**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 Ended**December
                26, 2005**
            Commission
                File Number**: 
                0-18668**








**MAIN
      STREET RESTAURANT GROUP, INC.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            
            **11-2948370**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**5050
                NORTH 40TH STREET****SUITE
                200, PHOENIX, ARIZONA**
            
            **85018**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(602)
                852-9000**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, $.001 par value**
 **Preferred
          Stock Purchase Rights**




Indicate
      by check mark if the registrant is a well -known-seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes  ̈ No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes  ̈ No x





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  ̈





Indicated
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filer ̈
            
            Accelerated
                Filer ̈
            
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act) Yes  ̈ No x





At
      June
      27, 2005, the last business day of the registrant’s most recently completed
      second fiscal quarter, there were outstanding 16,968,849 shares of the
      registrant's common stock, $.001 par value. The aggregate market value of common
      stock held by nonaffiliates of the registrant (7,869,436 shares) based on the
      last reported sale price of the common stock as reported on the NASDAQ National
      Market on June 27, 2005 ($3.79 per share) was $29,825,162. For purposes of
      this
      computation, all officers, directors, and 10% beneficial owners of the
      registrant are deemed to be affiliates. Such determination should not be deemed
      an admission that such officers, directors, or 10% beneficial owners are, in
      fact, affiliates of the registrant.





As
      of
      March 1, 2006, there were 17,221,176 outstanding shares of the registrant’s
      common stock, $.001 par value.





**Documents
      incorporated by reference:**





Portions
      of the registrant's Proxy Statement for the 2006 Annual Meeting of Stockholders
      to be filed pursuant to Regulation 14A under the Securities Exchange Act of
      1934, as amended, are incorporated by reference into Part III.














**MAIN
      STREET RESTAURANT GROUP, INC.**





ANNUAL
      REPORT ON FORM 10-K





FISCAL
      YEAR ENDED DECEMBER 26, 2005





TABLE
      OF
      CONTENTS





PART
                I
            
            PageITEM
                1.
            BUSINESS
            1ITEM
                1A.
            RISK
                FACTORS
            21ITEM
                2.
            PROPERTIES
            31ITEM
                3.
            LEGAL
                PROCEEDINGS
            31ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            32PART
                IIITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
            32ITEM
                6.
            SELECTED
                CONSOLIDATED FINANCIAL DATA
            33ITEM
                7.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS
            34ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISKS
            47ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            47ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            47ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            48ITEM
                9B.
            OTHER
                INFORMATION
            48PART
                IIIITEM
                10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT
            49ITEM
                11.
            EXECUTIVE
                COMPENSATION
            49ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                AND RELATED STOCKHOLDER MATTERS
            49ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            49ITEM
                14.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            49PART
                IVITEM
                15.
            EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES
            49SIGNATURES
            
            53





**Statement
      Regarding Forward-Looking Statements**





The
      statements contained in this Report on Form 10-K that are not purely historical
      are forward-looking statements within the meaning of applicable securities
      laws.
      Forward-looking statements include statements regarding our "expectations,"
      "anticipation," "intentions," "beliefs," or "strategies" regarding the future.
      Forward-looking statements also include statements regarding revenue, margins,
      expenses, store openings, store closings, asset impairment charges, cash flow
      and earnings analysis for fiscal 2006 and thereafter; future restaurant
      operations and new restaurant acquisitions or development or dispositions;
      the
      restaurant industry outlook in general; and liquidity and anticipated cash
      needs
      and availability. All forward-looking statements included in this Report are
      based on information available to us as of the filing date of this Report,
      and
      we assume no obligation to update any such forward-looking statements. Our
      actual results could differ materially from the forward-looking statements
      in
      this Report. A variety of factors could cause our actual results to differ
      materially from the forward-looking statements, including the factors discussed
      in Item 1A, "Risk Factors."




*Table
            of Contents*





**PART
      I**





**ITEM
                1.**
            **BUSINESS**





***General
      Overview***





We
      are
      the world's largest franchisee of TGI Friday's restaurants, currently owning
      55
      TGI Friday's restaurants. In addition, we own and operate 10 Bamboo Club “Asian
      Bistro” restaurants. We also own four Redfish Seafood Grill and Bar restaurants
      and operate an Alice Cooper’stown restaurant in Cleveland, Ohio, pursuant to a
      license agreement with Celebrity Restaurants, L.L.C., the owner of the exclusive
      rights to operate Alice Cooper’stown restaurants. Our sales in 2005 were
      approximately $239 million, and we conducted business in 13 states.





TGI
      Friday's restaurants are full-service, casual dining establishments featuring
      a
      wide selection of freshly prepared, popular foods and beverages served by
      well-trained, friendly employees in relaxed settings. Bamboo Club “Asian Bistro”
restaurants are full-service, casual plus restaurants that feature an extensive
      and diverse menu of innovative and tantalizing Pacific Rim cuisine. Redfish
      Seafood Grill and Bar restaurants are full-service, casual dining restaurants
      that feature a broad selection of American Bistro and New Orleans style fresh
      seafood, and traditional southern dishes, as well as a “Voodoo” style lounge,
      all under one roof. Alice Cooper’stown restaurants are rock and roll and sports
      themed featuring a connection to the music celebrity Alice Cooper.





We
      operate TGI Friday’s restaurants and own the exclusive rights to develop
      additional TGI Friday's restaurants in Southern California, Nevada, Arizona,
      New
      Mexico, and El Paso, Texas. In addition, we own TGI Friday's restaurants in
      the
      metropolitan areas of Kansas City, Kansas; Kansas City, Missouri; and Omaha,
      Nebraska. We do not have any rights to develop any additional TGI Friday’s in
      Kansas, Missouri, or Nebraska. We own the Bamboo Club and Redfish brands. Our
      strategy is as follows:





·
            capitalize
                on the brand-name recognition and goodwill associated with TGI Friday’s
                restaurants;





·
            expand
                our restaurant operations through





-
            the
                development of at least an additional 14 TGI Friday’s restaurants by 2009
                in our existing development
                territories,





-
            remodel
                the exterior and interiors of our older TGI Friday’s restaurants as part
                of the new revitalization program,





-
            the
                limited development of additional Bamboo Club restaurants in certain
                key
                markets in the United States when our development capital allows,
                and





-
            the
                possible acquisition or development of restaurants operating under
                other
                restaurant concepts;





·
            improve
                our profitability by continuing to enhance the dining experience
                of our
                guests and improving operating efficiency at all of our restaurant
                brands;





·
            reduce
                our long-term debt; and





·
            sell
                non-core assets or close restaurants in underperforming
                markets.





We
      may
      explore opportunities to franchise Bamboo Club and Redfish concepts to third
      parties in the future.





1
 *Table
            of Contents*





We
      were
      incorporated in December 1988. We maintain our principal executive
      offices  at
      5050
      North 40th Street, Suite 200, Phoenix, Arizona 85018, and our telephone number
      is (602) 852-9000. Our website is located at www.mainandmain.com .
      Through
      our website, we make available free of charge our annual report on Form 10-K,
      our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy
      statements, and any amendments to those reports filed or furnished pursuant
      to
      Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports
      are
      available as soon as reasonably practicable after we electronically file those
      reports with the Securities and Exchange Commission. We also post on our website
      the charters of our Audit Committee, Compensation Committee, and Nominations
      and
      Governance Committee; our Corporate Governance Guidelines, Code of Business
      Conduct and Ethics, and Code of Ethics for the CEO and Senior Financial
      Officers, and any amendments or waivers thereto; and any other corporate
      governance materials contemplated by SEC or NASDAQ regulations. These documents
      are also available in print to any stockholder requesting a copy from our
      corporate secretary at our principal executive offices. As used in this Report,
      the terms "we," "our," "us," the “Company”, “our company,” and "Main Street"
      refers to Main Street Restaurant Group, Inc. and its subsidiaries and operating
      divisions.





***Operations***





**The
      TGI Friday's Concept**





The
      TGI
      Friday's concept is franchised by TGI Friday’s Inc., a wholly owned subsidiary
      of Carlson Restaurants Worldwide, Inc., a wholly owned subsidiary of Carlson
      Companies Inc., which is a diversified company with business interests in the
      restaurant and hospitality industries. The first TGI Friday's restaurant was
      opened in 1965 in New York City. TGI Friday’s Inc. and its predecessors have
      conducted a business since 1972 that is substantially similar to the business
      currently conducted by its franchisees. As of December 26, 2005, TGI Friday’s
      Inc., had 289 franchisor-operated and 516 franchised TGI Friday's restaurants
      operating worldwide. On December 26, 2005, TGI Friday’s Inc. owned 53,016
      shares, or approximately 0.036%, of our outstanding common stock. Holders of
      our
      common stock do not have any financial interest in TGI Friday’s Inc., and TGI
      Friday’s Inc. has no responsibility for the contents of this
      report.





TGI
      Friday's restaurants are full-service, casual dining establishments featuring
      a
      wide selection of high-quality, freshly prepared popular foods and beverages,
      including a number of innovative and distinctive menu items, such as menu items
      featuring "Jack Daniel's®” sauces. The restaurants feature quick, efficient, and
      friendly table service designed to minimize customer-waiting time and facilitate
      table turnover.





Our
      restaurants generally are open seven days a week between the hours of
      approximately 11:00 a.m. and 1:00 a.m. We have five TGI Friday’s restaurants
      that have curbside service located in Chandler, Arizona; Desert Ridge and Happy
      Valley in North Phoenix, Arizona; Surprise, Arizona; and Ontario, California.
      We
      believe that the design and operational consistency of all TGI Friday's
      restaurants enable us to benefit significantly from the name recognition and
      goodwill associated with TGI Friday's restaurants.





*The
      TGI Friday's System*





TGI
      Friday's restaurants are developed and operated pursuant to a specified system.
      TGI Friday’s Inc. maintains detailed standards, specifications, procedures, and
      operating policies to facilitate the success and consistency of all TGI Friday's
      restaurants. To ensure that the highest degree of quality and service is
      maintained, each franchisee of TGI Friday’s Inc., including our company, must
      operate each TGI Friday's restaurant in strict conformity with these methods,
      standards, and specifications. The TGI Friday's system includes the
      following:





2
 *Table
            of Contents*





·
            distinctive
                exterior and interior design, decor, color scheme, and
                furnishings;





·
            uniform
                specifications, procedures for operations, formal training, and
                standardized menus featuring special recipes and menu
                items;





·
            advertising
                and promotional programs;





·
            requirements
                for quality and uniformity of products and services offered;
                and





·
            requirements
                that franchisees purchase or lease from approved suppliers equipment,
                fixtures, furnishings, signs, inventory, recorded music, ingredients,
                and
                other products and materials that conform with the standards and
                specifications of TGI Friday’s Inc.





The
      TGI
      Friday's system is identified by means of certain trade names, service marks,
      trademarks, logos, and emblems, including the marks TGI Friday's ® and
      Friday's ® .
      We
      believe the support as well as the standards, specifications, and operating
      procedures of TGI Friday’s Inc. are important elements to our restaurant
      operations. Our policy is to execute these specifications, procedures, and
      policies to the highest level of standards of TGI Friday’s Inc.





*Menu*





We
      attempt to capitalize on the innovative and distinctive menu items that have
      been an important attribute of TGI Friday's restaurants. The menu consists
      of
      more than 85 food items, including the following:





·
            appetizers,
                such as buffalo wings, stuffed potato skins, quesadillas, spinach
                dip,
                cheese sticks, and pot stickers;





·
            a
                variety of soups, salads, sandwiches, burgers, and
                pasta;





·
            southwestern,
                oriental, and American specialty
                items;





·
            beef,
                seafood, and chicken entrees, including Jack Daniel’s®, grill
                items;





·
            a
                series of appetizers and entrees that are Atkins approved and low
                in
                carbohydrates;





·
            a
                children’s menu; and





·
            desserts.





Beverages
      include a full bar featuring wines, beers, classic and specialty cocktails,
      after dinner drinks, soft drinks, milk, milkshakes, malts, hot chocolate,
      coffee, tea, frozen fruit drinks known as Friday's SmoothiesTM, and sparkling
      fruit juice combinations known as Friday's Flings ® .





Menu
      prices range from $9 to $20 for beef, chicken, and seafood entrees; $9 to $13
      for pasta and oriental and southwestern specialty items; $4 to $9 for salads,
      sandwiches, and burgers; and $6 to $13 for appetizers and soups. Each restaurant
      offers a separate children's menu with food entrees ranging from $2 to $3.
      Alcoholic beverage sales currently account for approximately 25% of total
      revenue.





*Restaurant
      Layout*





Each
      of
      our TGI Friday's restaurants is similar in terms of exterior and interior
      design. Each restaurant features a distinctive decor accented by red-and-white
      striped awnings, brass railings, stained glass, and eclectic memorabilia. Each
      restaurant has interior dining areas and bar seating. In 2004, TGI Friday’s
      rolled out an updated design prototype that modified the exterior and interior
      designs for TGI Friday's restaurants. The updated designs provide a more modern
      look to the TGI Friday's concept. We plan to use this new design in all of
      our
      new restaurant construction and have done so for our newest TGI Friday's in
      Surprise and North Phoenix, Arizona. We also plan to use this new design for
      all
      of our future remodels. TGI Friday's Inc. has mandated that all existing TGI
      Friday’s restaurants incorporate these new design features in a brand
      revitalization program.





3
 *Table
            of Contents*





Most
      of
      our TGI Friday's restaurants are located in free-standing buildings. These
      restaurants normally contain between 5,500 and 9,000 square feet of space and
      average approximately 7,000 square feet. Most of our restaurants developed
      since
      2001 contain 6,400 to 6,800 square feet of space. Our TGI Friday's restaurants
      contain an average of 60 dining tables, seating an average of 250 guests, and
      a
      bar area seating an average of approximately 20 to 30 additional
      guests.





*Construction
      Economics*





We
      estimate that our total cost of opening a new TGI Friday's restaurant currently
      ranges from $2,700,000 to $3,200,000, exclusive of annual operating expenses
      and
      assuming that we obtain the underlying real estate under a lease arrangement.
      These costs include approximately (a) $1,875,000 to $2,375,000 for building,
      improvements, and permits, including liquor licenses, (b) $600,000 for
      furniture, fixtures, and equipment, (c) $175,000 in pre-opening expenses,
      including hiring expenses, wages for managers and hourly employees, and
      supplies, and (d) $50,000 for the initial franchise fee. Actual costs, however,
      may vary significantly depending upon a variety of factors, including the site
      and size of the restaurant and conditions in the local real estate,
      construction, and labor markets.





