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

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR (52 WEEKS) ENDED DECEMBER 28, 1997.

                                      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        (IRS EMPLOYER IDENTIFICATION NUMBER)
     INCORPORATION OR ORGANIZATION)

              16313 NORTH DALE MABRY HIGHWAY, TAMPA, FLORIDA 
              ----------------------------------------------------
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 

                                 (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:
                          COMMON STOCK, $.01 PAR VALUE.
                          -----------------------------
                                (TITLE OF CLASS)

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. [X]

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 SYSTEM ON MARCH 17, 1998 AND THE ASSUMPTION FOR THIS
COMPUTATION ONLY THAT ALL DIRECTORS AND EXECUTIVE OFFICERS ARE AFFILIATES OF THE
REGISTRANT) WAS $30,246,448.

AS OF MARCH 17, 1998, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK, $.01 PAR VALUE, WAS 4,227,062.


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

                        (To the Extent Indicated Herein)

Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with solicitations of proxies for the Registrant's 1998
Annual Meeting of Stockholders scheduled to be held on May 14, 1998 is
incorporated by reference in Part III, Items 10, 11, 12 and 13 of this Form
10-K.

         When used in this discussion, 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 operating results
         are affected by a wide variety of other factors that could materially
         and adversely affect actual revenues and profitability, including
         changes in consumer preferences, tastes and eating habits; increases in
         food and labor costs; 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.

                                       1

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                                     PART I

ITEM 1. BUSINESS

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

CONCEPT AND STRATEGY

As of December 28, 1997, the Company owned 35 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. There were 33 Shells restaurants located in
Florida, six in Ohio and one in Kentucky. The Company opened nine restaurants
during 1997. In January 1998, the Company closed its Miami, Florida (Mall of the
Americas) location which was one of the units acquired as part of a six unit
acquisition in 1996. In February 1998, the Company opened an additional location
in Cincinnati, Ohio and in March 1998 opened a location in Cleveland, Ohio. The
Shells concept is designed to appeal to a broad range of customers, particularly
families and young adults, by serving generous portions of high-quality seafood
and offering friendly and efficient service at an attractive price point. Shells
restaurants feature a wide selection of seafood items, including shrimp,
oysters, clams, scallops, lobster, crab, and daily fresh fish specials, cooked
to order in a variety of ways: steamed, sauteed, grilled, blackened and fried.
In addition, Shells restaurants offer a wide selection of signature pasta
dishes, appetizers, salads, desserts and full bar service. All Shells
restaurants are open for dinner and thirteen restaurant locations are also open
for lunch.

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

The Company's restaurants average approximately 6,500 square feet in size and
have an average seating capacity of approximately 210 seats. Average annual
restaurant sales during the year (52 weeks) ended December 28, 1997 for the 27
restaurants open for the full year were approximately $2,110,000. The Company's
food sales and liquor sales 

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<PAGE>


accounted for 88% and 12% of revenues, respectively, for the year (52 weeks)
ended December 28, 1997.

EXPANSION STRATEGY

The Company intends to explore the acquisition of multiple units as part of its
expansion strategy into new markets.

The Company plans to open additional restaurants in 1998 in the Florida and
Midwest markets and is in various stages of lease negotiations for sites. The
actual number and location of the new restaurant openings will depend on the
Company's ability to locate suitable properties and execute satisfactory lease
or purchase terms. When opening restaurants outside of Florida, the Company
anticipates focusing on markets that are large enough to support several
restaurants, thereby providing the Company efficiencies in advertising,
supervision and distribution of food and other supplies within that market, and
the potential to capture a significant percentage of market share with several
restaurants. The Company may from time to time make minor adjustments to its
menu to accommodate local preferences in new markets that it serves. The Company
believes that it has a sufficient number of assistant restaurant managers
trained and qualified for promotion to restaurant manager to allow the Company
to transfer experienced restaurant managers to new locations. In tandem with its
expansion plan, the Company must continually hire management candidates
externally or promote qualified candidates internally who then are required to
complete an extensive 10 week training program. Given current economic
conditions and the availability of labor in certain markets, obtaining qualified
candidates for hire and retention can from time to time be difficult.

In March 1998, the Company entered into an agreement to acquire up to seven
restaurant locations in the Chicago and central Illinois areas. Pending
satisfactory completion of due diligence, the Company plans to convert and
reopen these acquired properties as Shells restaurants in the second half of
1998.

The Company has historically converted and renovated existing restaurants into
Shells restaurants in order to minimize initial capital expenditures. The
Company intends to use its existing cash balances, projected cash flows from
operations, third party financing and the proceeds, if any, from the exercise of
warrants to purchase common stock to implement its expansion strategy.

SITE SELECTION

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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 and kitchen facilities 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 two of its
sites, which are financed real estate purchases.

RESTAURANT LOCATIONS

As of March 1998, the Company managed and operated 41 restaurants. The Company's
restaurants are located in the following markets: (i) the Tampa/Sarasota,
Florida market consists of seven owned restaurants which are located in Brandon,
Clearwater, Holmes Beach, Redington Shores, St. Petersburg, St. Pete Beach and
Winter Haven, and the Managed Restaurants which are located in Carrollwood,
North Tampa, Sarasota and South Tampa, (ii) the Orlando, Florida market consists
of eight owned restaurants (including the Melbourne Restaurant) which are
located in Altamonte Springs, Daytona Beach, Kissimmee, New Smyrna Beach, Ocala,
Orlando, Winter Park and Melbourne (iii) the South Florida market consists of
six owned restaurants which are located in Coral Springs, Davie, Ft. Lauderdale,
Kendall, Pembroke Pines and Sunrise, (iv) the Cincinnati, Ohio market which
consists of five owned restaurants including three in Cincinnati, Ohio proper
and one in each of Middletown, Ohio and Florence, Kentucky, (v) the West Palm
Beach, Florida market consists of three owned restaurants which are located in
Delray Beach, Stuart and West Palm Beach, (vi) the Fort Myers, Florida market
consists of two owned restaurants which are located in Fort Myers and Port
Charlotte, (vii) the Columbus, Ohio market which consists of two owned
restaurants, one in each of Columbus and Reynoldsburg, (viii) the Jacksonville,
Florida market which consists of one owned restaurant in Mandarin, (ix) the
Akron, Ohio market which consists of one owned restaurant, (x) the Tallahassee,
Florida market which consists of one owned restaurant, and (xi) the Cleveland,
Ohio market which consists of one owned restaurant.

RESTAURANT OPERATIONS

MANAGEMENT AND EMPLOYEES. The Company currently employs seven area supervisors.
Each area supervisor is responsible for the management of several restaurants,
including management development, recruiting, training, quality of operations
and unit profitability. The Company anticipates hiring a restaurant supervisor
for every five to six

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additional restaurants opened. The staff of a typical dinner-only restaurant
consists of one general manager, two assistant managers, a kitchen manager and
approximately 40 other employees. The restaurants which are also open for lunch
generally have 15 to 20 additional employees. Restaurant management participates
in a discretionary quarterly bonus program based upon the financial results of
their particular restaurant. Bonuses typically average between 25% and 40% of
salary.

RESTAURANT REPORTING. The Company maintains financial and accounting controls
for each restaurant through a central accounting system. Sales data is collected
daily, and store managers are provided with daily sales and cash information for
their respective restaurants. 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 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 10-week training program, restaurant managers are taught to promote the
Company's team-oriented atmosphere among restaurant employees with emphasis on
preparing and serving food in accordance with strict standards and providing
friendly, courteous and attentive service. The restaurant staff is trained on
site by restaurant managers and other staff members. The Company believes that
the quality and training of its restaurant managers and staff results in
friendly, courteous, efficient service which contributes to a casual and
pleasurable dining experience for the customer.

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

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 

                                       5

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

QUALITY CONTROL.

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

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

ADVERTISING AND MARKETING

The Company employs a marketing strategy that seeks continuous visibility and
name recognition through use of billboards, radio and television advertisements.
The Company's strategy of developing a significant number of restaurants in a
market is designed to provide for the Company's cost-effective use of television
and radio advertising and other marketing efforts.

                                       6

<PAGE>


JOINT VENTURE AND THIRD-PARTY OWNED RESTAURANTS

The Shells restaurant system consists of (i) 35 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, inventories, and working capital. Pursuant to amended option
agreements, entered into in August 1995 (the "Amended Option Agreements"), upon
the Company's market capitalization reaching certain prescribed levels, either a
third-party owner of a Managed Restaurant or the Company has the option to
transfer that restaurant's assets to the Company in exchange for a purchase
price equal to six times the restaurant's adjusted annual cash flow, less the
amount, if any, of the third-party owner's liabilities assumed by the Company.
The purchase price is to be paid in the form of shares of the Company's common
stock which contain 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 

                                       7

<PAGE>


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 food service 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 state and local government regulation by
various governmental agencies, including state and local licensing, zoning, land
use, construction and environmental regulations and various regulations relating
to the sale of food and alcoholic beverages, sanitation, disposal of refuse and
waste products, public health, safety and fire standards. The Company's
restaurants are subject to periodic inspections by governmental agencies to
ensure conformity with such regulations. Difficulties or failure in obtaining
required licensing or other regulatory approvals could delay or prevent the
opening of a new restaurant, and the suspension of, or inability to renew a
license at an existing restaurant, 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.

The Company is subject 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. Florida law currently provides 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 21 years of age) if the
vendor willfully, knowingly and unlawfully sells or furnishes alcoholic
beverages to the minor and knows that the minor will soon thereafter be driving
a motor vehicle. A vendor can be similarly held liable if it knowingly provides
alcoholic beverages to a person who is in a noticeable state of intoxication,
knows that the person

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will soon thereafter be driving a motor vehicle and injury or damage is caused
by that person. In addition, significant national attention is focused on the
problem of drunk driving, which could result in the adoption of additional
legislation and increased potential liability of the Company for damage or
injury caused by its customers.

