down related to 11 restaurants while the 1998 write-down related to one
restaurant. The write-downs were necessitated by the current period operating
losses as well as the projected cash flows of the restaurants.

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 was made effective the beginning of
Fiscal 1998. As a result of the adoption, the Company began reporting
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
Fiscal 1998 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.

                                       50
<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 (the "Proxy Statement" to be filed with the Securities and
Exchange Commission in connection with the Company's Annual Meeting of
Stockholders, scheduled to be held on May 17, 2000, is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The section entitled "Executive Compensation" in the Company's Proxy
Statement 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 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 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, 10.7, 10.53 and 10.54 are
   management contracts, compensatory plans or arrangements.


                                       51
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT                                            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.*

10.11      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.*

10.15      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.*

10.17      Distributor agreement, dated June 1, 1999, 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.*
</TABLE>

                                      52
<PAGE>


<TABLE>
<CAPTION>
 EXHIBIT                                              DESCRIPTION
---------   ----------------------------------------------------------------------------------------------
<S>         <C>
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.*

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.**
</TABLE>

                                      53
<PAGE>


<TABLE>
<CAPTION>
 EXHIBIT                                         DESCRIPTION
---------   -------------------------------------------------------------------------------------
<S>         <C>
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.**

10.52       Consulting agreement, dated March 23, 1999, between Richard A. Mandell and Shells
            Seafood Restaurants, Inc.

10.53       Employment Agreement, dated April 14, 1999, between Arthur J. DeAngelis and Shells
            Seafood Restaurants, Inc.

10.54       Employment Agreement, dated February 28, 2000, between Norma C. Karter and Shells
            Seafood Restaurants, Inc.*

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

                                       54
<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
Dated: March 20, 2000                     President


     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>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
<S>                                  <C>                            <C>
/s/  WILLIAM E. HATTAWAY             President and Director         March 20, 2000
------------------------------
     William E. Hattaway

/s/  WARREN R. NELSON                Vice President of Finance,     March 20, 2000
------------------------------       Chief Financial Officer,
     Warren R. Nelson                Treasurer and Secretary

/s/  FREDERICK R. ADLER              Chairman of the Board          March 20, 2000
------------------------------
     Frederick R. Adler

/s/  PHILIP R. CHAPMAN               Director                       March 20, 2000
           Philip R. Chapman

/s/  CHRISTOPHER D. ILLICK           Director                       March 20, 2000
------------------------------
     Christopher D. Illick

/s/  RICHARD A. MANDELL              Director                       March 20, 2000
------------------------------
     Richard A. Mandell

/s/  KAMAL MUSTAFA                   Director                       March 20, 2000
------------------------------
     Kamal Mustafa

/s/  JAY S. NICKSE                   Director                       March 20, 2000
------------------------------
     Jay S. Nickse
</TABLE>

                                       55