**The
      Bamboo Club “Asian Bistro” Concept**





Bamboo
      Club “Asian Bistro” restaurants are full-service, casual plus restaurants that
      feature an extensive and diverse menu of innovative and tantalizing Pacific
      Rim
      cuisine. Bamboo Club restaurants use fresh ingredients and premium herbs and
      spices in creative combinations to serve high-quality food and beverages that
      deliver a unique combination of delicious taste, eye-appealing color, appetizing
      aroma, and delightful texture. The Bamboo Club “Asian Bistro” concept has been
      designed to deliver a consistent and enjoyable dining experience to each guest
      in an elegant, casual/plus atmosphere. The restaurants feature a modern décor
      that provides a dramatic yet comfortable impression, with food and beverages
      prepared and served by a highly trained and skilled staff.





Bamboo
      Club restaurants are open for lunch and dinner, with hours from 11:00 a.m.
      to
      11:00 p.m. Monday through Thursday, 11:00 a.m. to midnight on Friday and
      Saturday, and 11:00 a.m. to 10:00 p.m. on Sunday. The kitchen remains open
      until
      11:00 p.m. Monday through Thursday, until midnight on Friday and Saturday to
      accommodate guests who prefer to dine late, and until 10:00 p.m. on Sunday.
      Bamboo Club restaurants take reservations and can serve large parties or
      groups.





*Menu*





Bamboo
      Club restaurants feature a menu of more than 60 items inspired by the diverse
      and exotic cuisines found in locations such as Bangkok, Canton, Singapore,
      Seoul, Hong Kong, Indonesia, Hawaii, Saigon, Thailand, Japan and other Pacific
      Rim cities and provinces. Each Bamboo Club restaurant also features a
      full-service bar that serves a variety of popular drinks and liquors, such
      as
      martinis and tropical drinks, as well as traditional mixed beverages, fine
      wines, and a wide selection of popular Asian and domestic beers.





Menu
      prices range from $8 to $10 for salads; $3 to $12 for appetizers; and $9 to
      $21
      for entrees. Alcoholic beverage sales account for approximately 23% of total
      revenue. Take-out orders represent approximately 4%-5% of total revenue.





4
 *Table
            of Contents*





*Restaurant
      Layout*





Bamboo
      Club restaurants have been designed to create a dramatic impression in an
      atmosphere that is both spacious and intimate. The restaurants' décor features
      artful lighting, dramatic murals, an eclectic mix of background music, and
      a
      general color theme of black, copper, and bamboo to create a "hip," exotic
      feeling of warmth and color.





The
      restaurants also feature an "exhibition kitchen" adjacent to the seating area,
      where diners can watch highly skilled wok chefs prepare the restaurants'
      appetizers and entrees. Most dishes are prepared and served within five to
      ten
      minutes from the time when the order is placed.





Our
      10
      Bamboo Club restaurants are located in high-traffic retail shopping
      environments. Each restaurant contains approximately 6,600 square feet of space
      in leased facilities, excluding patio areas. Each of these restaurants features
      indoor seating and bar area seating for a total of approximately 240 guests,
      which does not include outdoor patio seating at some locations.





Bamboo
      Club “Asian Bistro” restaurants have developed an extensive program to train and
      motivate restaurant employees. The Bamboo Club serving staff is professional,
      friendly, highly skilled, and knowledgeable about the restaurant's cuisine
      and
      menu selections. Servers are trained to make suggestions or recommendations
      for
      new or different menu items or combinations that patrons might try, which helps
      each guest to enjoy a memorable dining experience.





We
      originally acquired two operating Bamboo Club restaurants in Phoenix and
      Scottsdale, Arizona, and since have opened 11 additional Bamboo Club
      restaurants, one each in Wellington, Tampa, and Aventura, Florida; one each
      in
      Tempe, Tucson, and Desert Ridge (North Phoenix), Arizona; one in Newport,
      Kentucky; one in King of Prussia, Pennsylvania; one in Novi (Detroit), Michigan;
      one in Raleigh/Durham, North Carolina; and one in 2004, in Fairfax, Virginia.
      Based on poor financial performance, we negotiated lease cancellation agreements
      and closed three of these locations, as follows: Newport, Kentucky, and
      Aventura, Florida, were both closed in early 2005 and Fairfax, Virginia, was
      closed in January 2006.





*Construction
      Economics*





Our
      total
      cost of opening a new mall-based Bamboo Club restaurant location ranges between
      $1,350,000 and $2,390,000, exclusive of annual operating expenses. These costs
      include approximately (a) $600,000 to $1,500,000, net of a reduction for
      landlord’s contribution, for building improvements and permits, including liquor
      licenses, (b) $600,000 to $650,000 for furniture, fixtures, and equipment,
      and
      (c) $150,000 to $240,000 in pre-opening expenses, including hiring expenses,
      wages for managers and hourly employees, and supplies. Our total cost of opening
      our first and only free-standing Bamboo Club was approximately $3,000,000,
      exclusive of annual operating expenses. These costs included approximately
      (a)
      $2,250,000 for building improvements and permits, including liquor licenses,
      (b)
      $610,000 for furniture, fixtures, and equipment, and (c) $140,000 in pre-opening
      expenses, including hiring expenses, wages for managers and hourly employees,
      and supplies. These costs were affected by the following factors: (i) this
      was
      our first free-standing unit and therefore we had increased design and
      architects fees, (ii) the site has a balcony for seating, (iii) pre-opening
      expenses were reduced by virtue of the location being in Phoenix, where our
      company is headquartered, and (iv) delay related costs associated with the
      construction of this project. Our costs are based on our history and are our
      estimates of future costs of construction. All of these costs would need to
      be
      adjusted for inflation and changed market conditions if we elect to build a
      new
      Bamboo Club “Asian Bistro” restaurant.





5
 *Table
            of Contents*





**Our
      Redfish Seafood Grill and Bar Restaurants**





Redfish
      Seafood Grill and Bar restaurants are full-service, casual dining restaurants
      that feature a broad selection of seafood, steaks, and French Quarter cuisine.
      Our four restaurants offer unique, freshly prepared food that is served quickly
      and efficiently in a fun-filled New Orleans atmosphere. Each Redfish
      restaurant's Voodoo lounge features a unique atmosphere decorated with an
      eclectic collection of authentic New Orleans artifacts, signs, and antiques.
      Some locations have bands and, occasionally, on weekends, we have bands that
      play live rhythm and blues music. Redfish restaurants are open for lunch and
      dinner seven days a week. Hours of operation are usually from 11:00 a.m. until
      midnight Monday through Thursday and 11:00 a.m. until 1:00 a.m. on
      weekends.





*Menu*





We
      have
      developed a menu of more than 65 items for our Redfish restaurants. Signature
      dishes include blackened redfish, Bourbon Street jambalaya, crab stuffed salmon,
      and shrimp brochette. The menu also features a selection of appetizers,
      including Looziana egg rolls, Maryland-style crab cakes, Captain Morgan® ribs
      and chicken, and crab and artichoke dip. Our Redfish menu also features a
      variety of fresh seafood, steaks, ribs, pastas, fresh seasonal salads,
      sandwiches, and tempting desserts, such as bananas foster, chocolate bread
      pudding, and our signature key lime pie. The spacious Voodoo lounge offers
      a
      wide selection of the finest beers on tap, a full wine list, and an extensive
      specialty drink list.





Menu
      prices range from $7 to $20 for an entrée and $5 to $10 for salads and
      appetizers. Alcohol sales currently account for approximately 36% of total
      revenue.





*Restaurant
      Layout*





We
      developed the Redfish restaurant layout to provide a refined southern roadhouse
      atmosphere. Each of our Redfish restaurants is decorated with nostalgic mementos
      of the South, together with decorative elements that are derived from the
      individual restaurant's locale. The décor generally creates a tribute to the
      legends of American music that created the blues, as well as to the regions
      that
      developed the classic Creole, Cajun, and American cuisine served in our Redfish
      restaurants.





Most
      of
      our Redfish restaurants are located in high-traffic urban office environments.
      These restaurants contain between 6,000 and 7,300 square feet of space and
      average approximately 7,000 square feet. Our Redfish restaurants contain an
      average of 60 dining tables, seating an average of 250 guests, and a bar area
      seating an average of approximately 25 additional guests. We have developed
      a
      prototype for use in developing Redfish restaurants in the future. We
      constructed two restaurants using this prototype in Scottsdale and Chandler,
      Arizona. We developed this prototype in order to standardize the construction
      process and to reduce costs. However, we do not currently plan to build any
      new
      Redfish restaurants in the foreseeable future.





*Construction
      Economics*





Our
      total
      cost of opening a new Redfish Seafood Grill and Bar restaurant currently ranges
      from $2,400,000 to $2,600,000, exclusive of annual operating expenses and
      assuming that we obtain the underlying real estate under a lease arrangement.
      These costs include approximately (a) $1,650,000 to $1,850,000 for building,
      improvements, and permits, including liquor licenses, (b) $600,000 for
      furniture, fixtures, and equipment, and (c) $150,000 in pre-opening expenses,
      including hiring expenses, wages for managers and hourly employees, and
      supplies. Our costs are based upon our actual construction costs, with the
      last
      Redfish restaurant being built in 2002. Actual costs, however, may vary
      significantly depending upon a variety of factors, including the site and size
      of the restaurant and conditions in the local real estate and employment
      markets. These numbers would have to be updated to include inflation and changed
      construction conditions if we were to elect to build a new Redfish
      restaurant.





6
 *Table
            of Contents*





**Our
      Alice Cooper’stown Restaurant**





The
      Alice
      Cooper’stown concept was developed by Celebrity Restaurants, L.L.C. and is rock
      and roll and sports themed, featuring a connection to Alice Cooper. We own
      no
      interest in Celebrity Restaurants, L.L.C., and it owns no interest in us.
      Celebrity Restaurants operates one Alice Cooper’stown restaurant, which opened
      in December 1998 in Phoenix, Arizona. Our Alice Cooper’stown restaurant opened
      in April 2002 in a location formerly occupied by a Redfish Seafood Grill and
      Bar
      restaurant in Cleveland, Ohio. The Cleveland location’s proximity to Jacobs
      Field, the home of the Cleveland Indians, and the fact that Cleveland is the
      home of the Rock and Roll Hall of Fame, resulted in our decision to convert
      the
      location into an Alice Cooper’stown. Our Alice Cooper’stown restaurant is a
      full-service, casual dining establishment featuring a wide selection of
      high-quality, freshly prepared popular foods and beverages, including a number
      of innovative and distinctive menu items, such as menu items that are sports
      and
      rock and roll themed. In addition, the restaurant sells sports and rock and
      roll
      memorabilia. The restaurant features quick, efficient, and friendly table
      service designed to minimize customer waiting time and facilitate table
      turnover. Our Alice Cooper’stown restaurant benefits significantly from the name
      recognition of Alice Cooper and the proximity to Jacobs Field, the home of
      the
      Cleveland Indians, and the Rock and Roll Hall of Fame.





*Menu*





Our
      menu
      in Cleveland includes salads and sandwiches, pizzas and burgers, and tempting
      appetizers and desserts.





Menu
      prices range from $6 to $12 for appetizers and desserts, $9 to $20 for entrées,
      and $7 to $10 for burgers.





*Restaurant
      Layout and Staffing*





Our
      Alice
      Cooper'stown restaurant was designed to feature a rock and roll and sports
      theme, featuring the connection to rock and roll legend Alice Cooper. The
      general décor is rock and roll and sports memorabilia. The logo reads “Where
      Rock and Roll and Sports Collide”. The restaurant features a video wall in the
      bar and a large screen video in the dining room. In keeping with its sports
      bar
      theme, there are more than 35 TV screens in the restaurant. Some of our former
      Cleveland Redfish staff, including management personnel, are involved in the
      operation of this restaurant.





*Construction
      Economics*





Our
      additional construction costs to convert this location were approximately
      $400,000, and pre-opening expenses were approximately $191,000. We have no
      current plans to open any additional Alice Cooper’stown restaurants at this
      time.





***Future
      Site Selection-All Concepts***





When
      evaluating whether and where to seek expansion of our restaurant operations,
      we
      analyze a restaurant's profit potential. We consider the location of a
      restaurant to be one of the most critical elements of the restaurant's long-term
      success. Accordingly, we expend significant time and effort in investigating
      and
      evaluating potential restaurant sites. In conducting the site selection process,
      we obtain and examine detailed demographic information, such as population
      characteristics, density, and household income levels; evaluate site
      characteristics, such as visibility, accessibility, and traffic volume; consider
      the proposed restaurant's proximity to demand generators, such as shopping
      malls, lodging, and office complexes; and analyze potential competition. Our
      senior corporate management evaluates and approves each restaurant site for
      all
      of our brands prior to acquisition after extensive consultation with all levels
      of our operations group and our outside real estate consultant/broker. TGI
      Friday’s Inc. provides site selection guidelines and criteria as well as site
      selection counseling and assistance for our TGI Friday's restaurant sites.
      We
      also must obtain TGI Friday’s Inc.'s consent to enter into definitive agreements
      for a TGI Friday's restaurant site.





7
 *Table
            of Contents*





In
      March
      2003 we entered into an exclusive real estate brokerage agreement with Staubach
      Retail Services - West LLC, a nationwide brokerage company, to provide us with
      real estate and site selection consulting services. The individual with whom
      we
      worked and who became involved with our site selection left Staubach’s in March
      2004 and joined another brokerage company. With the consent of Staubach’s we
      continue to use this individual to assist us in site selection and other real
      estate matters.





***2005
      Restaurant Openings and Closures***





During
      2005, we opened two TGI Friday's restaurants, in Surprise and North Phoenix,
      Arizona. In addition, we re-acquired a TGI Friday's restaurant in Omaha,
      Nebraska from an entity that we previously sold it to, when this entity elected
      to abandon the operation and where we were still liable on the lease. We did
      not
      open any new Bamboo Club restaurants in 2005. In 2005, we closed two Bamboo
      Club
      restaurants, in Newport, Kentucky and Aventura, Florida.





**2005
      Restaurant Openings and Closures**





Restaurants
            TGI
                Friday's
            Bamboo
                Club “Asian Bistro”
            Redfish
                Seafood Grill and Bar
            Alice
                Cooper'stownDecember
                27, 2004
            **52**
            **13**
            **4**
            **1**Closed/Sold/Terminated
            -
            **(3)**
            -
            -Acquired
            **1**
            **-**
            -
            -Opened
            **2**
            -
            -
            -December
                26, 2005
            ******55**
            **10***
            ******4**
            ******1**





*
      During
      the year ended December 26, 2005, we completed negotiations and entered into
      an
      agreement with the landlord of the Bamboo Club in Fairfax, Virginia to terminate
      the lease and close this restaurant. The restaurant was closed on January 31,
      2006.