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

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

SERVICEMARKS AND PROPRIETARY INFORMATION

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

The Company also relies on trade secrets and proprietary know-how and employs
various methods to protect its concepts and recipes. However, these methods may
not 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 December 28, 1997, the Company employed approximately 2,100 persons, of
whom approximately 200 were management or administrative personnel and 1,900
were employed in non-management restaurant positions. Approximately 1,200 of
these individuals were employed by the Company on a full-time basis. As of
December 28, 1997, approximately 200 persons were employed on a salaried basis
and 1,900 persons were employed on an hourly basis. The Company considers its
employee relations to be 

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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    54   President and Director
Warren R. Nelson       46   Vice President of Finance, Chief Financial Officer,
                            Treasurer and Secretary
John R. Ritchey        52   Vice President of Operations
Frank C. Roehl, III    42   Vice President of Marketing

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

Warren R. Nelson currently serves as Vice President of Finance, Chief Financial
Officer, Treasurer, and Secretary of the Company, positions he has held since
June 1993. From June 1983 to May 1993, Mr. Nelson was employed by the Eckerd
Corporation, a national drug store chain, where he held the positions of
Assistant Controller, Subsidiary Controller and Manager of Planning and
Analysis. From March 1977 to June 1983, Mr. Nelson was employed by Red Lobster
where his responsibilities included strategic planning, acquisitions, corporate
development, procurement/distribution/operations analysis, and controller for
seafood purchasing and processing operations of a subsidiary of Red Lobster.

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

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

ITEM 2. PROPERTIES

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

All but two 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 5 to 20 years and renewal options ranging from 10 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

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

The common stock of the Company is traded as of February 11, 1998 on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
National Market under the symbol "SHLL". Prior to that date the common
stock was traded on the Nasdaq Small Cap System. The following table sets forth,
since April 23, 1996, the date the Company's common stock commenced trading, the
high and low per share price of the Company's common stock as reported by
Nasdaq. The Common Stock was originally sold to the public at an initial public
offering price of $5.00 per share on April 23, 1996.

                                       11
<PAGE>
 

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

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


The number of stockholders of record of the Company's common stock on March 17,
1998 was approximately 187.

The Company's warrants to purchase common stock at a purchase price of $6.00 per
share were quoted on the Nasdaq Small Cap System under the symbol SHLLW until
July 16, 1997, the date on which the Company redeemed such warrants.

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

DIVIDEND POLICY

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

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historical and pro forma consolidated
financial data for the Company ("SSRI") and Shells, Inc., a wholly owned
subsidiary of the Company. The historical consolidated financial data for the
Company is for the years (52 weeks) ended December 28, 1997, December 29, 1996,
December 31, 1995, January 1, 1995 (historical and Pro forma), period from April
29, 1993 (date of inception) through January 2, 1994 (SSRI), and the year (52
weeks) ended January 2, 1994 (Shells, Inc.). The pro forma consolidated
financial data for the Company for the year (52 weeks) ended January 1, 1995
gives effect to the Merger. This consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. (The amounts are presented in
thousands, except per share and number of restaurants data).

                                       12

<PAGE>
<TABLE>
<CAPTION>
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                              YEAR (52 WEEKS) ENDED          
                                                                                                  JANUARY 1,        JANUARY 1,   
                                                   DECEMBER 28,  DECEMBER 29,   DECEMBER 31,        1995               1995       
                                                       1997         1996            1995          PRO FORMA (2)        SSRI       
                                                  ------------   -----------    ------------ ---------------------  ----------
<S>                                               <C>            <C>            <C>          <C>                    <C>
Statement of Operations Data:
Revenues
     Restaurant sales                               $ 64,914      $ 39,405        $ 28,269         $ 21,878         $  5,768
     Management fees                                     398           388             352              327            1,384
                                                    --------      --------        --------         --------         --------
      Total revenues                                  65,312        39,793          28,621           22,205            7,152
                                                    --------      --------        --------         --------         --------
 Costs and expenses
     Cost of sales                                    22,967        14,017          11,220            9,088            2,292
     Labor and other related expenses                 17,674        10,221           7,680            5,830            1,523
     Other restaurant operating expenses              13,432         8,266           6,301            5,002            1,429
     General and administrative expenses               4,940         3,351           2,316            2,243            2,012
     Depreciation                                      1,582           721             458              301              112
     Amortization                                      1,852           553             501              628              344
                                                    --------      --------        --------         --------         --------
 Income (loss) from operations                         2,865         2,664             145             (887)            (560)
Other income (expense):
     Interest expense, net                              (148)         (170)           (409)            (236)             (91)
     Other income (expense), net                         (44)         (233)            (33)              35               40
                                                    --------      --------        --------         --------         --------
 Income (loss) before elimination of minority          2,673         2,261            (297)          (1,088)            (611)
     partner interest, extraordinary gain and
     provision for income taxes
Extraordinary gain                                      --            --              --               --               --   
Elimination of minority partner interest                (174)         (169)           (106)             (67)             (67)
                                                    --------      --------        --------         --------         --------
Income (loss) before provision for income taxes        2,499         2,092            (403)          (1,155)            (678)
Income taxes (1)                                        (849)         (648)           --               --               --   
                                                    --------      --------        --------         --------         ---------
 Net income (loss)                                     1,650         1,444            (403)          (1,155)            (678)
Preferred shares accretion                               (74)         (117)           (167)            --               --   
                                                    --------      --------        --------         --------         ---------
Net income (loss) applicable to common stock        $  1,576      $  1,327        $   (570)        $ (1,155)        $   (678)
                                                    --------      --------        --------         --------         --------


                                                                 PERIOD FROM                      
                                                                APRIL 29,1993                     
                                                            (DATE OF INCEPTION)          
                                                                   THROUGH     YEAR ENDED 
                                                    JANUARY 1,    JANUARY 2,   JANUARY 2, 
                                                      1995          1994          1994 
                                                   SHELLS, INC.     SSRI       SHELLS, INC.
                                                   -----------    ----------   -----------
<S>                                                <C>            <C>          <C>
Statement of Operations Data:
Revenues
     Restaurant sales                               $ 16,110      $    147      $ 15,090
     Management fees                                     --            400           142
                                                    --------      --------      --------
      Total revenues                                  16,110           547        15,232
                                                    --------      --------      --------
 Costs and expenses
     Cost of sales                                     6,796            62         6,246
     Labor and other related expenses                  4,307            64         4,065
     Other restaurant operating expenses               4,630            24         3,467
     General and administrative expenses                 231           806         1,192
     Depreciation                                        189             5           278
     Amortization                                         78             8          --
                                                    --------      --------      --------
 Income (loss) from operations                          (121)         (422)          (16)
Other income (expense):
     Interest expense, net                              (145)          (17)         (291)
     Other income (expense), net                          (5)           35           550
                                                    --------      --------      --------
 Income (loss) before elimination of minority           (271)         (404)          243
     partner interest, extraordinary gain and
     provision for income taxes
Extraordinary gain                                      --            --             270
Elimination of minority partner interest                --            --            --
                                                    --------      --------      --------
Income (loss) before provision for income taxes         (271)         (404)          513
Income taxes (1)                                        --            --            --
                                                    --------      --------      --------
 Net income (loss)                                      (271)         (404)          513
Preferred shares accretion                              --            --            --
                                                    --------      --------      --------
Net income (loss) applicable to common stock        $   (271)     $   (404)     $    513
                                                    --------      --------      --------
</TABLE>
                                       13
<PAGE>
<TABLE>
<CAPTION>

                                                                    YEAR (52 WEEKS) ENDED
                                                          ------------------------------------------
                                                          DECEMBER 28    DECEMBER 29,   DECEMBER 31,
                                                             1997           1996            1995
                                                          -----------    ------------   ------------
<S>                                                       <C>             <C>           <C>
Pro forma net income (loss) per share (3)                   $ 0.32         $ 0.28          $(0.13)
Pro forma weighted average common shares outstanding (3)     4,964          4,715           4,227

                                                                    YEAR (52 WEEKS) ENDED
                                                         -------------------------------------------
                                                         DECEMBER 28     DECEMBER 29,   DECEMBER 31,
 OPERATING DATA:                                            1997           1996            1995
 System-wide sales:                                      -----------     ------------   ------------
    Company-owned restaurants (4)                         $ 64,914       $ 39,405        $ 28,269
    Licensed restaurants                                     9,947          9,660           8,796
                                                          --------       --------        --------
                                                          $ 74,861       $ 49,065        $ 37,065
                                                          ========       ========        ========

Number of restaurants (at end of period):
    Company-owned restaurants  (4)                              36             27              17
    Licensed restaurants                                         4              4               4
                                                          --------       --------        --------
                                                                40             31              21
                                                          --------       --------        --------

Average annual sales per Company-owned and joint
         venture restaurant open for full period            $2,110         $2,188          $1,934

Increase in Company-owned and joint
        venture restaurant same store sales (5)               2.50%         14.70%           6.60%


                                                                                         JANUARY 2,   JANUARY 2,
                                   DECEMBER 28, DECEMBER 29,  DECEMBER 31,   JANUARY 1,     1994         1994
                                       1997        1996          1995          1995        SSRI       SHELLS, INC.
                                   -----------  -----------   -----------  -----------  ----------    -----------
<S>                                <C>          <C>           <C>          <C>          <C>          <C>
Balance sheet data:
Working capital (deficiency)         $    484    $ (1,418)    $ (4,722)    $ (3,298)    $   (364)    $ (2,096)
Total assets                           26,566      18,373       10,438        9,078        2,426        1,294
Long term debt                          1,449       1,161        1,706        2,098        1,621          164
Minority partner interest                 514         512          574          467         --           --
Redeemable preferred shares             1,372       1,668        1,551        1,385         --          1,853
Stockholders' equity (deficiency)      14,521       7,472         (889)        (354)         (99)      (3,897)
<FN>
----------
(1)  The effective tax rates for 1997 and 1996 include the effect of recognizing
     tax benefits that were fully reserved prior to 1996. The effect of
     recognizing these benefits, primarily related to net operating loss
     carryforwards from prior years, is to reduce the effective income tax rate
     for the years ended December 28, 1997 and December 29, 1996 to 34% and 31%,
     respectively.

(2)  Gives effect to the Merger, which is accounted for as a purchase, as if it
     occurred at the beginning of the year. All material intercompany balances
     and transactions between the entities have been eliminated. The pro forma
     data is presented for the year ended January 1, 1995 to allow for a more
     appropriate and meaningful comparison to the operating results of the years
     ended December 28, 1997, December 29, 1996 and December 31, 1995.

(3)  Pro forma net income (loss) per share is the net income (loss) applicable
     to common stock divided by the pro forma weighted average common shares
     outstanding. The pro forma weighted average common shares outstanding is
     calculated as if all shares issued through December 28, 1997 were
     outstanding since January 2, 1995, inclusive of the dilutive effect of
     common stock equivalents for each period presented.

(4)  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.

(5)  Includes only restaurants open during the full fiscal year shown and open
     for a full comparable fiscal year and at least the full six months prior
     thereto.
</FN>
</TABLE>

                                       14
<PAGE>


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

GENERAL

As of December 28, 1997, the Company owned 35 Shells restaurants and a 51%
ownership interest in the Melbourne Restaurant. In addition, the Company managed
and operated four Managed Restaurants.

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 weeks ending the Sunday nearest to December 31.


<TABLE>
<CAPTION>

                                                                   YEARS (52 WEEKS) ENDED
                                                DECEMBER 28, 1997     DECEMBER 29, 1996     DECEMBER 31, 1995
                                                -----------------  ----------------------   -----------------
<S>                                             <C>                   <C>                   <C>
Revenues:
  Restaurant sales                                     99.4%                99.0%                 98.8%
  Management fees from related parties                  0.6                  1.0                   1.2
                                                      -----                -----                 -----
                                                      100.0%               100.0%                100.0%
                                                      =====                =====                 =====
Costs and expenses:
  Cost of restaurant sales (1)                         35.4%                35.6%                 39.7%
  Labor and other related expenses (1)                 27.2                 25.9                  27.2
  Other restaurant operating expenses (1)              20.7                 21.0                  22.3
                                                      -----                -----                 -----
  Total restaurant costs and expenses (1)              83.3                 82.5                  89.2
                                                      -----                -----                 -----

  General and administrative expenses                   7.6                  8.4                   8.1
  Depreciation                                          2.4                  1.8                   1.6
  Amortization                                          2.8                  1.4                   1.8

Income from operations                                  4.4                  6.7                   0.5

  Interest expense, net                                 0.2                  0.4                   1.4
  Other expense, net                                    0.1                  0.6                   0.1
                                                      -----                -----                 -----
Income (loss) before elimination of minority
    partner interest and income taxes                   4.1                  5.7                  (1.0)
Elimination of minority partner interest               (0.3)                (0.5)                 (0.4)
                                                      -----                -----                 -----
Income (loss) before provision for income taxes         3.8                  5.2                  (1.4)
Provision for income taxes (2)                         (1.3)                (1.6)                  --
                                                      -----                -----                 -----
Net income (loss)                                       2.5%                 3.6%                 (1.4%
                                                      =====                =====                 =====

<FN>
----------
(1)  As a percentage of restaurant sales.

(2)  The 34% effective rate for 1997 and the 31% effective tax rate for 1996
     includes the effect of recognizing tax benefits that were fully reserved
     prior to 1996. The effect of recognizing these benefits, primarily related
     to net operating loss carryforwards from prior years, is to reduce the
     effective income tax rate.
</FN>
</TABLE>

                                       15
<PAGE>


RESULTS OF OPERATIONS

FISCAL 1997 VERSUS FISCAL 1996

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

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

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

Labor and other related expenses were 27.2% of restaurant sales for Fiscal 1997
as compared to 25.9% in Fiscal 1996. This increase was primarily attributed to
higher wage rates outside of the state of Florida as well as increased staffing
at the manager levels to meet planned expansion. Labor and other related
expenses generally consist of restaurant hourly and management payroll,
benefits, and taxes. As the percentage of the Company's restaurants outside of
Florida increases, it is expected that labor as a percentage of sales will
increase.

Other restaurant operating expenses were 20.7% of restaurant sales in Fiscal
1997 as compared to 21.0% in Fiscal 1996. The decreases in these expenses as a
percentage of sales was due to the efficiencies realized through the higher
sales volumes at the stores coupled with increased operational efficiencies.
Other restaurant operating expenses generally consist of advertising,
supervision, operating supplies, repairs and maintenance, rent and other
occupancy costs and utilities. For Fiscal 1997, other restaurant operating
expenses also included a $197,000 one-time charge related to the closure of a
restaurant. There were also decreases in advertising production costs as a
percentage of sales.

                                       16

<PAGE>


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

Depreciation expense was 2.4% of revenues for Fiscal 1997 as compared with 1.8%
for Fiscal 1996. 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.

Amortization expense, consisting of amortization of goodwill and of pre-opening
costs, was 2.8% of revenues for Fiscal 1997 as compared with 1.4% for Fiscal
1996. The increases for Fiscal 1997 were attributed to the nine units that were
opened in the fourth quarter of Fiscal 1996 as well as the nine units opened
during Fiscal 1997, compounded by the higher pre-opening costs being incurred in
new markets outside of Florida. The amortization expense could increase during
Fiscal 1998 due to the combination of generally higher pre-opening costs in
markets outside of Florida as well as the anticipated statement of position by
the American Institute of Certified Public Accountants that would require the
expensing of pre-opening costs as incurred under generally accepted accounting
principles.

Net interest expense decreased slightly from $170,000 in Fiscal 1996 to $148,000
in Fiscal 1997. The reduction was attributable to the increase in interest
income generated from the approximately $5,400,000 in net proceeds received from
the exercise of warrants, as well as the increase in cash flow generated from
operations.

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

FISCAL 1996 VERSUS FISCAL 1995

Total revenues increased by 39.0% between Fiscal 1995 and Fiscal 1996. Most of
the 

                                       17

<PAGE>


year-to-year increases were attributable to new restaurant openings coupled
with increases in same store sales of 14.7% for Fiscal 1996. The increases in
same store sales were attributable to increases in the number of customers
served resulting from expanded advertising and remodeling of certain
restaurants, and to a lesser extent from menu price adjustments.

Cost of restaurant sales were 35.6% in Fiscal 1996 as compared to 39.7% in
Fiscal 1995. The improvements realized during Fiscal 1996 resulted primarily
from commodity cost savings on food purchases, primarily shrimp, which was
offset slightly by increases in the cost of dairy products.

Labor and other related expenses were 25.9% of restaurant sales for Fiscal 1996
as compared to 27.2% in Fiscal 1995. This improvement was attributed to the
efficiencies realized through higher sales volumes, including the 14.7% increase
in same store sales.

Other restaurant operating expenses were 21.0% of restaurant sales in Fiscal
1996 as compared to 22.3% in Fiscal 1995. The decrease in these expenses as a
percentage of sales was due to the efficiencies realized through the higher
sales volumes at the stores coupled with increased operational efficiencies

General and administrative expenses were 8.4% of revenues in Fiscal 1996 as
compared with 8.1% in Fiscal 1995. The increase was due to an increase in
management training costs and to a lesser extent to management compensation and
incentives related to improved operating performance.

Net interest expense decreased from $409,000 in Fiscal 1995 to $170,000
in Fiscal 1996. The reduction was attributable to the decrease in outstanding
debt and the income generated from the investment of short-term securities of
funds primarily obtained from the Offering. In connection with the Offering, the
$750,000 of shareholder indebtedness was converted into Common Stock and
warrants and the $1,610,000 of indebtedness was repaid with the proceeds of the
Offering.

As a result of increases in restaurant sales and decreases in restaurant
operating expenses, primarily food and labor costs, as percentages of sales, the
income from operations improved to $2,664,000 in Fiscal 1996 from $145,000 in
Fiscal 1995. The net income before taxes improved to $2,092,000 for Fiscal 1996
as compared with a net loss of $403,000 for Fiscal 1995. The net income for
Fiscal 1996 was $1,444,000 reflecting the $648,000 income tax provision. The
income tax provision during Fiscal 1996 was based on an effective rate of 31%
which reflected the valuation allowance adjustment of tax benefits as well as
1996 benefits of net operating loss carryforwards and tax credits that were
previously unrealized. The improvement in operations during Fiscal 1996 was due
primarily to operating efficiencies and economies of scale gained from the
Merger, same store sales gains, and the opening of additional restaurants.

                                       18

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

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

                                               1997       1996        1995
                                             -------     -------     -------
Net cash provided by operating activities    $ 5,184     $ 2,639     $   996
Net cash used in investing activities         (7,233)     (5,799)     (1,733)
Net cash provided by financing activities      4,330       5,417       1,041
                                             =======     =======     =======
Net increase in cash                         $ 2,281     $ 2,257     $   304
                                             =======     =======     =======

As of December 28, 1997, the Company's current assets of $7,980,000 exceeded its
current liabilities of $7,496,000, resulting in positive working capital of
$484,000. Prior to 1997, consistent with industry practice, the Company operated
with negative working capital as a result of costs associated with new
restaurants and remodeling existing restaurants, as well as the turnover of
restaurant inventory relative to more favorable vendor terms in accounts
payable. The use of current assets for investment in leasehold improvements,
land and buildings, and equipment has also contributed to a deficiency in
working capital.