8
 *Table
            of Contents*




***Current
      Restaurants***





The
      following table sets forth information relating to each restaurant we owned
      as
      of March 1, 2006:





**Location**
            
            **Square
                Footage**
            
            **Seating
                Capacity**
            
            **In
                Operation Since**
            
            **Operated
                by Our Company Since****Acquired
                TGI Friday's Restaurants**Phoenix,
                Arizona
            
            9,396
            
            298
            
            1985
            
            1990Mesa,
                Arizona
            
            9,396
            
            298
            
            1985
            
            1990Tucson,
                Arizona
            
            7,798
            
            290
            
            1982
            
            1990Las
                Vegas, Nevada
            
            9,194
            
            298
            
            1982
            
            1990Overland
                Park, Kansas
            
            6,000
            
            220
            
            1992
            
            1993San
                Diego, California
            
            8,002
            
            234
            
            1979
            
            1993Costa
                Mesa, California
            
            8,345
            
            232
            
            1980
            
            1993Woodland
                Hills, California
            
            8,358
            
            283
            
            1980
            
            1993Valencia,
                California
            
            6,500
            
            232
            
            1993
            
            1993Torrance,
                California
            
            8,923
            
            237
            
            1982
            
            1993La
                Jolla, California
            
            9,396
            
            225
            
            1984
            
            1993Palm
                Desert, California
            
            9,194
            
            235
            
            1983
            
            1993West
                Covina, California
            
            9,396
            
            232
            
            1984
            
            1993North
                Orange, California
            
            9,194
            
            213
            
            1983
            
            1993Ontario,
                California
            
            5,700
            
            190
            
            1993
            
            1993Laguna
                Niguel, California
            
            6,730
            
            205
            
            1990
            
            1993San
                Bernardino, California
            
            9,396
            
            236
            
            1986
            
            1993Brea,
                California
            
            6,500
            
            195
            
            1991
            
            1993Riverside,
                California
            
            6,500
            
            172
            
            1991
            
            1993Pleasanton,
                California
            
            8,000
            
            255
            
            1995
            
            1998Fresno,
                California
            
            5,950
            
            230
            
            1978
            
            1998Omaha,
                Nebraska
            
            6,750
            
            227
            
            1992
            
            2005**Developed
                TGI Friday's Restaurants**Glendale,
                Arizona
            
            5,200
            
            230
            
            1993
            
            1993Albuquerque,
                New Mexico
            
            5,975
            
            270
            
            1993
            
            1993Reno,
                Nevada
            
            6,500
            
            263
            
            1994
            
            1994Oxnard,
                California
            
            6,500
            
            252
            
            1994
            
            1994Carmel
                Mountain, California
            
            6,500
            
            252
            
            1995
            
            1995Rancho
                Santa Margarita, California
            
            6,548
            
            252
            
            1995
            
            1995Cerritos,
                California
            
            6,250
            
            223
            
            1996
            
            1996Las
                Vegas, Nevada
            
            6,700
            
            251
            
            1997
            
            1997Superstition
                Springs (Mesa), Arizona
            
            6,250
            
            240
            
            1998
            
            1998Puente
                Hills, California
            
            5,800
            
            272
            
            1999
            
            1999San
                Diego, California
            
            6,800
            
            277
            
            1999
            
            1999Independence,
                Missouri
            
            5,800
            
            240
            
            1999
            
            1999Rancho
                (San Diego), California
            
            5,800
            
            240
            
            1999
            
            1999Yorba
                Linda, California
            
            5,800
            
            240
            
            1999
            
            1999Simi
                Valley, California
            
            5,800
            
            240
            
            1999
            
            1999Tucson,
                Arizona
            
            5,800
            
            240
            
            1999
            
            1999Henderson,
                Nevada
            
            5,800
            
            240
            
            1999
            
            1999Carlsbad,
                California
            
            8,146
            
            302
            
            1999
            
            1999Temecula,
                California
            
            6,400
            
            278
            
            1999
            
            1999Chandler,
                Arizona
            
            6,000
            
            240
            
            1999
            
            1999Goodyear,
                Arizona
            
            6,000
            
            207
            
            2000
            
            2000Shawnee,
                Kansas
            
            6,400
            
            245
            
            2000
            
            2000




9
 *Table
            of Contents*




**Location**
            
            **Square
                Footage**
            
            **Seating
                Capacity**
            
            **In
                Operation Since**
            
            **Operated
                by Our Company Since**Thousand
                Oaks, California
            
            6,400
            
            249
            
            2000
            
            2000Union
                City(San Francisco), California
            
            6,400
            
            240
            
            2000
            
            2000Leawood,
                Kansas
            
            7,248
            
            240
            
            2000
            
            2000North
                Long Beach, California
            
            7,177
            
            291
            
            2000
            
            2000Scottsdale,
                Arizona
            
            7,100
            
            263
            
            2000
            
            2000Albuquerque
                West, New Mexico
            
            6,426
            
            241
            
            2001
            
            2001Porter
                Ranch, California
            
            6,426
            
            245
            
            2001
            
            2001Chandler
                Arizona
            
            6,800
            
            322
            
            2002
            
            2002Desert
                Ridge Mall (Phoenix), Arizona
            
            6,573
            
            292
            
            2003
            
            2003Surprise,
                Arizona
            
            7,455
            
            305
            
            2005
            
            2005Happy
                Valley (North Phoenix), Arizona
            
            7,077
            
            304
            
            2005
            
            2005**Acquired
                Redfish Restaurants**Chicago,
                Illinois
            
            6,200
            
            214
            
            1996
            
            1997Cincinnati,
                Ohio
            
            7,133
            
            239
            
            1997
            
            1997**Developed
                Redfish Restaurants**Scottsdale,
                Arizona
            
            7,285
            
            218
            
            2001
            
            2001Chandler,
                Arizona
            
            7,216
            
            334
            
            2002
            
            2002**Acquired
                Bamboo Club Restaurants**Phoenix,
                Arizona
            
            5,400
            
            200
            
            1995
            
            2000Scottsdale,
                Arizona
            
            5,400
            
            200
            
            1997
            
            2000**Developed
                Bamboo Club Restaurants**Tampa,
                Florida
            
            8,100
            
            235
            
            2001
            
            2001West
                Palm Beach, Florida
            
            6,317
            
            180
            
            2001
            
            2001Tempe,
                Arizona
            
            6,400
            
            210
            
            2001
            
            2001Tucson,
                Arizona
            
            6,422
            
            277
            
            2002
            
            2002King
                of Prussia, Pennsylvania
            
            7,391
            
            243
            
            2002
            
            2002Novi,
                Michigan
            
            6,941
            
            291
            
            2003
            
            2003Desert
                Ridge Mall (Phoenix), Arizona
            
            7,000
            
            293
            
            2003
            
            2003Raleigh/Durham,
                North Carolina
            
            7,217
            
            271
            
            2003
            
            2003Fairfax,
                Virginia(a)
            
            6,294
            
            198
            
            2004
            
            2004(a)
                Closed on January 31, 2006**Developed
                Cooper'stown Restaurant**Cleveland,
                Ohio
            
            11,160
            
            356
            
            2002
            
            2002




10
 *Table
            of Contents*





***Restaurants
      by State***




**State**
            
            **TGI
                Friday’s**
            
            **Bamboo
                Club**
            
            **Redfish**
            
            **Cooper’stown**California
            
            31
            
            __
            
            __
            
            __Arizona
            
            13
            
            5
            
            2
            
            1Nevada
            
            4
            
            __
            
            __
            
            __Florida
            
            __
            
            2
            
            __
            
            __New
                Mexico
            
            4
            
            __
            
            __
            
            __Kansas
            
            3
            
            __
            
            __
            
            __Missouri
            
            1
            
            __
            
            __
            
            __Ohio
            
            1
            
            __
            
            1
            
            1Nebraska
            
            1
            
            __
            
            __
            
            __Illinois
            
            __
            
            __
            
            1
            
            __Pennsylvania
            
            __
            
            1
            
            __
            
            __North
                Carolina
            
            __
            
            1
            
            __
            
            __Michigan
            
            __
            
            1
            
            __
            
            __Total
            
            55
            
            10
            
            4
            
            1




***Restaurant
        Operations***
 
 **TGI
        Friday's, Bamboo Club, Redfish, and Alice Cooper'stown
        Operations**
 
 Once
        a
        restaurant is integrated into our operations, we provide a variety of corporate
        services to assure the operational success of the restaurant. Our executive
        management continually monitors restaurant operations, inspects individual
        restaurants to assure the quality of products and services and the maintenance
        of facilities, institutes procedures to enhance efficiency and reduce costs,
        and
        provides centralized support systems.
 
 We
        also
        maintain quality assurance procedures designed to assure compliance with
        the
        high quality of products and services mandated by our company and, for our
        TGI
        Friday's restaurants, by TGI Friday’s Inc. We respond to and investigate
        inquiries and complaints, initiate on-site resolution of deficiencies, and
        consult with each restaurant's staff to assure that proper action is taken
        to
        correct any deficiency. Our personnel, and the third-party quality assurance
        professionals that we occasionally retain, make unannounced visits to
        restaurants to evaluate the facilities, products, and services. We believe
        that
        our quality review program and executive oversight enhance restaurant
        operations, reduce operating costs, improve customer satisfaction, and
        facilitate the highest level of compliance with the TGI Friday's
        system.
 
 We
        maintain a zero tolerance policy for discrimination of any type towards both
        our
        employees and customers and, to this end, constantly enforce this policy
        through
        our training of new employees, our policy and training manuals, and periodic
        re-enforcement programs.
 
 **Restaurant
        Management**
 
 Our
        TGI
        Friday’s regional and restaurant management personnel are responsible for
        complying with TGI Friday’s Inc.'s and our operational standards. Our Executive
        Vice President of Operations is responsible for the operation of all of our
        brands. Assisting our Executive Vice President, we have two Directors of
        Operations for TGI Friday's and one Senior Regional Manager for Redfish
        restaurants who has a Senior General Manager assisting him. Assisting these
        positions for TGI Friday's we have six Regional Managers for the TGI Friday's
        restaurants, who are each responsible for between seven and nine of our
        restaurants within their region.
  11
 *Table
            of Contents*
 
 We
        have
        two Regional Managers for the Bamboo Club “Asian Bistro” restaurants, each
        responsible for five restaurants in their territory, who report to the Executive
        Vice President of Operations.
 
 The
        Executive Vice President of Operations reports to our CEO and President,
        who has
        the ultimate responsibility for our TGI Friday's, Redfish, Bamboo Club, and
        Alice Cooper'stown operations.
 
 Restaurant
        managers are responsible for day-to-day restaurant operations, including
        customer relations, food preparation and service; cost control, restaurant
        maintenance, and personnel relations. We typically staff our restaurants
        with an
        on-site general manager, two or three assistant managers, and a kitchen manager.
        Our TGI Friday’s restaurants average between 80 and 90 hourly employees. Our
        Redfish restaurants average approximately 65 hourly employees and our Bamboo
        Club restaurants average approximately 72 hourly employees. Our Alice
        Cooper'stown restaurant averages 50 hourly employees. We support these
        operational personnel with personnel involved in financial planning, research
        and development, and training.





**Recruitment
      and Training**





We
      attempt to hire employees who are committed to the standards maintained by
      our
      company and, for our TGI Friday's restaurants, by TGI Friday’s Inc. We also
      believe that our high unit sales volume, the image and atmosphere of the TGI
      Friday's, Bamboo Club, Redfish, and Alice Cooper’stown concepts, and our career
      advancement and employee benefit programs enable us to attract high quality
      management and restaurant personnel.





Our
      TGI
      Friday's restaurant personnel participate in continuing training programs
      maintained by TGI Friday’s Inc. and our company. In addition, we supplement
      those programs by hiring personnel devoted solely to employee training. All
      TGI
      Friday's restaurant general and assistant managers complete a formal training
      program conducted by our company. This program provides our TGI Friday's
      restaurant managers 14 weeks of training. The training covers all aspects of
      management philosophy and overall restaurant operations, including supervisory
      skills, operating and performance standards, accounting procedures, and employee
      selection and training necessary for restaurant operations. We employ personnel
      who are involved exclusively in training for both new store openings and
      continued re-training.





Our
      Bamboo Club and Redfish restaurant managers and personnel participate in
      extensive training programs consistent with our operating standards. Many of
      our
      Redfish restaurant managers are experienced TGI Friday's managers who have
      accepted positions in our Redfish operations. We have implemented all of our
      policies and training programs in order to operate the Alice Cooper’stown
      restaurant with the same high standards we have established for our other
      brands.





**Maintenance
      and Improvement of Restaurants**





We
      maintain our restaurants and all associated fixtures, furnishings, and equipment
      in conformity with the TGI Friday's system or standards we have developed for
      our Bamboo Club and Redfish restaurants. We also make necessary additions,
      alterations, repairs, and replacements to our TGI Friday's restaurants as
      required by TGI Friday’s Inc., including periodic repainting or replacement of
      obsolete signs, furnishings, equipment, and decor. We are required, subject
      to
      certain limitations, to modernize our restaurants to the now current standards
      and specifications reflected in the new prototype design of TGI Friday’s Inc.





In
      the
      past few years, we have developed a plan that we refer to as a “pop out” in four
      of our existing TGI Friday's restaurants that expands the restaurants by
      approximately 950 to 1,200 square feet. In 2004, we completed a major renovation
      in our San Diego (Mission Valley), California, and in 2005 we completed a
      renovation in our Palm Desert, California, TGI Friday's restaurants and will
      complete additional renovations in 2006.





12
 *Table
            of Contents*





We
      have
      developed plans to construct improvements for some of our TGI Friday's locations
      to develop a take-out program, which program could be used in the future with
      our other brands.





Our
      Desert Ridge (North Phoenix), Arizona location was our first fully free-standing
      Bamboo Club restaurant.





**Information
      Systems**





We
      have
      devoted considerable resources to develop and implement management information
      systems that improve the quality and flow of information throughout our company.
      We use five to seven touch-screen computer registers (point of sale terminals)
      located conveniently throughout each of our restaurants. Servers enter guest
      orders by touching the appropriate sections of the register’s computer screen,
      which transfers the information electronically to the kitchen and bar for
      preparation. These registers also are connected to a computer in the restaurant
      office and to our corporate information system by cable/Internet or frame relay.
      Management receives detailed comparative reports on each restaurant’s sales and
      expense performance daily, weekly, and monthly.





During
      2004, we completed the installation of the Aloha Technologies Point of Sale
      System (POS) and back office systems at all of our restaurants and implemented
      a
      new human resources and payroll system using the Lawson ERP system. In 2005,
      we
      completed the conversion to the new ERP system for our financial modules
      (including general ledger, accounts payable, and fixed assets), which began
      in
      late 2004. Hosting and support of the new corporate ERP system has been
      outsourced to netASPx, Inc., under an outsourcing contract that runs through
      2006. We are currently in negotiations for renewal of this
      contract.





In
      2005,
      we completed the process of converting the data connection of our restaurants
      from a frame-relay technology to an Internet-based technology, allowing us,
      among other things, to have a more streamlined technology communication process
      including more productive bandwidth and higher speed capacity. This change
      has
      allowed us to more than double the speed of our up and down path of information,
      enabling more efficient support, quicker communication, faster email access,
      less down time, and an overall savings as it relates to the time our restaurant
      managers spend “in the office”.