The Company received $5,474,000 in net proceeds from the exercise of warrants to
purchase common stock during 1997. During 1996, the Company received $6,125,000
in net proceeds from the completion of the Company's initial public offering
(the "Offering") and the exercise of the underwriter's over-allotment option.
During 1995, funding was made available through loans aggregating $1,000,000
from the MicroCap Fund, Inc. ("MicroCap") and Mr. Frederick R. Adler, the
Company's Chairman, and $650,000 from various persons, including Mr. Adler and
$100,000 from an unrelated third party. The Company repaid the $1,000,000 loan
during 1997. During 1996, the Company repaid the $1,310,000 in shareholder
loans, plus accrued interest of approximately $300,000 from the proceeds of the
Offering. In addition, upon the consummation of the Offering, the (i) $750,000
of indebtedness borrowed in 1995 and (ii) $159,000 principal amount of
indebtedness owed to WLH Investments were converted into equity.

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 (See
Note 9 of the Consolidated Financial Statements). 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"). The Warrants
were exercisable at any time up to and including 5:00 p.m., Eastern Standard
Time, on July 16, 1997 (the "Exercise Termination Time"), at a redemption price
of $0.10 per Warrant. There were 917,276 warrants exercised during 1997, which
represented all but 100 of the warrants subject to redemption.

During Fiscal 1997, the Company's cash position increased by $2,281,000. Net
cash 

                                       19

<PAGE>


provided by operating activities totaled $5,184,000, while cash used in
investing activities was $7,233,000 which related to capital expenditures in
connection with the opening of nine new restaurants and the remodeling of
certain existing restaurants. The net cash provided by financing activities was
$4,330,000, which primarily consisted of the $5,474,000 in net proceeds from the
exercise of warrants to purchase Common Stock less net repayments of debt of
$1,477,000. During Fiscal 1996, the Company's cash position increased by
$2,257,000. Net cash provided by operating activities totaled $2,639,000, while
cash used in investing activities was $5,799,000, which related to capital
expenditures in connection with the opening of ten new restaurants, the
remodeling of certain existing restaurants, and the installation of restaurant
point-of-sale and cash management systems. During 1996, the net cash provided by
financing activities was $5,417,000, which primarily consisted of the $6,125,000
in net proceeds from the Offering and the exercise of the over-allotment option,
and the $840,000 in net proceeds from the issuance of debt, less the repayment
of $1,310,000 in shareholder debt.

In connection with the reorganization of Shells, Inc. during Fiscal 1993,
Shells, Inc. issued 185,312 shares of Shells, Inc. preferred shares (the
"Shells, Inc. Preferred Shares"), in exchange for retirement of certain loans
and trade payables totaling $1,853,000. The Shells, Inc. Preferred Shares have a
par value of $10.00 per share and a non-cumulative dividend of 5% per annum. The
Shells, Inc. Preferred Shares are redeemable by the Company in whole or in part
at any time upon payment of the par value plus any accrued but unpaid dividends.
In addition, the Company has agreed to allow each holder of Shells, Inc.
Preferred Shares to sell 20% of their shares of Shells, Inc. Preferred Shares to
the Company on an annual basis, beginning April 23, 1997, at a price of $10.00
per share. The Company intends to use cash flow from its operations to purchase
any Shells, Inc. Preferred Shares sold to the Company by the holders of such
shares. The Company redeemed $371,000 in preferred shares during 1997.

There are approximately 226,000 warrants to purchase shares of the Company's
common stock at $5.50 per share which expire April 22, 1998. The proceeds, if
any, from the exercise of these warrants is required to be used to retire
outstanding Shells Inc. preferred shares.

The Company believes that cash flows from operations coupled with the funds
available from anticipated third party financing and cash balances at December
28, 1997, will be sufficient to satisfy its contemplated cash requirements for
at least 12 months. The Company's expansion strategy is dependent upon obtaining
third party financing and achieving projected cash flow from operations. The
third party financing may include, but is not limited to, traditional lending
sources such as bank lines of credit, equipment leasing, and/or restaurant
sale/leaseback arrangements that may be available to the Company.

The Company currently has access to a $600,000 line of credit to finance
restaurant equipment. The Company from time-to-time utilized mortgage financing
with various banks as necessary to facilitate expansion. In the event that the
Company's plans change or its assumptions prove to be inaccurate (due to
unanticipated expenses or construction

                                       20

<PAGE>


or other delays or difficulties or otherwise), Third Party Financing or
projected cash flow otherwise prove to be insufficient to fund operations and
fully implement the Company's expansion strategy, the Company could be required
to seek additional financing from sources not currently anticipated or reduce
its expansion plans. There can be no assurance that third party financing will
be available to the Company when needed, on acceptable terms, or at all. The
Company has $215,000 of principal indebtedness due in 1998 as well as a maximum
of $371,000 of Shells Inc. Preferred Share repurchases which are 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 to various factors, including the
seasonal nature of its business, weather conditions in Florida 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. Seasonality at the Company's
restaurants is magnified due to their present concentration in Florida and, in
many cases, locations are in coastal cities, where sales are significantly
dependent on tourism and its seasonality patterns. It is anticipated that
implementation of the Company's expansion program into the Midwest markets will,
over time, partially reduce some of the existing seasonal fluctuations.

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

YEAR 2000 ISSUE

The Company's computer systems, both hardware and software, were designed in
recent years, and concerns relating to the year 2000 issue have generally been
addressed at initial development. The Company intends to continually review both
its systems and the systems of its vendors relative to year 2000 compliance
during 1998 and 1999. At this time, the Company does not believe the year 2000
issue will present a material event or uncertainty relative to the Company's
ability to operate its business.

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. Due to the fact that
the Company's business is 

                                       21

<PAGE>


somewhat dependent on tourism in Florida, any significant decrease in tourism
due to inflation would likely have a material adverse effect on revenues and
profitability.

                                       22

<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS


Independent Auditors' Report                                                F-1

Consolidated Balance Sheets as of December 28, 1997 and 
December 29, 1996                                                           F-2

Consolidated Statements of Operations for the years (52 weeks) 
ended December 28, 1997, December 29, 1996 and December 31, 1995            F-3 

Consolidated Statements of Stockholders' Equity (Deficiency) for
the years (52 weeks) ended December 28, 1997, December 29, 1996             F-4
and December 31, 1995

Consolidated Statements of Cash Flows for the years (52 weeks) 
ended December 28, 1997, December 29, 1996 and December 31, 1995            F-5

Notes to Consolidated Financial Statements                                  F-7

                                       

<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 December 28, 1997 and
December 29, 1996 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the years (52 weeks) ended
December 28, 1997, December 29, 1996, and December 31, 1995. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 28, 1997 and December 29, 1996 and the results of its operations and
its cash flows for the years (52 weeks) ended December 28, 1997, December 29,
1996, and December 31, 1995 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
Tampa, Florida
February 13, 1998
(March 12, as to Note 15)
                                       


                                      F-1

<PAGE>
<TABLE>
<CAPTION>

                SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                               DECEMBER 28, 1997    DECEMBER 29, 1996
                                                               ----------------     -----------------
<S>                                                            <C>                  <C>
ASSETS
Cash                                                              $  5,314,771        $  3,033,851
Inventories                                                            861,247             663,563
Other current assets                                                 1,663,867           1,455,405
Receivables from related parties                                       139,948             132,048
                                                                  ------------        ------------
      Total current assets                                           7,979,833           5,284,867
Property and equipment, net                                         14,306,138           8,655,149
Prepaid rent                                                           324,321             374,721
Other assets                                                           450,155             346,707
Goodwill                                                             3,505,387           3,711,583
                                                                  ------------        ------------
TOTAL ASSETS                                                      $ 26,565,834        $ 18,373,027
                                                                  ============        ============

LIABILITIES AND STOCKHOLDERS EQUITY
Accounts payable                                                  $  3,805,633        $  2,486,943
Accrued expenses                                                     2,881,404           2,159,788
Sales tax payable                                                      318,223             282,966
Income taxes payable                                                   275,216             496,216
Notes payable to stockholders                                             --             1,000,000
Current portion of long-term debt                                      215,235             276,765
                                                                  ------------        ------------
      Total current liabilities                                      7,495,711           6,702,678
Deferred rent                                                        1,214,143             857,830
Long-term debt, less current portion                                 1,449,092           1,160,513
                                                                  ------------        ------------
      Total liabilities                                             10,158,946           8,721,021
                                                                  ------------        ------------

Minority partner interest                                              514,047             511,810
                                                                  ------------        ------------
Shells, Inc. preferred shares subject to redemption,
      $10 par value; authorized 10,000,000 shares; 148,250
      and 185,312 issued and outstanding, respectively               1,371,852           1,668,476
                                                                  ------------        ------------
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; 4,227,062 and 3,297,536 shares issued and
      outstanding, respectively                                         42,270              32,975
Additional paid-in-capital                                          12,944,995           7,480,548
Retained earnings (deficit)                                          1,533,724             (41,803)
                                                                  ------------        ------------
      Total stockholders'  equity                                   14,520,989           7,471,720
                                                                  ------------        ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $ 26,565,834        $ 18,373,027
                                                                  ============        ============
</TABLE>
                 See notes to consolidated financial statements.