We
      are in
      early stages of implementation and testing of our labor scheduling modules,
      which should allow for improved labor efficiency by predicting at the restaurant
      level the labor needs based on sales expectations.





We
      believe that our management information systems enable us to increase the speed
      and accuracy of order taking and pricing, better assist guest preferences,
      efficiently schedule labor to better serve guests, quickly and accurately
      monitor food and labor costs, assist in product purchasing and product movement
      analysis, promptly access financial and operating data, and improve the accuracy
      and efficiency of store-level information and reporting.





**Supply,
      Purchasing, and Distribution**





We
      purchase or lease, on a short-term basis, all fixtures, furnishings, equipment,
      signs, recorded music, food products, supplies, inventory, and other products
      and materials required for the development and operation of our TGI Friday's
      restaurants from suppliers approved by TGI Friday’s Inc. In order to be approved
      as a supplier, a prospective supplier must demonstrate to the reasonable
      satisfaction of TGI Friday’s Inc. its ability to meet the then-current standards
      and specifications of TGI Friday’s Inc. for such items, possess adequate quality
      controls, and have the capacity to provide supplies promptly and reliably.
      We
      are not required to purchase supplies from any specified suppliers, but the
      purchase or lease of any items from an unapproved supplier requires the prior
      approval of TGI Friday’s Inc.





13
 *Table
            of Contents*





TGI
      Friday’s Inc. maintains a list of approved suppliers and a set of the TGI
      Friday's system standards and specifications. TGI Friday’s Inc. receives no
      commissions on direct sales to its franchisees, but may receive rebates and
      promotional discounts from manufacturers and suppliers, some of which are passed
      on proportionately to our company. TGI Friday’s Inc. is an approved supplier of
      various kitchen equipment and store fixtures, decorative memorabilia, and
      various paper goods, such as menus and in-store advertising materials and items.
      We are not, however, required to purchase such items from TGI Friday’s Inc. If
      we elect to purchase such items from TGI Friday’s Inc., TGI Friday’s Inc. may
      derive revenue as a result of such purchases.





We
      have
      an agreement with U.S. Foodservice, a national food distribution service
      company, to serve substantially all of our TGI Friday's restaurants in
      California, Arizona, and Nevada and for all of our Bamboo Club and Redfish
      restaurants. We have an agreement with Performance Food Group in Missouri,
      Nebraska, Kansas, and New Mexico for all of our TGI Friday's restaurants located
      in those states. Product orders are sent electronically to the supplier by
      the
      local restaurant general manager. Our suppliers have comprehensive warehouse
      and
      delivery outlets servicing each of our markets. We believe that our purchases
      from our primary suppliers enable us to maintain a high level of quality,
      achieve dependability in the receipt of our supplies, avoid the costs of
      maintaining a large purchasing department, and attain cost advantages as the
      result of volume purchases. We believe, however, that all essential products
      are
      available from other national suppliers as well as from local suppliers in
      the
      cities in which our restaurants are located in the event we determine to
      purchase our supplies from other suppliers.





In
      late
      2005, in response to escalating fuel costs, US Foodservice adopted a “fuel
      surcharge” and additional delivery cost, which the company estimates will add a
      15-25 basis point increase to our cost of goods sold for 2006 and
      beyond.





***Advertising
      and Marketing***





**TGI
      Friday's Restaurants**





We
      participate in the national marketing and advertising programs conducted by
      TGI
      Friday’s Inc. The programs use network and cable television and national
      publications and feature new menu innovations and various promotional programs.
      In addition, from time to time, we supplement the marketing and advertising
      programs conducted by TGI Friday’s Inc. through local radio, newspaper, and
      magazine advertising media and sponsorship of community events. In conjunction
      with TGI Friday’s Inc., we maintain a "frequent diner" program that includes
      awards of food, merchandise, and travel to frequent diners based upon points
      accumulated through purchases.





As
      a
      franchisee of TGI Friday’s Inc., we are able to utilize the trade names, service
      marks, trademarks, emblems, and indicia of origin of TGI Friday’s Inc.,
      including the marks TGI Friday's ® and
      Friday's ® .
      We
      advertise in various media utilizing these marks to attract new customers to
      our
      restaurants.





Each
      franchise agreement also requires us to spend at least 4% of gross sales on
      local marketing and to contribute to a national marketing pool that is
      administered by TGI Friday’s Inc. The national marketing pool is used to develop
      national advertising campaigns (creative material) and buy national, spot,
      and
      local advertising. All funds contributed to the national marketing pool are
      credited against the local advertising requirement. Our marketing pool
      contributions were 4%, 3.5%, and 3.25%, in 2005, 2004, and 2003 respectively.
      Our marketing pool contributions will be 4.0% of sales for 2006. Our marketing
      pool contributions were $8.1 million for 2005, $6.6 million for 2004, and $6.2
      million for 2003.





14
 *Table
            of Contents*





**Bamboo
      Club and Redfish Restaurants**





Our
      in-house marketing department develops advertising and marketing programs for
      our Bamboo Club and Redfish restaurants. We develop these programs with an
      emphasis on building awareness of the "Bamboo Club" and "Redfish” brands in the
      communities in which we operate Bamboo Club and Redfish restaurants and generate
      sales for those restaurants. Advertising and marketing campaigns have included
      radio and print advertising, as well as point-of-sale marketing promotions.
      We
      conduct a comprehensive advertising and public relations campaign in advance
      of
      each Bamboo Club and Redfish restaurant grand opening.





**Alice
      Cooper’stown Restaurant**





Our
      in-house marketing department has developed advertising and marketing programs
      for our Alice Cooper’stown restaurant. We will emphasize the sports and rock and
      roll connection and feature Alice Cooper.





**Expansion
      of Operations**





We
      plan
      to expand our restaurant operations through the development of additional TGI
      Friday's restaurants in our existing development territories We have no current
      plans to develop any additional Bamboo Club, Redfish, or Cooper’stown
      restaurants. See “Liquidity and Capital Resources” section of Management’s
      Discussion and Analysis of Financial Condition and Results of Operations for
      additional information regarding our financial condition.





**Leasing
      Activity**





We
      have
      signed leases to cover our obligations pursuant to our development agreements
      through 2006 in our Southern California territory and through 2008 in our
      Arizona, Nevada, and New Mexico territories. We are currently negotiating lease
      agreements to cover our 2007 Southern California obligations.





***New
      Restaurant Openings Expected in 2006***





Pursuant
      to our development agreements with TGI Friday’s Inc. we expect to open four to
      six new locations in 2006. Our location in the Orleans Hotel and Casino in
      Las
      Vegas, Nevada should open early in the second quarter of 2006, our locations
      in
      Rancho Cucamonga, California and Flagstaff, Arizona are planned to open in
      the
      third quarter of 2006, and a fourth location in Chandler, Arizona is expected
      to
      open in the last quarter of 2006. We also are under lease for two additional
      sites in Corona and Chino Hills, California, which will likely open in the
      last
      quarter of 2006 or early in 2007.





We
      currently are considering other sites for additional restaurants, but have
      not
      entered into leases or purchase agreements for such sites. We do not know how
      many sites will materialize since they depend on a variety of factors and
      economic conditions.





The
      opening of new restaurants also may be affected by increased construction,
      utility, and labor costs, delays resulting from governmental regulatory
      approvals, strikes, or work stoppages, adverse weather conditions such as the
      devastating hurricanes of 2005, and other acts of God. Newly opened restaurants
      generally operate at a loss for a period following their opening. The length
      of
      this period will depend upon a number of factors, including the time of year
      the
      restaurant is opened, the experience of our locales, leadership team, sales
      volume, and operating costs.





15
 *Table
            of Contents*





There
      can
      be no assurance that we will be successful in achieving our expansion goals
      through the development or acquisition of additional restaurants or that any
      additional restaurants that are developed or acquired will be profitable. In
      addition, the opening of additional restaurants in an existing market may have
      the effect of drawing customers from, and reducing the sales volume of, our
      existing restaurants in those markets.





***Restaurant
      Closures and Lease Terminations***





Generally
      when we close a location due to underperformance or other reasons that
      management deems appropriate, our first priority is to transfer useable assets
      to other locations. Other assets that are not transferable, including leasehold
      improvements and certain kitchen equipment, are written off at the time of
      closure (unless written down previously) or when the formal decision to close
      or
      not renew the lease is made. At the time of closure, allocated goodwill is
      also
      written off.





***Development
      Agreements***





We
      are a
      party to two development agreements with TGI Friday’s Inc., one covering
      Southern California and the other covering the southwest territory including
      the
      states of Arizona, Nevada, and New Mexico. Our development agreements obligate
      us to open at least 14 additional new TGI Friday's restaurants through 2009.
      In
      the past, we were unable to meet the terms of development agreements with TGI
      Friday’s Inc. In each instance, TGI Friday’s Inc. waived our non-compliance.
      Each development agreement grants us the right to develop additional TGI
      Friday's restaurants in a specified territory and obligates us to develop
      additional TGI Friday's restaurants in that territory in accordance with a
      specified development schedule. We own the exclusive rights to develop
      additional TGI Friday's restaurants in territories encompassing the southern
      portion of California, most of the counties in the states of Arizona, Nevada,
      and New Mexico, and El Paso, Texas. We plan to develop additional TGI Friday's
      restaurants in our existing development territories.





The
      following table sets forth information regarding our minimum requirements to
      open new TGI Friday's restaurants under our current development agreements,
      as
      well as the number of existing restaurants in each of our development
      territories.





**Year**
            
            **Southern**
              **California**
              **Territory****(a)**
            
            **Southwest**
              **Territory****(b)**
            
            **Midwest**
              **Territory****(
                c)**
            
            **Total**2005
            
            1 (d)
            
            -(e)
            
            -
            
            12006
            
            2
            
            1
            
            -
            
            32007
            
            2
            
            1(f)
            
            -
            
            32008
            
            2
            
            1(f)
            
            -
            
            32009
            
            3
            
            1
            
            -
            
            4Minimum
                Requirements
            
            10
            
            4
            
            -
            
            14Existing
                Restaurants
            
            31
            
            19
            
            5
            
            55




(a)
            Consists
                of Southern California. Agreement expires at the end of 2009.


(b)
            Consists
                of the states of Arizona and Nevada, most of the state of New Mexico,
                and
                El Paso, Texas. Agreement expires at the end of
                2009.


(c)
            Former
                development territory consisting of metropolitan Kansas City, Kansas
                and
                Kansas City, Missouri. Agreement terminated in first quarter of
                2004.


(d)
            This
                obligation has been modified to June 30,
                2006.


(e)
            Two
                restaurants were opened in 2005.


(f)
            These
                restaurants will likely open in
                2006.





16
 *Table
            of Contents*





Each
      development agreement gives TGI Friday’s Inc. certain remedies in the event that
      we fail to comply in a timely manner with our schedule for restaurant
      development, if we otherwise default under the development agreement or any
      franchise agreement relating to a restaurant within that development territory
      as described above, or if our officers or directors breach the confidentiality
      or non-compete provisions of the development agreement. The remedies available
      to TGI Friday’s Inc. include (a) the termination of our exclusive right to
      develop restaurants in the related territory; and (b) the termination of the
      development agreement. None of these remedies would adversely affect our ability
      to continue to operate our then-existing TGI Friday's restaurants.





We
      have
      entered into a Development Incentive Agreement with TGI Friday’s Inc. that
      provides royalty and development cost relief for our California operations,
      if
      certain conditions and development performances are met. The amount of such
      cost
      relief in 2005 was not material to our financial results.





***TGI
      Friday’s Restaurant Re-image and Improvement Program***





TGI
      Friday’s Inc. has developed specific plans and prototype examples of a
      restaurant remodel and improvement program to enhance the restaurants, and
      brand’s overall appeal and position in the marketplace. TGI Friday’s Inc. has
      required franchisees to remodel each location as soon as reasonably and
      financially practicable with an indicated expectation that they will be
      substantially completed by the end of 2007. The timetable and cost of remodeling
      a location can vary greatly, from $150,000 to $750,000, depending on numerous
      factors, including the age and state of repair of the restaurant, landlord
      authorization and approval, local construction code requirements and changes,
      the possibility of additional expansion of existing facilities, and compliance
      with such laws as the Americans with Disabilities Act.





We
      believe we have approximately 50 restaurants that will require remodeling to
      one
      degree or another and have scheduled to initially complete four in the first
      half of 2006. The balance of the locations will be scheduled as the results
      of
      the initial four are known and our financial position and liquidity permit.
      The
      total expected cost for the remodel campaign is estimated to be $20 to $30
      million. This level of capital expenditure, coupled with the restaurant
      development agreements through 2007, is very likely to exceed the allowable
      capital expenditures under our new revolving credit agreement, which limits
      our
      capital expenditures for all capital items to no more than $15 million per
      year.
      We are unable to predict the ramifications should we be unable to complete
      the
      re-image program under the TGI Friday’s Inc. timetable.





***Franchise
      Agreements***





We
      enter
      into or assume a separate franchise agreement with respect to each TGI Friday's
      restaurant that we acquire or develop pursuant to a development agreement.
      Each
      franchise agreement grants us an exclusive license to operate a TGI Friday's
      restaurant within a designated geographic area, which generally is a three-mile
      radius from each restaurant, and obligates us to operate such restaurant in
      accordance with the requirements and specifications established by TGI Friday’s
      Inc. relating to food preparation and quality of service as well as general
      operating procedures, advertising, records maintenance, and protection of
      trademarks. The franchise agreements restrict the ability to transfer the
      interest in the TGI Friday's restaurants without the consent of TGI Friday’s
      Inc.





17
 *Table
            of Contents*





Each
      franchise agreement requires us to pay TGI Friday’s Inc. an initial franchise
      fee of $50,000. We currently have entered into an agreement with TGI Friday's
      Inc. where we only pay $25,000 for new Southern California franchises, which
      agreement has a term equal to the Southern California Development Agreement.
      In
      addition, we are obligated to pay TGI Friday’s Inc. a royalty of generally 4% of
      gross revenue as defined in the franchise agreement for each restaurant,
      although we have entered into a California Development Incentive Agreement
      that
      will reduce a portion of these fees and TGI Friday's Inc. has agreed in certain
      circumstances to waive royalty payments for one year for any restaurant opened
      by June 30, 2006. Royalty expense under these agreements totaled $7.5 million
      during fiscal 2005, $7.2 million during fiscal 2004, and $7.5 million during
      fiscal 2003.





As
      previously discussed, each franchise agreement also requires us to spend at
      least 2% of gross sales on local marketing and to contribute up to 4% of gross
      sales to a national marketing pool that is administered by TGI Friday’s Inc.





A
      default
      under one of our franchise agreements will not constitute a default under any
      of
      our other franchise agreements. A default under the franchise agreement for
      a
      restaurant in a development territory may, however, constitute a default under
      the development agreement for that development territory.





***License
      Agreements***





Our
      license agreement with Celebrity Restaurants, L.L.C., allows us to operate
      the
      Alice Cooper'stown restaurant in Cleveland, Ohio. The agreement grants us the
      right to use Celebrity Restaurants’ exclusive rights to Alice Cooper’s likeness
      and its trademarks and trade names to operate a sports and rock and roll themed
      restaurant featuring Alice Cooper.





The
      license agreement requires us to pay Celebrity Restaurants a royalty fee in
      the
      amount of 1% of gross sales for food and beverage sales up to the amount of
      gross sales derived in 2001 in our Cleveland location through its existing
      operations; 2.5% from that point to $3,500,000; and 3% over $3,500,000. For
      the
      sale of merchandise products, such as logo and memorabilia, we pay a royalty
      of
      20% of gross sales.





The
      amounts paid under this license agreement were not material in any
      year.





***Government
      Regulation***





Each
      of
      our restaurants is subject to licensing and regulation by state and local
      departments and bureaus of alcohol control, health, sanitation, and fire and
      to
      periodic review by the state and municipal authorities for areas in which the
      restaurants are located. In addition, we are subject to local land use, zoning,
      building, planning, and traffic ordinances and regulations in the selection
      and
      acquisition of suitable sites for constructing new restaurants. Delays in
      obtaining, or denials of, or revocation or temporary suspension of, necessary
      licenses or approvals could have a material adverse impact on our development
      of
      restaurants.





We
      also
      are subject to regulation under the Fair Labor Standards Act, which governs
      such
      matters as working conditions and minimum wages. An increase in the minimum
      wage
      rate or the cost of workers' compensation insurance, both of which recently
      occurred in California, or changes in tip-credit provisions or employee benefit
      costs, including costs associated with mandated health insurance coverage or
      other costs associated with employees, could adversely affect our
      company.





18
 *Table
            of Contents*





In
      addition, we are subject to the Americans with Disabilities Act of 1990, or
      ADA,
      and similar state statutes in California. The ADA and California statutes may
      require us to make certain installations in new restaurants or renovations
      to
      existing restaurants to meet federally and state mandated requirements. To
      our
      knowledge, we are in compliance in all material respects with all applicable
      federal, state, and local laws affecting our business, with the exception of
      renovations to restaurants existing at the time of passage of the ADA and the
      California statutes.





***Competition***





The
      restaurant business is highly competitive with respect to price, service, food
      type, and quality. In addition, restaurants compete for the availability of
      restaurant personnel and managers. Our restaurants compete with a large number
      of other restaurants, including national and regional restaurant chains and
      franchised restaurant systems, many of which have greater financial resources,
      more experience, and longer operating histories than we possess. We also compete
      with locally owned, independent restaurants.





Our
      casual dining business also competes with various types of food businesses,
      as
      well as other businesses, for restaurant locations. We believe that site
      selection is one of the most crucial decisions required in connection with
      the
      development of restaurants. As the result of the presence of competing
      restaurants in our development territories, our management devotes great
      attention to obtaining what we believe will be premium locations for new
      restaurants, although we can provide no assurance that we will be successful
      in
      these efforts.





***Employees***





We
      employ
      approximately 6,000 people of whom approximately 64 are corporate management
      and
      staff personnel, 336 are restaurant area directors, managers, or trainees,
      and
      5,600 are employees in non-management restaurant positions. None of our
      employees are covered by a collective bargaining agreement with us. We have
      never experienced a major work stoppage, strike, or labor dispute. We consider
      our relations with our employees to be good.





***Executive
      Officers***





The
      following table sets forth certain information regarding our executive
      officers:





Name
            
            Age
            
            PositionWilliam
                G. Shrader
            
            58
            
            President,
                Chief Executive Officer, and DirectorMichael
                Garnreiter
            
            53
            
            Executive
                Vice President, Treasurer, and Chief Financial OfficerStuart
                K. Gee
            
            42
            
            Executive
                Vice President-Restaurant OperationsMichael
                J. Herron
            
            65
            
            General
                Counsel, Vice President, and SecretaryCynthia
                A. Ward
            
            45
            
            Vice
                President-Accounting and ControllerStephanie
                Barbini
            
            36
            
            Vice
                President-Human Resources and TrainingJudy
                Schumacher
            
            44
            
            Vice
                President-Marketing





***William
      G. (Bill) Shrader*** has
      served as our Chief Executive Officer since April 2004 and as our President
      and
      a director since June 2001. Mr. Shrader served as our Executive Vice President
      and Chief Operating Officer from March 1999 until June 2001. Mr. Shrader was
      Senior Vice President of Marketing for Tosco Marketing Company from February
      1997 to March 1999. From August 1992 to February 1997, Mr. Shrader served in
      several capacities at Circle K Stores, Inc., including President of the Arizona
      Region, President of the Petroleum Products/Services Division, Vice President
      of
      Gasoline Operations, and Vice President of Gasoline Marketing. Mr. Shrader
      began
      his career in 1976 at The Southland Corporation and departed in 1992 as National
      Director of Gasoline Marketing.





19
 *Table
            of Contents*





***Michael
      Garnreiter*** has
      served as our Executive Vice President, Treasurer, and Chief Financial Officer
      since April 2002. Prior to joining our company, Mr. Garnreiter served as a
      general partner of the international accounting firm of Arthur Andersen. Mr.
      Garnreiter began his career in public accounting with the Los Angeles office
      of
      Andersen in 1974 after graduating with a Bachelor of Science degree in
      accounting from California State University at Long Beach. In 1986, he
      transferred to their Tucson, Arizona office to become its Office Managing
      Partner. Mr. Garnreiter’s career as an accounting and audit partner spanned many
      different industries but focused on the entrepreneurial, public company. Mr.
      Garnreiter is a Certified Public Accountant in California and Arizona and
      retired from Andersen in March 2002.





***Stuart
      K. Gee*** has
      served as our Executive Vice President for Restaurant Operations since November
      2004. Prior to that he was our Senior Vice President-Restaurant
      Operations-Bamboo Club since July 2003. Mr. Gee worked for Sam Seltzer’s
      Steakhouse restaurant chain as an operating partner from October 2002 to May
      2003. Prior to that, Mr. Gee worked in various capacities for Brinker
      International-Romano’s Macaroni Grill, the last as Vice President of Operations,
      from March 1993 to March 2002. Mr. Gee was a general manager for Darden
      Restaurants-Red Lobster from March 1987 to February 1993.





***Michael
      J. Herron*** has
      served as our General Counsel since March 2001, as our Secretary since June
      2001, and as a Vice President since June 2003. Prior to joining us, Mr. Herron
      was actively engaged in the private practice of law in Aspen, Colorado from
      February 1985 until February 2001 and in Miami Beach, Florida from October
      1965
      to August 1984. While practicing in Florida, he served as outside General
      Counsel for a restaurant franchisor known as the Orange Bowl, a restaurant
      concept exclusively located in regional shopping centers through the United
      States. Mr. Herron is a former President of the Miami Beach, Florida, Bar
      Association and was a member of the Florida Bar Association’s standing Ethics
      Committee.





***Cynthia
      A. Ward*** has
      served as our Vice President-Accounting since November 2004 and as our
      Controller since July 2001. Prior to that, she was the Controller for Auer
      Precision Mfg., Inc. from August 1997 to April 2001. Ms. Ward was Controller
      for
      Knight Transportation from March 1995 to August 1997, starting as an Accounting
      Manager, and was an Accounting Manager for Swift Transportation from January
      of
      1993 to March 1995. In addition, Ms. Ward worked as an auditor for the Office
      of
      Auditor General from June 1991 to January 1993. Ms. Ward holds a Bachelor of
      Science Degree in Accounting from Arizona State University and is a Certified
      Public Accountant.





***Stephanie
      Barbini*** has
      served as our Vice President of Human Resources and Training since September
      2002. Ms. Barbini held a variety of senior level HR positions with Conoco/
      Phillips from 1994 to September 2002. During her eight-year tenure with
      Conoco/Phillips, she provided strategic human resource support to retail
      operations, corporate headquarters, petroleum refining and distribution through
      five separate multi-billion dollar acquisitions. Ms. Barbini holds a BA in
      Psychology from Oklahoma University and a Master’s in Organizational Psychology
      from Columbia University.





***Judy
      Schumacher*** has
      served as our Vice President of Marketing since February 2005. Prior to joining
      our company Ms. Schumacher owned and successfully operated a full-service
      communications consulting company, Schumacher Communications Inc., from January
      2000 to January 2005, that provided services in the areas of marketing and
      advertising, media relations, financial communications, issues research, jury
      selection, and case argument development. Prior to that, she was Director of
      Corporate Communications for Arizona Public Service Company (APS), Arizona’s
      largest electric utility, from 1996 to 2000. Prior to APS, Ms. Schumacher was
      Director of Communications and Investor Media Relations with Tosco Marketing
      Company/Circle K, from 1987 to 1996, responsible for public relations, community
      relations and employee communications.





20
 *Table
            of Contents*





**ITEM
                1A.**
            **RISK
                FACTORS**





You
      should carefully consider the following factors, in addition to the other
      information in this Report, in evaluating our company and our
      business.





**We
      face risks associated with changes in general economic and political conditions
      that affect discretionary consumer spending.**





Adverse
      economic conditions and any related decrease in discretionary spending by our
      customers have an adverse affect on our revenues and operating results. When
      the
      economy struggles, our customers may become more apprehensive about the economy
      and reduce their level of discretionary spending. In addition, rising gasoline
      prices can severely affect our business by both increasing our cost of doing
      business as a result of fuel surcharges passed on by our suppliers, and the
      reduction in our customers’ discretionary income. We believe that a decrease in
      discretionary spending could impact the frequency with which our customers
      choose to dine out or the amount they spend on meals while dining out, thereby
      decreasing our revenues. Additionally, military and governmental responses
      to
      future terrorist attacks and the prospect of future wars may exacerbate the
      then
      current economic conditions, and may lead to weakening in the economy.





**We
      depend on TGI Friday’s Inc.**





Our
      success depends, to a significant extent, on the continued vitality of the
      TGI
      Friday’s restaurant concept and the overall success of the TGI Friday’s system.
      We have no control over the management or operation of TGI Friday’s Inc. or
      other TGI Friday's franchisees. A variety of factors affecting TGI Friday’s Inc.
      or the TGI Friday's concept could have a material adverse effect on our
      business. These factors include the following:





·
            any
                business reversals that TGI Friday’s Inc. may
                encounter;





·
            a
                failure by TGI Friday’s Inc. to promote the TGI Friday's name or
                restaurant concept;





·
            the
                inability or failure of TGI Friday’s Inc. to support its franchisees,
                including our company;





·
            the
                failure to operate successfully the TGI Friday's restaurants that
                TGI
                Friday’s Inc. itself owns; and





·
            negative
                publicity with respect to TGI Friday’s Inc. or the TGI Friday's
                name.





The
      future results of the operations of our restaurants will not necessarily reflect
      the results achieved by TGI Friday’s Inc. or its other franchisees, but will
      depend upon such factors as the effectiveness of our management team, the
      locations and markets of our restaurants, and the operating results of those
      restaurants.





We
      pay
      into a marketing pool for development and execution of a national marketing
      campaign. During the campaign, TGI Friday’s Inc. can select specific products to
      promote and pricing levels that may not be favorable to us in our markets.
      For
      example, during the third quarter of 2005 (and again in the first quarter of
      2006) the national advertising campaign featured a “three course meal for
      $12.99”. While this value proposition drove increasing traffic, it represented a
      reduction from regular retail prices of nearly 40%. There were no retail pricing
      options available to us for the different markets in which we operate throughout
      the United States.





21
 *Table
            of Contents*





**Our
      franchise agreements with TGI Friday’s Inc. require substantial
      payments.**





Our
      franchise agreement with TGI Friday’s Inc. for each TGI Friday's restaurant that
      we own generally requires us to pay an initial franchise fee of $50,000,
      although currently the fee is $25,000 in Southern California, pay royalties
      of
      generally 4% of the restaurant’s gross sales, although we have entered into a
      California Development Incentive Agreement that will reduce a portion of these
      fees, and spend up to 4% of the restaurant’s gross sales on advertising, which
      may include contributions to a national marketing pool administered by TGI
      Friday’s Inc.





TGI
      Friday’s Inc. requires us and its other franchisees to contribute a percentage
      of gross sales to the national marketing pool, which has been set at 4.0% for
      2006. We must pay or accrue these amounts regardless of whether or not our
      restaurants are profitable.





If
      we
      fail to satisfy these requirements or otherwise default under the franchise
      agreements, we could be subject to potential damages for breach of contract
      and
      could lose our franchise rights for some or all of our TGI Friday's restaurants.
      We also could lose our rights to develop additional TGI Friday's restaurants.





**Our
      development agreements with TGI Friday’s Inc. require us to open additional TGI
      Friday’s restaurants and re-image or remodel our existing
      locations.**





Our
      development agreements with TGI Friday’s Inc. require us to open additional TGI
      Friday's restaurants. We may not be able to secure sufficient restaurant sites
      that we believe are suitable or we may not be able to develop restaurants on
      terms and conditions that we consider favorable in order to satisfy the
      requirements of the development agreements. The development agreements give
      TGI
      Friday’s Inc. certain remedies in the event that we fail to comply with the
      development schedule in a timely manner or if we breach the confidentiality
      or
      non-compete provisions of the development agreements. These remedies include,
      under certain circumstances, the right to reduce the number of restaurants
      we
      may develop in the related development territory or to terminate our exclusive
      right to develop restaurants in the related development territory. **** In
      the
      past, we have negotiated waivers from TGI Friday’s Inc. of the obligations we
      have not fulfilled. However, we can provide no assurance that we will
      successfully fulfill these obligations in the future or, if we do not, that
      we
      will be able to obtain waivers.





We
      believe we have approximately 50 restaurants that will require remodeling to
      one
      degree or another. The total expected cost for the remodel campaign is estimated
      to be $20 to $30 million. Even if we had access to the cash or borrowings for
      this program, the level of total capital expenditures, coupled with the
      restaurant development agreements through 2007, is very likely to exceed the
      allowable capital expenditures under our new revolving credit agreement, which
      limits our capital expenditures for all capital items to no more than $15
      million per year. We may not have the manpower to complete the remodel program
      by the end of 2007. Our franchise agreements require us to comply with remodel
      requirements from TGI Friday’s Inc. but we believe such requirements must be
      reasonable to be enforceable and, based on the enormity of the project for
      us,
      the current requirements may not be reasonable. We are unable to predict the
      ramifications should we be unable to complete the re-image program under the
      TGI
      Friday’s Inc. timetable.