                                       F-2
<PAGE>

<TABLE>
<CAPTION>
            ***** SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                             YEARS (52 WEEKS) ENDED
                                                         --------------------------------------------------------------
                                                         DECEMBER 28, 1997     DECEMBER 29, 1996     DECEMBER 31, 1995
                                                         -----------------     -----------------     ------------------
<S>                                                      <C>                   <C>                   <C> 
REVENUES:
  Restaurant sales                                          $ 64,914,358          $ 39,405,304          $ 28,268,522
  Management fees from related parties                           398,106               387,519               352,118
                                                            ------------          ------------          ------------
                                                              65,312,464            39,792,823            28,620,640
                                                            ------------          ------------          ------------
COST AND EXPENSES:
  Cost of restaurant sales                                    22,967,259            14,017,163            11,219,794
  Labor and other related expenses                            17,673,808            10,220,280             7,679,898
  Other restaurant operating expenses                         13,431,530             8,266,403             6,300,702
  General and administrative expenses                          4,940,173             3,350,765             2,316,468
  Depreciation                                                 1,582,162               720,821               457,706
  Amortization                                                 1,852,467               553,296               501,210
                                                            ------------          ------------          ------------
                                                              62,447,399            37,128,728            28,475,778
                                                            ------------          ------------          ------------

INCOME FROM OPERATIONS                                         2,865,065             2,664,095               144,862
                                                            ------------          ------------          ------------

OTHER INCOME (EXPENSE):
  Interest expense                                              (364,645)             (337,347)             (419,339)
  Interest income                                                216,654               167,718                10,797
  Other expense, net                                             (44,500)             (233,051)              (32,834)
                                                            ------------          ------------          ------------
                                                                (192,491)             (402,680)             (441,376)
                                                            ------------          ------------          ------------
INCOME (LOSS) BEFORE ELIMINATION OF MINORITY
        PARTNER INTEREST AND INCOME TAXES                      2,672,574             2,261,415              (296,514)

ELIMINATION OF MINORITY PARTNER INTEREST                        (174,047)             (169,450)             (106,928)
                                                            ------------          ------------          ------------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES                2,498,527             2,091,965              (403,442)

PROVISION FOR INCOME TAXES                                      (849,000)             (648,000)                 --
                                                            ------------          ------------          ------------

NET INCOME (LOSS)                                              1,649,527             1,443,965              (403,442)

PREFERRED SHARES ACCRETION                                       (74,000)             (117,000)             (166,229)
                                                            ------------          ------------          ------------

NET INCOME (LOSS) APPLICABLE TO COMMON STOCK                $  1,575,527          $  1,326,965          $   (569,671)
                                                            ============          ============          ============

NET INCOME (LOSS) PER SHARE OF COMMON STOCK                 $       0.42          $       0.49          $      (0.39)
                                                            ============          ============          ============

WEIGHTED COMMON SHARES OUTSTANDING                             3,726,949             2,729,417             1,462,684
                                                            ============          ============          ============

DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK         $       0.33          $       0.40          $      (0.39)
                                                            ============          ============          ============

DILUTED WEIGHTED COMMON SHARES OUTSTANDING                     4,750,620             3,312,651             1,462,684
                                                            ============          ============          ============
</TABLE>

                 See notes to consolidated financial statements

                                      F-3
<PAGE>

<TABLE>
<CAPTION>


   SHELLS SEAFOOD RESTAURANTS, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                                                       ADDITIONAL    UNAMORTIZED       RETAINED
                                                 COMMON STOCK            PAID-IN       DEFERRED        EARNINGS
                                              SHARES      AMOUNT         CAPITAL     COMPENSATION      (DEFICIT)         TOTAL
                                            ---------    --------      ----------    -------------   -----------     ------------
<S>                                         <C>          <C>           <C>           <C>             <C>             <C>        
Balance at January 1, 1995                  1,462,684    $ 14,627       $ 748,070     $ (34,125)     $ (1,082,326)      $ (353,754)
Net loss                                                                                                 (403,442)        (403,442)
Shells Inc. preferred shares accretion                                   (166,229)                                        (166,229)
Amortization of deferred compensation                                                    34,125                             34,125
                                            --------     --------       ---------     ---------      ------------       ----------
Balance at December 31, 1995                1,462,684      14,627         581,841             -        (1,485,768)        (889,300)
Net income                                                                                              1,443,965        1,443,965
Issuance of common stock and warrants       1,834,852      18,348       7,015,707                                        7,034,055
                                            
Shells Inc. preferred shares accretion                                   (117,000)                                        (117,000)
                                            ---------    --------    ------------    ---------       ------------     ------------
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
Issuance of common stock                      929,526       9,295       5,464,447                                        5,473,742
Shells Inc. preferred shares accretion                                                                    (74,000)         (74,000)
                                            ---------    --------    ------------     ---------       -----------     ------------
Balance at December 28, 1997                4,227,062    $ 42,270    $ 12,944,995     $       -       $ 1,533,724     $ 14,520,989
                                            =========    ========    ============     =========       ===========     ============
</TABLE>
                 See notes to consolidated financial statements

                                     F-4
<PAGE>
<TABLE>
<CAPTION>

                        SHELLS SEAFOOD RESTAURANTS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                 YEARS (52 WEEKS) ENDED
                                                            ----------------------------------------------------------------
                                                             DECEMBER 28, 1997      DECEMBER 29, 1996      DECEMBER 31, 1995
                                                            -------------------    -------------------    ------------------
<S>                                                         <C>                    <C>                    <C>
OPERATING ACTIVITIES:
Net  income (loss)                                               $ 1,649,527            $ 1,443,965            $ (403,442)
Adjustments to reconcile net income (loss) to net
   cash provided by  operating activities:
Depreciation                                                       1,582,162                720,821               457,706
Amortization                                                       1,852,467                553,296               501,210
Amortization of deferred compensation                                      -                      -                34,125
Minority partner interest                                              2,237                 96,519               106,928
Changes in assets and liabilities:
 Increase in inventories                                            (197,684)              (266,444)             (104,446)
 (Increase) decrease in receivables from related parties              (7,900)               (69,054)              136,260
  Increase in other assets                                        (1,958,181)              (868,137)             (457,614)
  Decrease in prepaid rent                                            50,400                 50,399               144,842
  Increase (decrease) in accounts payable                          1,318,690                (36,230)               76,842
  Increase in accrued expenses                                       721,616                356,585               340,486
  Decrease in payable to related parties                                   -                (98,927)              (55,004)
  Increase in sales tax payable                                       35,257                 53,435                43,836
  (Decrease) increase in income taxes payable                       (221,000)               496,216                     -
  Increase in deferred rent                                          356,313                206,696               174,596
                                                          -------------------    -------------------    ------------------
Total adjustments                                                  3,534,377              1,195,175             1,399,767
                                                          -------------------    -------------------    ------------------
Net cash provided by operating activities                          5,183,904              2,639,140               996,325
                                                          -------------------    -------------------    ------------------

INVESTING ACTIVITIES:
Purchase of investment securities                                          -             (6,045,000)                    -
Sale of investment securities                                              -              6,045,000                     -
Purchase of property and equipment                                (7,233,151)            (5,798,872)           (1,733,371)
                                                          -------------------    -------------------    ------------------
Net cash used in investing activities                             (7,233,151)            (5,798,872)           (1,733,371)
                                                          -------------------    -------------------    ------------------

FINANCING ACTIVITIES:
Proceeds from debt financing                                         703,884                839,340                47,571
Repayment of debt                                                   (476,835)              (189,377)             (756,281)
Redemption of preferred shares                                      (370,624)                     -                     -
Proceeds from borrowings from stockholders                                 -                      -             1,750,000
Repayment of notes payable to stockholders                        (1,000,000)            (1,358,214)                    -
Net proceeds from issuance of common stock and warrants            5,473,742              6,125,055                     -
                                                          -------------------    -------------------    ------------------
Net cash provided by financing activities                          4,330,167              5,416,804             1,041,290
                                                          -------------------    -------------------    ------------------

Net increase in cash                                               2,280,920              2,257,072               304,244

CASH AT BEGINNING OF YEAR                                          3,033,851                776,779               472,535
                                                          -------------------    -------------------    ------------------

CASH AT END OF YEAR                                              $ 5,314,771            $ 3,033,851             $ 776,779
                                                          ===================    ===================    ==================
</TABLE>

                 See notes to consolidated financial statements

                                      F-5


<PAGE>


SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest was $377,765, $611,296 and $307,510 for the years (52
weeks) ended December 28, 1997, December 29, 1996 and December 31, 1995,
respectively.

Concurrent with the initial public offering during 1996, there were 200,000
shares of common stock and 100,000 warrants issued upon the conversion of
$750,000 of related party debt and $159,000 of minority partner interest.

Cash paid for income taxes was $1,070,000 and $151,784 during the years (52
weeks) ended December 28, 1997 and December 29, 1996, respectively. No income
taxes were paid prior to 1996.

Discounts of $53,094, $57,081 and $56,198 were recognized as interest expense
for the years (52 weeks) ended December 28, 1997, December 29, 1996, and
December 31, 1995, respectively, related to non-interest bearing notes.



                 See Notes to Consolidated Financial Statements.

                                       F-6

<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 40 full service, casual dining
seafood restaurants in Florida, Kentucky, and Ohio under the name "Shells". The
Company was incorporated on April 29, 1993 and began operations in August 1993.

         In August 1993, the Company purchased from Shells, Inc. the
servicemarks "Shells" and "Shells Seafood, ShellFish and Whatnot," as well as
all other intangible and tangible assets necessary to operate a restaurant chain
under the name "Shells". As part of the purchase, the Company entered into a
management and license agreement with Shells, Inc. whereby the Company became
the exclusive manager of the Shells restaurants owned by Shells, Inc. While
neither the Company nor Shells, Inc. controlled the other entity, certain
officers, directors and stockholders of the Company were also officers,
directors or stockholders of Shells, Inc. The Company and Shells, Inc.
determined that it would be to the advantage of both parties and their
respective stockholders that Shells, Inc. be merged into the Company. To that
end, the Company 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 weeks ending the
Sunday nearest to December 31.

         Certain Significant Risks and Uncertainties -- 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.

         Preopening Costs -- Preopening costs, consisting of direct costs
associated with the opening of restaurants, are amortized over the 12-month
period following the

                                       F-7

<PAGE>


 restaurant opening date.

         Property and Equipment -- Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements and buildings are depreciated over the
shorter of the lease term or 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 to the
presentation of the consolidated financial statements in all periods presented.

         Goodwill -- The excess of the Company's cost over the fair value of the
net assets resulting from the acquisition of Shells, Inc. is being amortized on
the straight-line basis over 20 years. The use of a 20 year estimated life was
based on the upper and lower limits considering among other factors the lease
terms of restaurants acquired and the cash flow projections of the restaurants.