**Our
      growth strategy depends on opening new restaurants. Our ability to expand our
      restaurant base is influenced by factors beyond our control, which may slow
      restaurant development and expansion and impair our
      growth.**





We
      are
      pursuing an aggressive but disciplined growth strategy, which, to be successful,
      will depend in large part on our ability to open new restaurants and to operate
      these restaurants on a profitable basis. We anticipate that our new restaurants
      will generally take several months to reach planned operating levels due to
      inefficiencies typically associated with new restaurants, including lack of
      market awareness, the need to hire and train sufficient team members, and other
      factors. We cannot guarantee that we will be able to achieve our expansion
      goals
      or that new restaurants will be opened profitably. Further, we cannot assure
      that any restaurant we open will obtain operating results similar to those
      of
      our existing restaurants. One of our biggest challenges in meeting our growth
      objectives will be to locate and secure an adequate supply of suitable new
      restaurant sites. We have experienced delays in opening some of our restaurants
      and may experience delays in the future. Delays or failures in opening new
      restaurants could materially and adversely affect our planned growth. The
      success of our planned expansion will depend upon numerous factors, many of
      which are beyond our control, including the following:





22
 *Table
            of Contents*





·
            the
                hiring, training, and retention of qualified operating personnel,
                especially managers;





·
            reliance
                on the knowledge of our executives to identify available and suitable
                restaurant sites;





·
            competition
                for restaurant sites;





·
            negotiation
                of favorable lease terms;





·
            timely
                development of new restaurants, including the availability of construction
                materials and labor;





·
            management
                of construction and development costs of new
                restaurants;





·
            securing
                required governmental approvals and permits in a timely manner, or
                at
                all;





·
            cost
                and availability of capital;





·
            competition
                in our markets; and





·
            general
                economic conditions.





**Our
      assets may become impaired due to changing economic
      conditions.**





Our
      assets may become impaired due to changing economic conditions. When we
      encounter a “triggering” event, decide to close a restaurant, or perform a
      periodic review of our marginally performing locations (particularly in the
      fourth quarter of each year), we record appropriate asset impairment charges
      if
      necessary. The amount of impairment charges and the allocation of goodwill,
      if
      any, is based upon assessments of current and future economic conditions and
      their estimated impact on our ability to recover our investment in long-lived
      assets. Even in strong economic conditions, there can be conditions or local
      situations that might require the recording of asset impairment charges. We
      will
      continue to perform periodic asset impairment tests and it is likely that we
      will record future asset impairment charges.





**Our
      ability to utilize our revolving credit agreement and our ability to raise
      capital in the future may be limited, which could adversely impact our business.**





Our
      new
      revolving credit agreement contains a number of restrictive covenants that
      limit
      our ability to, among other things **,** engage
      in
      mergers, acquisitions, joint ventures, and sale-leaseback transactions, and
      to
      sell assets, incur indebtedness, make investments, create liens, and pay
      dividends. Our revolving credit agreement also requires us to maintain
      compliance with specified financial ratios and tests, including an annual
      limitation on capital expenditures of $15 million. These restrictions could
      affect our ability to operate our business and may limit our ability to take
      advantage of potential business opportunities as they arise.





23
 *Table
            of Contents*





Changes
      in our operating plans, acceleration of our expansion plans, lower than
      anticipated sales, increased costs, or other events, including those described
      in this section, may cause us to seek additional debt or equity financing on
      an
      accelerated basis. Financing may not be available on acceptable terms, or at
      all, and our failure to raise capital when needed could negatively impact our
      growth and other plans as well as our financial condition and results of
      operations. Additional equity financing may be dilutive to the holders of our
      common stock and debt financing, if available, may involve significant cash
      payment obligations and covenants that restrict our ability to operate our
      business.





**We
      have significant debt, and we may be unable to continue to meet debt
      covenants.**





We
      have
      incurred significant indebtedness in connection with our growth strategy. As
      of
      December 26, 2005, we had long-term debt of approximately $38 million, including
      the current portion, and a working capital deficit of $18 million. Our
      borrowings include financial covenants, which have been amended and revised
      from
      time to time, generally based on EBITDA, which limit the amount we can borrow.
      These debt agreements require us to measure our compliance with financial
      covenants each fiscal quarter. If we fail to meet any financial covenants,
      our
      lenders could call their loans immediately. There can be no assurance we will
      continue to meet these covenants in the future. Currently, the assets of all
      of
      our restaurants are pledged directly or indirectly to secure our debt
      obligations.





**Our
      borrowings involve substantial interest expense.**





Our
      borrowings will result in interest expense of approximately $4.0 million in
      2006
      and $3.5 million in 2007, based on currently prevailing interest rates and
      assuming outstanding and contemplated indebtedness is paid in accordance with
      the existing payment schedules without any prepayments or additional borrowings.
      Additionally, current interest rates have significantly increased from
      historically low levels. If interest rates were to continue to increase, our
      interest costs would also increase, since all of our debt, before consideration
      of the impact of our swap agreements, is variable interest rate debt. We must
      make these interest and principal payments regardless of our operating results.





**We
      depend on a key food product distributor** .





We
      depend
      on U.S. Foodservice, a national food distribution service company, to serve
      substantially all of our restaurants in California, Arizona, and Nevada and
      for
      all of our Bamboo Club and Redfish restaurants. U.S. Foodservice is a subsidiary
      of Royal Ahold. The inability of U.S. Foodservice to continue providing us
      with
      a high level of quality and dependability in the receipt of our supplies, at
      the
      cost advantages resulting from our volume purchases, could have a material
      impact on our business.





Various
      factors beyond our control, including adverse weather conditions, governmental
      regulation, production, availability, recalls of food products, and seasonality
      may affect our food costs or cause a disruption in our supply chain. Chicken
      and
      beef represented a substantial portion of our food purchases in 2005. We enter
      into periodic and in some cases annual supply contracts with our beef and
      chicken suppliers, generally at fixed prices during the contract term. Changes
      in the price or availability of chicken and beef could materially adversely
      affect our profitably. We cannot predict whether we will be able to anticipate
      and react to changing food costs by adjusting our purchasing practices and
      menu
      prices, and a failure to do so could adversely affect our operating results.
      In
      addition, because we frequently provide “value-priced” promotional items, we may
      not be able to pass along commodity price increases to our guests.





We
      believe that all essential products are available from other national suppliers
      as well as from local suppliers in the cities in which our restaurants are
      located in the event we must purchase our products from other suppliers;
      however, there can be no assurance that we will be able to match quality, price,
      or dependability of supply.





24
 *Table
            of Contents*





**Health
      concerns relating to the consumption of chicken, beef, or other food products
      could affect consumer preferences and could negatively impact our results of
      operations.**





Like
      other restaurant chains, consumer preferences could be affected by health
      concerns about the consumption of chicken or beef, the key ingredients in many
      of our menu items, or negative publicity concerning food quality, illness and
      injury generally, such as negative publicity concerning E. coli, “mad cow” or
      foot-and-mouth disease, “avian bird flu”, publication of government or industry
      findings concerning food products served by us, or other health concerns or
      operating issues stemming from one restaurant or a limited number of
      restaurants. A decrease in guest traffic to our restaurants as a result of
      these
      health concerns or negative publicity or as a result of a change in our menu
      or
      concept could materially harm our business.





**We
      face risks associated with the expansion of our
      operations.**





The
      success of our business depends on our ability to expand the number of our
      restaurants, either by developing or acquiring additional restaurants. Our
      success also depends on our ability to operate and manage successfully our
      growing operations. Our ability to expand successfully will depend upon a number
      of factors, including the following:





·
            the
                availability and cost of suitable restaurant locations for
                development;





·
            the
                availability of restaurant acquisition
                opportunities;





·
            the
                hiring, training, and retention of additional management and restaurant
                personnel;





·
            the
                availability of adequate financing;





·
            the
                continued development and implementation of management information
                systems;





·
            competitive
                factors; and





·
            general
                economic and business conditions.





Increased
      construction costs and delays resulting from governmental regulatory approvals,
      strikes, or work stoppages, adverse weather conditions, and various acts of
      God
      may also affect the opening of new restaurants. Newly opened restaurants may
      operate at a loss for a period following their initial opening. The length
      of
      this period will depend upon a number of factors, including the time of the
      year
      the restaurant is opened, the sales volume, and our ability to control costs.
      We
      may not successfully achieve our expansion goals. Additional restaurants that
      we
      develop or acquire may not be profitable.





**New
      restaurants added to our existing markets may take sales from existing
      restaurants.**





We
      intend
      to open new restaurants in our existing markets, which may reduce sales
      performance and guest visits for existing restaurants in those markets. In
      addition, new restaurants added in existing markets may not achieve sales and
      operating performance at the same level as established restaurants in the
      market.





**We
      will need additional capital for expansion, which may or may not be
      available.**





We
      will
      need additional funds to develop new restaurants, including funds for
      construction, tenant improvements, furniture, fixtures, equipment, training
      of
      employees, permits, initial franchise fees, and other similar expenditures.
      However, we believe our cash flows from operations in 2006 will be sufficient
      to
      fund all of our planned capital expansion, which includes opening four to six
      new restaurants. However, we will require funds to develop additional TGI
      Friday's restaurants after 2006 and to pursue any additional restaurant
      development or restaurant acquisition opportunities that may arise and to comply
      with our required minimum restaurant openings in accordance with our development
      agreements with TGI Friday’s Inc. In addition, we will require $20 to $30
      million over the next few years to complete the TGI Friday’s image
      revitalization program for our existing locations. The capital available for
      this program, if available, is subject to the limitations imposed upon us by
      our
      new bank financing, which limits our annual capital expenditures for all asset
      additions and replacements to $15 million.





25
 *Table
            of Contents*





In
      the
      future, we may seek additional equity or debt financing to provide funds so
      that
      we can develop or acquire additional restaurants and to pay down debt. Such
      financing may not be available or may not be available on satisfactory terms.
      If
      financing is not available on satisfactory terms, we may be unable to satisfy
      our obligations under our development agreements with TGI Friday’s Inc. or
      otherwise to expand our restaurant operations. While debt financing will enable
      us to add more restaurants than we otherwise would be able to add, debt
      financing increases expenses and is limited as to availability due to our past
      financial results, and we must repay the debt regardless of our operating
      results. Future equity financings will likely result in dilution to our
      stockholders, and that dilution could be significant.





**We
      face risks that affect the restaurant industry in general** .





A
      variety
      of factors over which we have no control may affect the ownership and operation
      of restaurants. These factors include adverse changes in national, regional,
      or
      local economic or market conditions; increased costs of labor or food products;
      fuel, utility, energy and other price increases; the number, density, and
      location of competitors; and changing demographics, traffic patterns, and
      consumer tastes, habits, and spending priorities.





Third
      parties may file lawsuits against us based on discrimination, personal injury,
      claims for injuries or damages caused by serving alcoholic beverages to an
      intoxicated person or to a minor, or other claims. As a multi-unit restaurant
      operator, our business could be adversely affected by publicity about food
      quality, illness, injury, or other health and safety concerns or operating
      issues at one restaurant or a limited number of restaurants operated under
      the
      same name, whether or not we actually own or manage the restaurants in question.
      We cannot predict any of these factors with any degree of certainty. Any one
      or
      more of these factors could have a material adverse effect on our
      business.





Employees
      may file claims or lawsuits against us based on discrimination or wrongful
      termination or based upon their rights created by the state laws wherein we
      do
      business. These claims or lawsuits could result in unfavorable publicity and
      could have a material adverse effect on our business.





**We
      will be subject to the risks associated with franchising operations if we begin
      franchising the Redfish or Bamboo Club concepts** .





We
      do not
      have any immediate plans to begin franchising. However, we will be subject
      to
      the risks associated with franchising if we begin franchising activities in
      the
      future. If we develop a franchising program, our success as a franchisor will
      depend upon our ability to develop and implement a successful system of concepts
      and operating standards and to attract and identify suitable franchisees with
      adequate business experience and access to sufficient capital to enable them
      to
      open and operate restaurants in a manner consistent with our concepts and
      operating standards. We cannot provide assurance that we would be able to
      successfully meet these challenges as a franchisor. In addition, as a franchisor
      we would be subject to a variety of federal and state laws and regulations,
      including Federal Trade Commission regulations, governing the offer and sale
      of
      franchises. These laws and regulations could result in significant increased
      expenses and potential liabilities for our company in the event we engage in
      franchising activities in the future.





**We
      have substantial operations in California.**





We
      have
      31 of our 70 restaurants located in California. The state of California has
      a
      higher minimum wage rate than the rest of the United States and there have
      been
      recent initiatives to further increase the minimum wage. Additionally, tips
      received by our servers are not allowed to offset this minimum wage in
      California.





26
 *Table
            of Contents*





We
      have
      determined that there are many cost categories that are significantly higher
      in
      California than most other markets in which we operate, including
      occupancy-related costs, labor, liability and workers compensation insurance,
      and litigation.





**We
      face rising insurance costs.**





The
      cost
      of workers compensation insurance, general liability insurance, health
      insurance, and directors and officers liability insurance has risen
      significantly in the past few years and is expected to continue to increase
      in
      2006. In California, we face significantly higher benefits and costs for
      workers’ compensation claims as compared to other markets. We may be unable to
      make the improvements in our operations to mitigate the effects of increased
      frequency and higher costs.





**We
      face intense competition.**





The
      restaurant business is highly competitive with respect to price, service, and
      food type and quality. Restaurant operators also compete for attractive
      restaurant sites and qualified restaurant personnel and managers. Our
      restaurants compete with a large number of other restaurants, including national
      and regional restaurant chains and franchised restaurant systems, as well as
      with locally owned, independent restaurants. Many of our competitors have
      greater financial resources, more experience, and longer operating histories
      than we possess.





**We
      depend upon our senior management.**





Our
      future success significantly depends on the continued services and performance
      of our key management personnel, particularly Bill Shrader, our chief executive
      officer and president, Michael Garnreiter, our chief financial officer, and
      Stuart Gee, our executive vice president of operations. Our future performance
      will depend on our ability to motivate and retain these and other key officers
      and key team members, particularly regional operations directors, restaurant
      general managers, and kitchen managers. Competition for these employees is
      intense. The loss of the services of members of our senior management team
      or
      the inability to attract additional qualified personnel as needed could
      materially harm our business.





**We
      may not be able to attract and retain qualified personnel to operate and manage
      our restaurants.**





Our
      success and the success of our individual restaurants depends on our ability
      to
      attract, motivate and retain a sufficient number of qualified restaurant
      employees, including restaurant managers, kitchen staff, and wait staff. The
      inability to recruit and maintain these individuals may delay planned openings
      of new restaurants or result in high employee turnover in existing restaurants.
      This could inhibit our expansion plans and business performance and, to the
      extent that a labor shortage may force us to pay higher wages, harm our
      profitability.





**We
      face risks associated with government regulation.**





Various
      federal, state, and local laws affect our business. The development and
      operation of restaurants depend to a significant extent on the selection and
      acquisition of suitable sites. These sites are subject to zoning, land use,
      environmental, traffic, and other regulations of state and local governmental
      agencies. City ordinances or other regulations, or the application of such
      ordinances or regulations, could impair our ability to construct or acquire
      restaurants in desired locations and could result in costly delays.





27
 *Table
            of Contents*





The
      delay
      or failure to obtain or maintain any licenses or permits necessary for
      operations could have a material adverse effect on our business. In addition,
      an
      increase in the minimum wage rate, employee benefit costs, or other costs
      associated with employees could adversely affect our business. We also are
      subject to the Americans with Disabilities Act of 1990 that, among other things,
      may require us to install certain fixtures or accommodations in new restaurants
      or to renovate existing restaurants to meet federally mandated
      requirements.





Sales
      of
      alcoholic beverages represent an important source of revenue for each of our
      restaurants. The temporary suspension or permanent loss of, or the inability
      to
      maintain, a liquor license for any restaurant would have an adverse effect
      on
      the operations of that restaurant. We do not plan to open a restaurant in any
      location for which we believe we cannot obtain or maintain a liquor
      license.





**We
      face increased expenditures of time and money associated with compliance with
      changing regulation of corporate governance and public
      disclosure.**





Keeping
      abreast of, and in compliance with, changing laws, regulations, and standards
      relating to corporate governance and public disclosure, including the
      Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ National Market
      rules, has required an increased amount of management attention and external
      resources. We remain committed to maintaining high standards of corporate
      governance and public disclosure. As a result, we intend to invest all
      reasonably necessary resources to comply with evolving standards, and this
      investment may result in increased general and administrative expenses and
      a
      diversion of management time and attention from revenue generating activities
      to
      compliance activities. As Sarbanes-Oxley Act compliance has evolved, its costs
      have escalated over early estimates to the point where we anticipate the
      additional expenditure of approximately $200,000-$300,000 in order to fully
      comply in 2007.





**Litigation
      could have a material adverse effect on our business.**





We
      are
      from time to time the subject of complaints or litigation from guests alleging
      food-borne illness, injury, or other food quality, health, or operational
      concerns. We may be adversely affected by publicity resulting from such
      allegations regardless of whether such allegations are valid or whether we
      are
      liable. We are also subject to complaints or allegations from former or
      prospective employees from time to time. A lawsuit or claim could result in
      an
      adverse decision against us that could have a material adverse effect on our
      business.





We
      are
      subject to state “dram shop” laws and regulations, which generally provide that
      a person injured by an intoxicated person may seek to recover damages from
      an
      establishment that wrongfully served alcoholic beverages to such person. While
      we carry liquor liability coverage as part of our existing comprehensive general
      liability insurance, we may still be subject to a judgment in excess of our
      insurance coverage and we may not be able to obtain or continue to maintain
      such
      insurance coverage at reasonable costs, or at all.





**The
      market price of our common stock has been highly volatile.**





Historically,
      the market price of our common stock has been extremely volatile. In the future,
      the market price of our common stock may be subject to wide fluctuations as
      a
      result of a variety of factors, including the following:





·
            quarterly
                variations in our operating results or those of other restaurant
                companies;





·
            changes
                in analysts' estimates of our financial
                performance;





·
            changes
                in national and regional economic conditions, the financial markets,
                or
                the restaurant industry;





28
 *Table
            of Contents*





·
            natural
                disasters;





·
            other
                developments affecting our business or other restaurant
                companies;





·
            actual
                or anticipated variations in our quarterly results of
                operations;





·
            changes
                in market valuations of companies in our
                industry;





·
            changes
                in expectations of future financial performance or changes in estimates
                of
                securities analysts;





·
            fluctuations
                in stock market prices and volumes;





·
            issuances
                of common stock or other securities in the future;
                and





·
            the
                addition or departure of key
                personnel.





The
      trading volume of our common stock has been limited, which may increase the
      volatility of the market price for our stock. In addition, the stock market
      has
      experienced extreme price and volume fluctuations in recent years. This
      volatility has had a significant effect on the market prices of securities
      issued by many companies for reasons not necessarily related to the operating
      performances of those companies.





**The
      existence of a substantial amount of stock options and warrants may adversely
      affect the stock price volatility and any future
      financings.**





Stock
      options to all employees, directors, officers, or former officers/directors,
      to
      acquire an aggregate of 3.4 million shares of common stock currently are
      outstanding, of which approximately 3.0 million are vested. An additional
      432,915 shares of common stock have been reserved for issuance upon exercise
      of
      options that may be granted under our existing stock option plans. In addition,
      we have outstanding warrants to CIC Partners to purchase 581,395 shares of
      common stock.





During
      the terms of these options and warrants, the holders of those securities will
      have the opportunity to profit from an increase in the market price of our
      common stock. The existence of options and warrants may adversely affect the
      volatility of our stock price or the terms on which we can obtain additional
      financing in the future since the holders of options and warrants can be
      expected to exercise those options at a time when we would be able to obtain
      additional capital by offering shares of common stock at prices higher than
      those provided by the exercise of such options and warrants.





**Our
      management controls a significant portion of the voting power of our common
      stock.**





Our
      directors, their related entities, and our executive officers currently own
      or
      control, directly or indirectly, approximately 6.4 million shares, or 37%,
      of
      our outstanding common stock. These directors and officers also hold options
      to
      purchase an aggregate of 1.7 million shares of common stock at exercise prices
      ranging from $1.67 to $5.81 per share. As a result, these persons voting
      together have significant voting power, including the election of directors
      and
      the approval of other corporate matters.





These
      stockholders, acting individually or together, could exert influence over
      various matters requiring stockholder approval, including the election of
      directors and approval of significant corporate transactions. This concentration
      of ownership could delay or prevent a change in control of our company, and
      make
      some transactions more difficult without the support of these stockholders.
      The
      interests of these stockholders may not always coincide with our interests
      as a
      company or the interests of other stockholders. Our certificate of incorporation
      and bylaws require a 66 2/3% supermajority vote of our stockholders to remove a director or to amend
      specified provisions of our certificate of incorporation or bylaws.





29
 *Table
            of Contents*





**Provisions
      in Delaware law and our charter may prevent or delay a change of control, even
      if that change of control may be beneficial to our
      stockholders.**





We
      are
      subject to the Delaware anti-takeover law regulating corporate takeovers. These
      anti-takeover laws prevent Delaware corporations from engaging in business
      combinations with any stockholder, including all affiliates and associates
      of
      the stockholder, who owns 15.0% or more of the corporation’s outstanding voting
      stock, for three years following the date that the stockholder acquired 15.0%
      or
      more of the corporation’s voting stock unless specified conditions are
      met.





Our
      amended and restated certificate of incorporation and our amended and restated
      bylaws include a number of provisions that may deter or impede hostile takeovers
      or changes of control. These provisions:





·
            authorize
                our board of directors to establish one or more series of preferred
                stock,
                the terms of which can be determined by the board of directors at
                the time
                of issuance;





·
            require
                that any action required or permitted to be taken by our stockholders
                must
                be effected at a duly called annual or special meeting of the stockholders
                and may not be effected by any consent in
                writing;





·
            state
                that special meetings of our stockholders may be called only by the
                board
                of directors or by a committee of the board of directors to which
                the
                board of directors has delegated such
                authority;





·
            establish
                advance notice requirements for submitting nominations for election
                to the
                board of directors and for proposing matters that can be acted upon
                by
                stockholders at the meeting;





·
            provide
                that certain provisions of our certificate of incorporation can be
                amended
                only by supermajority vote of the outstanding shares;





·
            allow
                our directors to fill vacancies on our board of directors;
                and





·
            provide
                that the authorized number of directors may be changed by resolution
                of
                the board of directors.





Our
      company has also adopted a stockholder rights plan intended to encourage anyone
      seeking to acquire us to negotiate with our board of directors prior to
      attempting a takeover. While the plan was designed to guard against coercive
      or
      unfair tactics to gain control of our company, the plan may have the effect
      of
      making more difficult or delaying any attempts by others to obtain control
      of
      our company.





**Sales
      of large numbers of shares could adversely affect the price of our common
      stock.**





Sales
      of
      substantial amounts of common stock in the public market, or even the potential
      for such sales, could adversely affect prevailing market prices for our common
      stock and could adversely affect our ability to raise capital. As of March
      1,
      2006, there were approximately 17.3 million shares of our common stock
      outstanding. All of these shares are freely transferable without restriction
      under the securities laws, unless they are held by our "affiliates," as that
      term is defined in the securities laws. Affiliates also are subject to certain
      of the resale limitations of Rule 144. Generally, under Rule 144, each person
      that beneficially owns restricted securities with respect to which at least
      one
      year has elapsed since the later of the date the shares were acquired from
      us or
      one of our affiliates may, every three months, sell in ordinary brokerage
      transactions or to market makers an amount of shares equal to the greater of
      1%
      of our then-outstanding common stock or the average weekly trading volume for
      the four weeks prior to the proposed sale of such shares.





30
 *Table
            of Contents*





**We
      do not anticipate that we will pay dividends.**





We
      have
      never paid any cash or stock dividends on our common stock, and we do not
      anticipate that we will pay dividends in the foreseeable future. We intend
      to
      apply any earnings to the expansion and development of our business. In
      addition, the terms of our credit facility limits our ability to pay dividends
      on our common stock.





**ITEM
                2.**
            **PROPERTIES**





We
      have a
      lease agreement, which expires in 2012, for our corporate offices covering
      18,100 square feet in a four-story office building in Phoenix, Arizona. We
      believe that the leased space is adequate for our current and reasonably
      anticipated future needs.





We
      also
      lease space for all of our restaurants. The initial lease terms range from
      10 to
      20 years and usually contain renewal options for up to 20 years. The leases
      typically provide for a fixed rental payment plus a percentage of our revenue
      in
      excess of a specified amount.





**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





From
      time
      to time, we are subject to routine contract, negligence, employment related,
      and
      other litigation in the ordinary course of business.





We
      have
      been served with two lawsuits filed on behalf of current employees, seeking
      damages, under California law, for both missed breaks and missed meal breaks
      the
      employees allege they did not receive. These lawsuits seek to establish a class
      action relating to our California operations. We have vigorously defended these
      lawsuits, both on the merits of the employees’ cases and the issues relating to
      class action status. In July 2005, the court ruled to grant class action status
      in one of these cases. During the fourth quarter of 2005, the appellate Court
      in
      California ruled on the same issues involved in our cases, which effectively
      characterizes damages as a penalty and not wages, which shortens the period
      for
      which we could be liable to one year versus three and eliminates the exposure
      for the employees’ attorney’s fees. Subsequent
      to that ruling, additional appellate court rulings were made including one
      which
      ruled that the claim was a claim for wages. As
      a
      result of the overall developments in our cases and the appellate court rulings
      over similar facts in unrelated cases, we recorded, in the fourth quarter of
      2005, an estimated settlement reserve of $1.5 million. We continue to
      aggressively defend our company and we are unable to predict the ultimate
      amount, if any, of a settlement or the timing of any payments.





The
      state
      of California initiated a sales tax audit of our restaurants and determined
      that
      the optional 15% gratuity added to checks for parties of eight or more should
      have been subject to sales tax and, as such, has assessed taxes and related
      penalties of initially approximately $900,000, but which have since been reduced
      to approximately $500,000. We have vigorously contested this assessment. The
      first of various appeal conferences was held in November 2003. In February
      2004,
      we were notified that our appeal was denied by the appeals officer. We were
      in
      the process of preparing a second appeal to the full state of California
      Franchise Tax Board, but this appeal is being held in abeyance pending our
      ability to reach a settlement with the state. In February 2006, we were notified
      by the California Settlement Bureau that our offer was rejected. We plan to
      continue to see if an acceptable settlement can be reached and, failing that,
      we
      plan to appeal this decision and continue to contest this assessment. We are
      unable to predict the outcome of this proceeding.





31
 *Table
            of Contents*





Other
      than those proceedings, we are not subject to any pending litigation that we
      believe will have a material adverse effect on our business, financial
      condition, results of operations, or liquidity.





**ITEM4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**





None.





**PART
      II**





**ITEM
                5.**
            **MARKET
                FOR THE REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
                ISSUER
                PURCHASES OF EQUITY
                SECURITIES**





Our
      common stock is quoted on the NASDAQ National Market under the symbol "MAIN".





The
      following table sets forth the quarterly high and low sales prices of our common
      stock for the periods indicated as reported by the NASDAQ National
      Market.





**High**
            
            **Low**2004First
                Quarter
            
            $
            4.45
            
            $
            1.91Second
                Quarter
            
            
            2.79
            
            
            1.81Third
                Quarter
            
            
            2.11
            
            
            1.43Fourth
                Quarter
            
            
            1.82
            
            
            1.202005First
                Quarter
            
            $
            2.60
            
            $
            1.44Second
                Quarter
            
            
            3.93
            
            
            2.17Third
                Quarter
            
            
            6.91
            
            
            3.31Fourth
                Quarter
            
            
            5.96
            
            
            4.232006First
                Quarter (through March 1, 2006)
            
            $
            5.60
            
            $
            3.51





On
      March
      1, 2006, there were 781 holders of record of our common stock and the closing
      sale price of our common stock on the NASDAQ National Market was $5.44 per
      share.





We
      have
      never declared or paid any cash dividends. We intend to retain any earnings
      to
      fund the growth of our business and do not anticipate paying any cash dividends
      in the foreseeable future. In addition, our existing debt obligations limit
      our
      ability to pay cash dividends.





**EQUITY
      COMPENSATION PLAN INFORMATION**





The
      following table sets forth information with respect to our common stock that
      may
      be issued upon the exercise of stock options, warrants, or rights under our
      various equity compensation plans as of December 26, 2005:





Plan
                Category
            
            (a)Number
                of Securities to be Issued Upon Exercise of Outstanding Options,Warrants,
                and Rights
            
            (b)Weighted
                Average Exercise Price of Outstanding Options,Warrants,
                and Rights
            
            (c)Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans (Excluding SecuritiesReflected
                in Column (a))Equity
                Compensation Plans Approved by Stockholders (1)
            
            
            3,503,335
            
            $
            3.30
            
            
            432,915Equity
                Compensation Plans Not Approved by Stockholders (2)
            
            
            581,395
            
            
            3.01
            
            
            -Total
            
            
            4,084,730
            
            
            
            
            
            432,915




(1)
            Includes
                3,370,835 of outstanding options and 132,500 shares of restricted
                stock.


(2)
            Represents
                warrants issued to CIC Partners LP (see Note
                6).