        Impairment of Long-Lived Assets -- Property and equipment, goodwill and
other intangible assets are reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable by comparing the carrying values to the estimated future
undiscounted cash flows. A deficiency in the cash flows relative to the carrying
amounts is an indication of the need for a write-down due to impairment. The
impairment write-down would be the difference between the carrying amounts and
the fair value of those assets. A loss due to impairment would be recognized by
a charge to earnings.

         Income Taxes -- The Company uses the asset and liability method which
recognizes the amount of current and deferred 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 -- Earnings per common
share are computed in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share", which requires companies to
present basic earnings per share and diluted earnings per share. The basic net
income (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 outstanding. Diluted net income per share of common stock is
computed by dividing net income applicable to common stock by the weighted
average number of shares of common stock and common stock equivalents
outstanding. Diluted net loss per common share is computed by dividing the net
loss applicable to common stock by the weighted average number of shares of
common stock outstanding exclusive of common stock equivalents as the inclusion
of common stock equivalents would be anti-dilutive. (See Note 11).

                                       F-8

<PAGE>




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

2. OTHER CURRENT ASSETS

     Other current assets consist of the following:

<TABLE>
<CAPTION>
                                                 DECEMBER 28, 1997       DECEMBER 29, 1996
                                                 -----------------       -----------------
<S>                                              <C>                     <C>        
Preopening costs, net                              $ 1,081,176              $ 1,050,898
Prepaid expenses                                       400,344                  259,721
Accounts receivable                                    170,707                  131,400
Other current assets                                    11,640                   13,386
                                                   ===========              ===========
                                                   $ 1,663,867              $ 1,455,405
                                                   ===========              ===========


3. PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:


                                                 DECEMBER 28, 1997      DECEMBER 29, 1996
                                                 -----------------      -----------------

Equipment                                          $  6,312,696             $ 4,273,529
Leasehold improvements                                6,438,300               3,318,428
Furniture and fixtures                                2,994,259               1,803,848
Land and buildings                                    1,478,512               1,422,871
Signage                                                 752,014                 357,665
Construction in progress                                479,062                  19,500
                                                   ------------             -----------
                                                     18,454,843              11,195,841
Less accumulated depreciation and amortization       (4,148,705)             (2,540,692)
                                                   ------------             -----------
                                                   $ 14,306,138             $ 8,655,149
                                                   ------------             -----------


4.  ACCRUED EXPENSES

     Accrued expenses consist of the following:


                                                 DECEMBER 28, 1997       DECEMBER 29, 1996
                                                 -----------------       -----------------
Accrued payroll                                    $   958,376              $   956,536
Accrued insurance                                      718,833                  284,723
Unearned revenue                                       524,242                  378,615
Other                                                  679,953                  539,914
                                                   ===========              ===========
                                                   $ 2,881,404              $ 2,159,788
                                                   ===========              ===========

                                       F-9

<PAGE>


5. LONG-TERM DEBT

         Long-term debt consists of the following:

                                                                                 DECEMBER 28, 1997   DECEMBER 29, 1996
                                                                                 -----------------   -----------------
Payable to stockholders:
   Loans payable to stockholders, interest at the prime rate plus 2% (10.25%
      at December 29, 1996) This loan was repaid during October 1997. (See
      Note 12)                                                                    $       -           $ 1,000,000

Payable to others:
   $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 $72,175 and $94,081, respectively,
       at 9%, collateralized by a leasehold interest in certain property and
       fixed assets of the Company.                                                  219,695               255,919

   $540,000 non-interest bearing note, principal payable in variable monthly
       installments through December 2004, net of imputed interest of $126,403
       and $157,591, respectively, at 11%, collateralized by a leasehold interest
       in certain property and fixed assets of the Company.                          276,186               294,141

    12% secured note, collateralized by certain fixed assets                               -               150,000

   $447,500 promissory note with a bank secured 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 8.22% and 7.89%, respectively.                                     415,000               447,500

   $453,000 promissory note with a bank secured 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 9.25%, respectively.      410,415               268,905

   Finance agreements, collateralized by equipment, principal and interest due
       monthly through April, 2002, interest rates ranging from 7.4% - 11.0%.        343,031                20,813
                                                                                 -----------           -----------
                                                                                   1,664,327             2,437,278
   Less current portion                                                             (215,235)           (1,276,765)
                                                                                 -----------           -----------
                                                                                 $ 1,449,092           $ 1,160,513
                                                                                 ===========           ===========

   The annual maturities of debt as of December 28, 1997 are as follows:

                                                                                        1998          $   215,235
                                                                                        1999              215,299
                                                                                        2000              184,032
                                                                                        2001              781,154
                                                                                        2002              268,607
                                                                                                      -----------
                                                                                                      $ 1,664,327
                                                                                                      -----------
</TABLE>

The carrying amount of long-term debt approximates fair value.

                                       F-10

<PAGE>


6. COMMITMENTS AND CONTINGENCIES

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

         With the exception of two sites, the Company conducts all of its
operations and maintains its administrative offices in leased facilities.
Certain leases provide for the Company to pay for common area maintenance
charges, insurance, and its proportionate share of real estate taxes. In
addition, certain leases have escalation clauses and/or require additional rent
based upon a percentage of the restaurant's sales in excess of stipulated
amounts. Total rent expense under these leases was $3,112,000, $1,710,000 and
$1,545,000 for the years (52 weeks) ended December 28, 1997, December 29, 1996
and December 31, 1995, respectively, and includes contingent rent of $365,000,
$140,000 and $81,000 for the years (52 weeks) ended December 28, 1997, December
29, 1996 and December 31, 1995, respectively. The approximate future minimum
rental payments under such operating leases as of December 28, 1997 are as
follows:


          1998      $ 2,770,000
          1999        2,659,000
          2000        2,481,000
          2001        1,924,000
          2002        2,097,000
    Thereafter        7,707,000
                    -----------
                    $19,638,000
                    ===========

         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 $117,000 to $187,000 per year for each of the
officers. The employment agreement for the Company's president is effective
through August 31, 1998 whereas other employment agreements are annual and
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 $126,000 and $4,000 for the
years ended December 28, 1997 and December 29, 1996, respectively. The Company
paid a $12,000 royalty settlement related to the Miami restaurant which was
closed in January, 1998.

                                       F-11

<PAGE>


         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 $350,000, $342,000 and $212,000 during
the years (52 weeks) ended December 28, 1997, December 29, 1996 and December 31,
1995, respectively. The Joint Venture paid the Company $150,000, $154,000 and
$139,000 in management and license fees for the years (52 weeks) ended December
28, 1997, December 29, 1996 and December 31, 1995, respectively

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

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

8. REDEEMABLE PREFERRED SHARES

         Shells, Inc. currently has issued and outstanding 148,250 shares of 5%
non-cumulative preferred shares ("Shells, Inc. Preferred Shares"). The Company
has agreed to allow each holder of Shells, Inc. Preferred Shares to put 20% of
his or her shares to the 

                                      F-12

<PAGE>


Company on an annual basis effective April 23, 1997. The put price is $10.00 per
share plus annual dividends, if applicable. There have been no dividends payable
to date as the subsidiary, Shells, Inc. does not have retained earnings as of
December 28, 1997. The Company has also agreed that it will use the proceeds, if
any, received from the exercise of the Shells, Inc. Warrants to redeem the
Shells, Inc. Preferred Shares, at a redemption price of $10.00 per share (See
Note 9). The Shells, Inc. Warrants expire on April 22, 1998 and there is no
certainty with respect to the number of warrants that will be exercised.

         The carrying amount of Shells, Inc. Preferred Shares was recorded at
its estimated fair market value and is periodically accreted using the interest
method, so that the carrying amount will equal the total redemption value as of
the anticipated redemption dates. The carrying amount will be further
periodically increased by amounts representing dividends not currently declared
or paid, but which will be payable under the redemption features for which
payment is not solely within the control of the Company. Additional increases in
the carrying value will be affected by charges against retained earnings or in
the absence of retained earnings by charges against additional paid-in capital.
Each increase in the carrying amount of preferred shares subject to redemption
will be treated in the calculation of earnings per share in the same manner as
preferred share dividends. The maximum annual redemption payment by the Company
will be $370,624 for five years plus accrued dividends at 5%, commencing April
23, 1997. Shells, Inc. Preferred Shares accretion for the years (52 weeks) ended
December 28, 1997, December 29, 1996 and December 31, 1995 was $74,000, $117,000
and $166,229, respectively.

         The estimated annual accretions, assuming no warrants are exercised
from the adjusted fair market value plus accrued dividends payable at 5% as of
December 28, 1997, are as follows:

                        ACCRETION         5% DIVIDEND             TOTAL
                        ---------         -----------           ---------
        1998            $  58,000           $  60,000           $ 118,000
        1999               39,000              42,000              81,000
        2000               14,000              28,000              42,000
                        ---------           ---------           ---------
                        $ 111,000           $ 130,000           $ 241,000
                        ---------           ---------           ---------
 
9. STOCKHOLDERS' EQUITY

         The Company completed an initial public offering (the "Offering") of
1,400,000 shares of the Company's common stock at $5.00 per share and warrants
to purchase 700,000 shares of the Company's common stock on April 29, 1996,
raising net proceeds of $5,090,000 for the Company. Concurrent with the
Offering, the Company converted $750,000 of outstanding debt and $159,000 in
minority partner interest into 200,000 shares of common stock and warrants to
purchase 100,000 shares of the Company's common stock, at $4.50 per share and
$0.09 per warrant, respectively, which represented the Offering price net of
underwriter's discount. In connection with the conversion of debt, the lender
was granted an option (the "Lender's Option") to purchase an additional 

                                       F-13

<PAGE>


24,752 shares and 12,376 warrants at $4.50 per share and $0.09 per warrant
simultaneously with and in the same proportion to which the underwriter
exercises its over-allotment option. The underwriter exercised its
over-allotment option effective May 13, 1996 resulting in the issuance of an
additional 210,000 shares of common stock and warrants to purchase 105,000
shares of the Company's common stock, plus the issuance of 24,752 shares and
warrants to purchase 12,376 shares of the Company's common stock through the
Lender's Option, generating an additional $1,035,000 in net proceeds for the
Company. Upon completion of the Offering, the Company repaid a $1,310,000
principal amount loan plus accrued and unpaid interest of $307,000 to an
affiliated entity. During June 1997, the Company issued a notice of redemption
of all such registered warrants to purchase common stock. There were
approximately 917,000 warrants exercised at a price of $6.00 per warrant raising
approximately $5,400,000, net of related expenses.

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. The warrants are exercisable until April 22, 1998. Each
warrant is redeemable by the Company at a price of $0.10 at any time prior to
its expiration, but only after the 20th consecutive trading day on which the
Company's common stock maintains a closing bid price at least equal to $9.00 per
common share, and always subject to the right of the holders to exercise his or
her purchase rights thereunder within a period of 30 days following the
furnishing by the Company of its notice of redemption. These warrants were only
redeemable by the Company upon registration of the underlying shares. There were
approximately 226,000 warrants outstanding as of December 28, 1997.

         Prior to the effective date of the Offering, the Company reincorporated
under the laws of the State of Delaware. The Company's Common Stock, at a par
value of $0.001 with 50,000,000 shares authorized for issuance under the laws of
the State of Florida, was converted into shares of the Company's Common Stock
registered under the laws of the State of Delaware, at a par value of $0.01 with
20,000,000 shares authorized, on a share-for-share basis. At December 28, 1997,
4,227,062 shares of the Company's Common Stock are issued and outstanding.

                                       F-14
<PAGE>


INCOME TAXES

      The components of the provision for income taxes for the years ended
December 28, 1997 and December 29, 1996 are as follows:

                                                YEARS (52 WEEKS) ENDED
                                         DECEMBER 28, 1997    DECEMBER 29, 1996
                                         -----------------    -----------------
Federal
  Current                                   $ 678,000            $ 537,000
  Deferrred                                         -                    -
                                            ---------              -------
                                              678,000              537,000
                                              -------              -------
State
  Current                                     171,000              111,000
  Deferrred                                         -                    -
                                             --------            ----------
                                              171,000              111,000
                                              -------              -------
                                            $ 849,000            $ 648,000
                                            ---------            ---------

There were no income taxes due and payable prior to Fiscal 1996.

         The Company's effective tax rate is composed of the following:

                                             YEAR (52 WEEKS) ENDED
                                               DECEMBER 28, 1997   
                                               -----------------   
Federal Statutory rate                              34.0%
State income tax, net of federal benefit             4.5 
FICA tip credits                                    (7.7)
Goodwill amortization                                2.8 
Valuation allowance adjustment                      (5.3)
Tax exempt interest                                 (0.6) 
Other                                                6.3
                                                    ---- 
                                                    34.0%
                                                    ----                


         As of December 28, 1997, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $1,926,000 which
expire between 2006 and 2009. The Company also has approximately $290,000 of
general business credit carryforwards which expire by 2012. The Company had an
ownership change in both 1994 and 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
carryforwards and approximately $71,000 of credits are subject to the annual
limitation. For financial reporting purposes, a valuation allowance of
$1,361,000 as of December 28, 1997 has

                                       F-15

<PAGE>


been recognized to offset the deferred tax assets.

         Deferred income taxes reflect the net 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 tax assets and liabilities are as follows:


                                                  DECEMBER 28, 1997
                                       ---------------------------------------
                                        CURRENT      NON-CURRENT       TOTAL
                                       ---------     -----------    -----------
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)
                                                                   -----------
                                                                   $         -
                                                                   ===========

                                                   DECEMBER 29, 1996
                                       ---------------------------------------
                                        CURRENT       NON-CURRENT      TOTAL
                                       ----------     -----------    ----------
Preopening costs and other assets      $      -       $ (203,000)   $ (203,000)
Accrued liabilities                     289,000          360,000       649,000
Net operating loss carryforwards              -          788,000       788,000
General business credits                      -          261,000       261,000
                                       --------       ----------    ----------
                                        289,000        1,206,000     1,495,000

Valuation allowance                                                 (1,495,000)
                                                                    ----------
                                                                    $        -
                                                                    ----------

11. NET INCOME (LOSS) PER SHARE OF COMMON STOCK

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

                                       F-16

<PAGE>
<TABLE>
<CAPTION>

                                                            YEARS (52 WEEKS) ENDED
                                                  DECEMBER 28,     DECEMBER 29,     DECEMBER 31,
                                                      1997             1996             1995
                                                  -----------      -----------      -----------
<S>                                               <C>              <C>              <C>         
Net income (loss)                                 $ 1,649,527      $ 1,443,965      $  (403,442)
Preferred share accretion                             (74,000)        (117,000)        (166,229)
                                                  -----------      -----------      -----------
Net income (loss) applicable to common 
 share owners                                     $ 1,575,527      $ 1,326,965      $  (569,671)
                                                  ===========      ===========      ===========

Weighted common shares outstanding                  3,726,949        2,729,417        1,462,684

Net income (loss) per common share                $      0.42      $      0.49      $     (0.39)
                                                  ===========      ===========      ===========

Effect of dilutive securities:
Warrants                                              897,103          529,631             --
Stock options                                         126,568           53,603             --

Diluted weighted common shares outstanding          4,750,620        3,312,651        1,462,684
                                                  -----------      -----------      -----------
Diluted net income (loss) per common share        $      0.33      $      0.40          $  (.39)
                                                  ===========      ===========      ===========
</TABLE>


Diluted net loss per common share for the year ended December 31, 1995 excludes
84,000 common stock equivalents which were antidilutive.

The pro forma weighted average number of shares assumes the additional shares
that were outstanding as of December 28, 1997 were outstanding since January 2,
1995. The pro forma earnings (loss) per share reflecting the increased pro forma
weighted average number of shares outstanding were $0.32, $0.28, and ($0.13)
based on pro forma weighted average number of common shares outstanding of
4,964,000, 4,715,000, and 4,227,000 for the years ended December 28, 1997,
December 29, 1996 and December 31, 1995, respectively inclusive of the dilutive
effect of common stock equivalents.


12. RELATED PARTY TRANSACTIONS

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

                                      F-17

<PAGE>


and warrants to purchase up to 12,376 shares of the Company's common stock at a
purchase price of $4.50 per share and $0.09 per warrant, respectively,
simultaneously with and in the same proportion to which the underwriter
exercised its over-allotment option. The Debt Conversion was completed
concurrently with the Offering, and the Adler option was exercised concurrently
with the underwriter's over-allotment option. The warrants to purchase common
stock related to both the Debt Conversion and the Adler option were exercised
during 1997.

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

         The Company manages three restaurants pursuant to a management and
license agreement which became effective July 1993. These entities are deemed to
be related parties based on the Company's ability to influence the management
and operating policies of the managed restaurants. The Company provides
management services and licenses the Company's proprietary information required
to operate the restaurant for a management fee of 4% of restaurant sales. The
management agreements outline the respective owners ("licensees") responsibility
for funding all restaurant expenses, including food and beverage costs,
staffing, training, recruiting, inventories and working capital. A fourth
restaurant is operated by the Company, for a management fee of 4%, pursuant to
an oral agreement requiring the restaurant to be operated in conformance with
the policies and procedures established by the Company for Shells restaurants.
The management fees paid under these agreements were approximately $398,000, 
$388,000 and $352,000 for each of the years (52 weeks) ended December 28, 1997,
December 29, 1996 and December 31, 1995, respectively.

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

                                      F-18

<PAGE>


13. 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 ten years. The weighted average remaining contractual life for
the options outstanding at December 28, 1997 for both plans is approximately
eight 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 December 28, 1997, options to purchase 292,293 shares had been
granted with 101,654 exercisable. There were 9,332 shares purchased through the
exercise of these options during 1997. The exercise prices of the options ranged
from $5.00 to $13.88. Effective February 9, 1998, up to 1,000 options per person
were reissued at the market price on that date, $8.00, for those option holders
who were previously issued options at market prices above $8.00. A total of
31,000 options were repriced at the $8.00 exercise price.

         On May 20, 1997, the stockholders approved the Stock Option Plan for
Non-employee Directors. The plan authorized a total of 100,000 shares to be
reserved for issuance under this director's compensation plan. The Company
granted 10,000 options during 1997 at the market price on the date of grant,
none of which were exercisable as of December 28, 1997.

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


                                          DECEMBER 28, 1997   DECEMBER 29, 1996
                                          -----------------   -----------------
Pro forma - net income applicable to 
     common stock                            $1,530,540            $945,542
Basic net income per share                   $     0.41            $   0.35
Diluted net income per share                 $     0.32            $   0.29


         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 54% and 35% for fiscal 1997
and fiscal 1996 grants, respectively; (iii) a risk-free interest rate of 5.5%
and 6.4% for fiscal 1997 and fiscal 1996 grants, respectively; (iv) an estimated
option life of three and a half years. The results reported above may vary
depending on the assumptions applied within the model. There were no options
granted prior to the Offering.

                                      F-19

<PAGE>

Option activity is summarized below:
                                                                  WEIGHTED
                                       NUMBER OF      OPTION       AVERAGE
                                        SHARES        PRICE         PRICE
                                       ---------   ------------  ----------
Outstanding at January 1, 1995                -               -     $ -  
     Granted                            159,960           $5.00      5.00
     Exercised                                -               -       -
     Cancelled                                -               -       -  
                                       --------
Outstanding at December 31, 1995        159,960            5.00      5.00
     Granted                            101,000     5.00 - 8.25      5.50
     Exercised                                -               -       - 
     Cancelled                           (2,000)           5.00      5.00
                                        -------
Outstanding at December 29, 1996        258,960     5.00 - 8.25      5.19
     Granted                             45,000     9.50 - 13.88    10.43
     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 - 13.88     5.99


14. 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.

15. SUBSEQUENT EVENT

         On March 12, 1998, the Company's management entered an agreement
outlining the terms of a proposed transaction to acquire up to seven properties
from another restaurant company. The asset purchase and sale agreement outlines
the required terms and conditions necessary to consummate the transaction.

                                      F-20

<PAGE>


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

NONE

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

ITEM 14. EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)      Financial Statements

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

(3)      Exhibits

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

EXHIBITS    DESCRIPTION
-------     --------------

3.1    Certificate of Incorporation*

                                       23

<PAGE>

       Agreement and Plan of Merger, dated March 31, 1996, by and between Shells
       Seafood Restaurants, Inc., a Delaware Corporation, and Shells Seafood
       Restaurant, Inc., a Florida Corporation.*
3.2    By-laws.*
3.3    Specimen Common Stock Certificate.*
4.1    Form of Warrant Agreement between Shells Seafood Restaurant, Inc. and
       Continental Stock Transfer & Trust Company and Paragon Capital
       Corporation.*
4.2    Form of Warrant Agreement between Shells Seafood Restaurants, Inc. and
       Paragon Capital Corporation.*
10.1   Employment Agreement, dated September 1, 1995, between William E.
       Hattaway and Shells Seafood Restaurants, Inc.*
10.2   Employment Agreement, dated September 2, 1993, between Frank C. Roehl,
       III and Shells Seafood Restaurants, Inc.*
10.3   Employment Agreement, dated October 11, 1993, between John R. Ritchey and
       Shells Seafood Restaurants, Inc.*
10.4   Employment Agreement, dated May 18, 1993, between Warren R. Nelson and
       Shells Seafood Restaurants, Inc.*
10.5   1996 Employee Stock Option Plan.*
10.6   1995 Employee Stock Option Plan.*
10.7   1996 Stock Option Plan for Non-Employee Directors
10.8   Agreement for Purchase and Sale of Assets, dated May 14, 1993, between
       Shells Seafood Restaurants, Inc. and Shells, Inc.*
10.9   Agreement for Assignment of Servicemarks, dated August 19, 1993, between
       Shells Seafood Restaurants, Inc. and Shells, Inc.*
10.10  Agreement and Plan of Merger, dated November 16, 1994, by and among
       Shells Seafood Restaurants, Inc., Shells Seafood Acquisition, Inc. and
       Shells, Inc.*
10.11  First Amendment of Agreement and Plan of Merger, dated December 13, 1995,
       by and among Shells Seafood Restaurants, Inc., Shells Seafood
       Acquisition, Inc. and Shells, Inc.*
10.12  Warrant Agreement, dated as of December 29, 1994, relating to warrants to
       purchase 230,000 shares of Common Stock, adopted by the Board of
       Directors of Shells Seafood Restaurants, Inc.* 
10.13  Shareholders Agreement, dated September 20, 1993, by and among Cotton
       Foods, Inc., William E. Hattaway, Commonwealth Associates Growth Fund,
       Inc. and Shells Seafood Restaurants, Inc.*
10.14  First Amendment to Note and Stock Purchase Agreement and Shareholders
       Agreement, effective as of December 29, 1994, by and among Food
       Properties, Ltd., (as successor in interest to Cotton Foods, Inc.),
       William E. Hattaway, The MicroCap Fund, Inc. (formerly known as
       Commonwealth Associates Growth Fund, Inc.), and Shells Seafood
       Restaurants, Inc.*
10.15  Registration Rights Agreement, effective as of December 29, 1994, by and
       among Frederick R. Adler, The MicroCap Fund, Inc. and Shells Seafood
       Restaurants, Inc.*
10.16  Warrant Agreement, dated December 29, 1994, relating to Warrants to
       purchase 20,000 shares of Class A Preferred Stock, adopted by the Board
       of Directors of Shells Seafood Restaurants, Inc.*

                                       24

<PAGE>


10.17  Note and Warrant Purchase Agreement among Shells Seafood Restaurants,
       Inc., and Frederick R. Adler, as nominee, dated as of September 19,
       1995.*
10.18  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.*
10.19  Security Agreement, dated as of September 19, 1995 by and among Shells
       Seafood Restaurants, Inc. and Frederick R. Adler, as nominee and James
       Monroe.*
10.20  Promissory Note in the initial principal amount of $650,000, dated
       September 19, 1995, by Shells Seafood Restaurants, Inc. for the benefit 
       of Frederick R. Adler, as nominee.*
10.21  Promissory Note in the initial principal amount of $100,000, dated
       September 19, 1995, by Shells Seafood Restaurants, Inc. for the benefit 
       of James Monroe.*
10.22  Registration Rights Agreement, dated as of September 19, 1995 by and
       among Shells Seafood Restaurants, Inc., Frederick R. Adler, as nominee,
       James Monroe, and any person or entity in whose name certain warrants are
       originally registered.*
10.23  Form of Extension Agreement, effective February 1, 1996, by and among
       Frederick R. Adler, The MicroCap Fund, Inc. James Monroe and Shells
       Seafood Restaurants, Inc.
10.24  Distributor Agreement, dated January, 1995, between Rykoff Sexton and
       Shells Seafood Restaurants, Inc.*
10.25  Joint Venture Agreement, dated March 1, 1994, between Shells of
       Melbourne, Inc. and WLH Investments, Inc.*
10.26  First Amendment to Joint Venture Agreement, effective as of March 31,
       1995 between Shells of Melbourne, Inc. and WLH Investments, Inc.*
10.27  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.*
10.28  Management and License Agreement, dated March 1, 1994, between Shells of
       Melbourne Joint Venture and Shells Seafood Restaurants, Inc.
10.29  Management and License Agreement dated July 29, 1993, between Shells of
       Carrollwood Village, Inc. and Shells Seafood Restaurants, Inc., as
       amended.*
10.30  Management and License Agreement, dated July 28, 1993, between Shells of
       North Tampa, Inc. and Shells Seafood Restaurants, Inc., as amended.*
10.31  Management and License Agreement, dated July 29, 1993, between Shells of
       Sarasota South, Inc. and Shells Seafood Restaurants, Inc., as amended.*
10.32  Amended Option Agreement dated August 10, 1995 between Shells Seafood
       Restaurants, Inc. and Shells of Carrollwood Village, Inc.*
10.33  Amended Option Agreement, dated August 11, 1995 between Shells Seafood
       Restaurants, Inc. and Shells of North Tampa, Inc.*
10.34  Amended Option Agreement, dated August 16, 1995 by and between Shells
       Seafood Restaurants, Inc. and Shells of Sarasota South, Inc.*
10.35  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.*

                                       25

<PAGE>


10.36  Asset Purchase Agreement, dated September 30, 1994 between Shells of St.
       Pete Beach, Inc. and the Bleckley Corporation.*
10.37  Assignment Agreement, dated September 30, 1994 between Shells of St. Pete
       Beach, Inc. and the Bleckley Corporation.*
10.38  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.*
10.39  Continuing and Unconditional Guaranty by Shells Seafood Restaurants, Inc.
       for the benefit of the Bleckley Corporation.*
10.40  Security Agreement, dated September 30, 1995 between Shells of St. Pete
       Beach, Inc. and the Bleckley Corporation.*
10.41  Assignment Agreement, dated November 1, 1993 between Shells of
       Countryside Square, Inc. and Clearwater Food Service, Inc.*
10.42  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.*
10.43  Form of Directors Indemnification Agreement.*
10.44  Form of Extension Agreement, effective March 30, 1996 by and among
       Frederick R. Adler, The MicroCap Fund, Inc., Longview Partners, L.P. and
       Shells Seafood Restaurants, Inc.*
10.45  Form of Amended and Restated Common Stock Warrant Agreement, effective as
       of February 1, 1996.*
10.46  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.**
10.47  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.**
10.48  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**
10.49  Equipment Lease Agreement between Captec and Shells Seafood Restaurants,
       Inc.
10.50  Loan Agreement, dated January 15, 1998, between Shells Seafood 
       Restaurants, Inc. and Manufacturers Bank of Florida, in the initial 
       principal amount of $850,000.
10.51  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.
10.52  Proposal to loan $600,000 to Shells Seafood Restaurants, Inc.
       by Lyon Credit Corporation.
11     Computation of Per Share Earnings
21     Subsidiaries of the Registrant.*
27     Financial Data Schedule

* 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

         Current report on Form 8-K dated June 16, 1997 relating to the notice
         of redemption sent to the holders of the outstanding publicly 
         registered Common Stock Purchase Warrants of the Company.

(c)      Exhibits

         See (a) (3) above.

                                       26

<PAGE>


(d)      Financial Statement Schedule

See "Index to Financial Statements" at Item 8 of this Annual Report on Form
10-K. Schedules not included herein are omitted because they are not applicable
or the required information appears in the Consolidated Financial Statements or
notes thereto.

                                       48

<PAGE>


                                   SIGNATURES

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

                        SHELLS SEAFOOD RESTAURANTS, INC.

                           By /s/ WILLIAM E. HATTAWAY
                             -------------------------------
                                  William E. Hattaway, President

DATE:  March 20, 1998

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.

Signature                           Title                            Date

/s/ WILLIAM E. HATTAWAY
------------------------
William E. Hattaway             President and Director         March 20, 1998


/s/ WARREN R. NELSON
------------------------
Warren R. Nelson                Vice President of Finance,     March 20, 1998
                                Chief Financial Officer,
                                Treasurer and Secretary

/s/ FREDERICK R. ADLER
------------------------
Frederick R. Adler              Chairman of the Board          March 20, 1998


/s/ PHILIP R. CHAPMAN
------------------------
Philip R. Chapman               Director                       March 20, 1998


/s/ KAMAL MUSTAFA
------------------------
Kamal Mustafa                   Director                       March 20, 1998


/s/ JAY S. NICKSE
------------------------
Jay S. Nickse                   Director                       March 20, 1998


/s/ EDWIN F. RUSSO
------------------------
Edwin F. Russo                  Director                       March 20, 1998

                                       49