32
 *Table
            of Contents*





**ITEM6.**
            **SELECTED
                CONSOLIDATED FINANCIAL
                DATA**





The
      following table sets forth selected consolidated financial data for our company
      for the periods indicated. The selected consolidated financial data for each
      of
      the five fiscal years in the period ended December 26, 2005, has been derived
      from our consolidated financial statements which have been audited by (1) KPMG,
      LLP, our former independent accountants, for the fiscal year ended December
      31,
      2001 and (2) Mayer Hoffman McCann P.C., our current independent registered
      public accountants, for each of the four fiscal years in the period ended
      December 26, 2005.





This
      data
      should be read in conjunction with, and are qualified by reference to, our
      consolidated financial statements and the notes thereto and Item 7,
      "Management's Discussion and Analysis of Financial Condition and Results of
      Operations" included elsewhere in this Report.




**Fiscal
                Years Ended**(in
                thousands, except for per share amounts)Dec.
                26,2005
            
            Dec.
                27,2004
            
            Dec.
                29,2003
            
            Dec.
                30,2002
            
            Dec.
                31,2001Statement
                of Operations Data:Revenue
            
            $
            239,729
            
            $
            224,751
            
            $
            224,494
            
            $
            220,151
            
            $
            211,823Restaurant
                operating expenses:Cost
                of sales
            
            
            63,265
            
            
            59,025
            
            
            60,299
            
            
            61,270
            
            
            59,139Operating
                income (loss)
            
            
            (2,423
            )
            
            4,747
            
            
            (1,454
            )
            
            (3,491
            )
            
            2,921Net
                income (loss)(1)(2)
            
            $
            (7,796
            )
            $
            953
            
            $
            (2,144
            )
            $
            (8,750
            )
            $
            (259
            )Diluted
                earnings per share:Net
                income (loss) (1)(2)
            
            $
            (0.48
            )
            $
            0.07
            
            $
            (0.15
            )
            $
            (0.62
            )
            $
            (0.01
            )Weighted
                average shares outstanding - diluted
            
            
            16,321
            
            
            14,649
            
            
            14,179
            
            
            14,105
            
            
            14,048Balance
                Sheet Data:Working
                capital (deficiency)
            
            $
            (18,069
            )
            $
            (19,701
            )
            $
            (17,946
            )
            $
            (15,822
            )
            $
            (8,135
            )Total
                assets
            
            
            99,409
            
            
            103,172
            
            
            106,207
            
            
            112,395
            
            
            112,462Long-term
                debt, net of current portion
            
            
            34,902
            
            
            42,232
            
            
            47,869
            
            
            51,998
            
            
            47,232Stockholders'
                equity
            
            
            28,949
            
            
            29,285
            
            
            28,124
            
            
            28,816
            
            
            39,686


_____________________


(1)
            Fiscal
                2005, 2004, 2003, and 2002 include a charge of $939,000, $80,000,
                $270,000, and $46,000, respectively, for early extinguishment or
                refinancing of debt.


(2)
            Fiscal
                2002 includes a full valuation allowance against deferred tax
                assets.





33
 *Table
            of Contents*





**Quarterly
      Results of Operations (Unaudited)**





The
      following table presents unaudited consolidated statements of operations data
      for each of the eight quarters in the period ended December 26, 2005. We believe
      that all necessary adjustments have been included to present fairly the
      quarterly information when read in conjunction with our consolidated financial
      statements. The operating results for any quarter are not necessarily indicative
      of the results for any subsequent quarter.





**Fiscal
                Quarter Ended**(In
                thousands, except per share amounts)2005
            
            2004Dec.
                26
            
            Sept.
                26
            
            June
                27
            
            Mar.
                28
            
            Dec.
                27
            
            Sept.
                27
            
            June
                28
            
            Mar.
                29Revenue
            
            $
            57,507
            
            $
            59,120
            
            $
            61,670
            
            $
            61,432
            
            $
            52,218
            
            $
            54,845
            
            $
            56,610
            
            $
            59,079Cost
                of sales
            
            
            15,195
            
            
            15,632
            
            
            16,164
            
            
            16,274
            
            
            14,280
            
            
            14,197
            
            
            14,902
            
            
            15,646Income
                (loss) before income taxes (1)(2)
            
            
            (10,368
            )
            
            (346
            )
            
            1,550
            
            
            1,571
            
            
            (1,113
            )
            
            179
            
            
            870
            
            
            1,129Net
                income(loss) (1)(2)
            
            $
            (10,570
            )
            $
            (236
            )
            $
            1,550
            
            $
            1,461
            
            $
            (1,113
            )
            $
            117
            
            $
            820
            
            $
            1,129Net
                income (loss) per share before income taxes (1)(2)
            
            $
            (0.60
            )
            $
            (0.02
            )
            $
            0.10
            
            $
            0.11
            
            $
            (0.08
            )
            $
            0.01
            
            $
            0.06
            
            $
            0.08Net
                income (loss) per share (1)(2)
            
            $
            (0.61
            )
            $
            (0.01
            )
            $
            0.10
            
            $
            0.10
            
            $
            (0.08
            )
            $
            0.01
            
            $
            0.06
            
            $
            0.08


_____________________


(1)
            
            Fourth
                quarter fiscal 2005 and 2004 include asset impairment charges and
                other
                and lease termination fees of $6,867,000 and $1,385,000, respectively,
                including an allocation of goodwill in fiscal 2005 of
                $1,000,000.





(2)
            
            Fourth
                quarter fiscal 2005 includes $1,366,000 in interest expense related
                to the
                write-down of our swap agreements ($939,000) and the write-off of
                deferred
                financing fees ($427,000) associated with the refinancing of debt
                as
                discussed in Note 2 and Note 5 to our financial
                statements.








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





**EXECUTIVE
      SUMMARY**





**Background**





We
      commenced our restaurant operations in May 1990 with the acquisition of four
      TGI
      Friday's restaurants in Arizona and Nevada. During the past 15 years, we have
      grown through acquisitions and development of new restaurants in four brands.
      We
      currently own 70 restaurants.





During
      2004, we opened one new Bamboo Club “Asian Bistro” restaurant in Fairfax,
      Virginia, and we closed two California TGI Friday’s locations, Oakland and
      Salinas, where we made the decision not to renew the lease. In addition, we
      recorded charges in the fourth quarter for (i) the further write-down of the
      value of land held for sale in El Paso, Texas by $200,000, (ii) the impairment
      of assets in the amount of $310,000, and the estimated one-time lease
      termination fees of $875,000 covering three Bamboo Club locations, two of which
      have operating restaurants, Newport, Kentucky and Aventura, Florida, and one
      lease in Columbus, Ohio where we did not build a restaurant. We paid $575,000
      in
      lease termination fees on two of these locations.





34
 *Table
            of Contents*





During
      2005, we opened two new TGI Friday's restaurants, one in Surprise, and the
      other
      in North Phoenix (Happy Valley), Arizona, and reacquired a TGI Friday’s in
      Omaha, Nebraska that we previously owned. We also closed two Bamboo Club
      locations, one in Newport, Kentucky and the other in Aventura, Florida early
      in
      the year. Additionally, we entered into a lease termination and accrued $250,000
      in lease termination fees to close a third Bamboo Club restaurant in Fairfax,
      Virginia. In January 2006, we paid the lease termination fees and closed this
      restaurant.





During
      2005, we recorded charges for (i) non-cash asset impairment charges and other
      of
      $5,617,000, including asset impairments for four underperforming restaurant
      locations, one of which was closed in January 2006, (ii) an allocation of
      $1,000,000 of goodwill related to those restaurants, (iii) $250,000 in lease
      cancellation charges related to the restaurant that we closed in January 2006
      (paid in cash in January 2006), and (iv) a non-cash provision of $1,500,000
      for
      the estimated settlement of a lawsuit, included in general and administrative
      expenses. In addition, included in interest expense, we recorded a write-off
      of
      $427,000 for deferred financing fees and $939,000 related to the write-down
      of
      our interest rate swaps, both of which were non-cash costs associated with
      the
      debt refinancing and new debt revolving line of credit.








***Economic
      Overview***





We
      conduct business in the casual dining restaurant industry and the operating
      performance of our restaurants is directly and heavily influenced by the overall
      state of the national and local economies where our restaurants are located.
      When overall economic conditions negatively impact the financial performance
      of
      an individual restaurant, we periodically consider all of the factors
      influencing that restaurant, such as operational efficiencies, local demographic
      changes, local construction activity, competition, and other related factors.
      We
      then assess the prospect that we can improve both the short-term and long-term
      financial results, at least to a level sufficient to recover our investment
      in
      the leasehold improvements and equipment assets. There have been and likely
      will
      continue to be situations where we will make the decision that an asset is
      impaired and a write-down is required even when overall economic conditions
      are
      strong.





***Same
      Store Sales***





We
      measure and report same store sales only on a full company basis, for stores
      that have been open for at least 18 months. Our same store sales increases
      or
      decreases by quarter are as follows:


**Same
        Store Sales**
 **Year**
              
              **Annual**
              
              **First
                  Qtr**
              
              **Second
                  Qtr**
              
              **Third
                  Qtr**
              
              **Fourth
                  Qtr**2005
              
              7.7%
              
              6.3%
              
              10.8%
              
              8.5%
              
              5.0%2004
              
              2.4%
              
              5.0%
              
              (1.6)%
              
              1.3%
              
              4.2%2003
              
              1.1%
              
              1.2%
              
              (1.2)%
              
              2.3%
              
              1.4%2002
              
              0.4%
              
              2.4%
              
              1.5%
              
              (3.6)%
              
              (0.8)%
 35
 *Table
              of Contents*




***Asset
      Impairments and Write-Offs***





The
      vast
      majority of our TGI Friday's restaurants have performed well; thus, we have
      experienced a limited number of asset impairments in recent years. As the local
      and national economies strengthen and our financial performance improves or
      remains strong, the overall judgment about asset impairment write-downs, for
      all
      of our brands, becomes easier; when the economy weakens, this judgment is made
      more difficult.





In
      the
      last five years we have opened 11 new Bamboo Club restaurants. Financial results
      have been substantially below our original expectations, primarily as a result
      of the timing of when we opened these restaurants, the state of the weak
      national economy, and certain real estate specific locations that have proven
      difficult. Three of these locations, in Newport, Kentucky, Aventura, Florida,
      and Fairfax, Virginia, have performed significantly below our expectations,
      due
      in part to what we now believe to be poor real estate location decisions. Each
      of these three locations has been closed as of January 2006. Other Bamboo Club
      locations continue to perform below our expectations at levels that require
      the
      recording of asset impairment charges. In some cases, negotiations with the
      property landlord about lease or rent modifications are ongoing.





In
      the
      future and for many business reasons, we may vacate operating properties of
      any
      brand where we have a long-term lease obligation. Any such vacating of property
      will likely require us to pay fees and costs, which are likely to be
      material.





***Employee-related
      Insurance Costs and Wage Expense***





Another
      major cost category for us is employee-related insurance costs, such as health
      care and workers compensation benefits. We self-insure for the majority of
      the
      risks associated with these costs and we purchase excess insurance for
      situations where the individual cases become very costly. Each mid year and
      again at year end, with the assistance of our insurance actuaries, we evaluate
      the actual claims history to (i) predict the estimated total costs to accrue
      for
      the upcoming year, and (ii) to evaluate the level of accruals for prior years’
open claims. As claims mature, we are provided with better information and
      insight about the likely ultimate outcomes and can better estimate the ultimate
      liability for any given year. However, this judgment can impact the amount
      of
      accruals actually needed as compared to previous amounts recorded, and any
      shortfall or excess can be material.





In
      addition, 31 of our 70 restaurants are located in California. California does
      not permit us to reduce the minimum wage that we are required to pay to our
      wait
      staff by the amount of tips and gratuity they receive from our customers. This
      tip credit practice is permitted in most other states in which we operate.
      This
      condition results in a significantly higher level of wages paid to our employees
      in California compared to the other 12 states in which we operate. This
      condition also impacts worker compensation benefits and our costs in California.
      We estimate that our workers compensation cost for each claim in California
      is
      more than double the cost we experience in other states.





***Brand
      Economics***




*General*





All
      of
      our restaurants operate in the casual dining sector of the restaurant industry.
      However, because of each brand’s age and relative business maturity, and because
      of differing levels of marketing and brand recognition, each brand currently
      has
      somewhat different economic results. We do not allocate any cost of capital
      or
      general and administrative cost directly to the restaurants.





36
 *Table
            of Contents*





Restaurant
      level operating profit (ROP) includes all restaurant-specific revenues and
      direct costs of operations, including royalties and marketing costs paid to
      Carlson on behalf of the TGI Friday’s brand. Restaurant level EBITDA represents
      restaurant level cash flow, adding depreciation and amortization to
      ROP.





The
      following tables reflect TGI Friday’s and Bamboo Club brand financial data only
      (Redfish Bar and Grill and Alice Cooper’stown represent less than 10% of total
      revenue):





*TGI
      Friday’s Brand*





The
      TGI
      Friday’s brand is over 40 years old and yet remains very widely recognized and
      accepted. In spite of its age, it and has been very resilient against its
      increasingly tough competition (dollar amounts in thousands):


**2005**
              **2004**Brand
                  Revenues
              $203,800
              $188,538Restaurant
                  level Operating Profit
              $
                  19,656
              $
                  16,527Restaurant
                  level Cash Flow (EBITDA)
              $
                  26,337
              $
                  22,844EBITDA
                  as % of Revenue
              12.9%
              12.1%Average
                  Number of Restaurants
              53.6
              53.0Average
                  Annual Unit Volumes
              $
                  3,802
              $
                  3,557





*Bamboo
      Club Brand*





The
      Bamboo Club concept is significantly less mature than our TGI Friday’s brand and
      the marketing and advertising support is dramatically lower. Of our 11 locations
      at December 26, 2005, nine have been built and opened in the last four years,
      and two locations have significantly under performed our expectations. Our
      original expectation was that a restaurant achieved sales maturity within six
      to
      eight months, but we have found that it takes much longer. We now believe two
      years is a more appropriate estimation period to achieve maturity. Additionally,
      costs are higher, especially for labor, in the initial two-year period as a
      restaurant adjusts to its local market conditions and customer
      expectations (dollar
      amounts in thousands);





2005Sales
            
            ROP
            
            EBITDA
            
            #
                of LocationsClosed
                Locations*(a)*
            
            $
            1,600
            
            $
            (1,400
            )
            $
            (1,100
            )
            
            3Arizona
                and Florida
            
            
            18,600
            
            
            200
            
            
            1,400
            
            
            7Other
                Markets*(b)*
            
            
            5,800
            
            
            (1,300
            )
            
            (800
            )
            
            3Brand
                Totals
            
            $
            26,000
            
            $
            (2,500
            )
            $
            (500
            )




(a)
            Represents
                the 2005 operating activities of restaurants closed in 2005 (Newport,
                Kentucky and Aventura, Florida) and early 2006 (Fairfax, Virginia).
                Does
                not include any asset write-off or lease termination payments for
                these
                locations.


(b)
            Other
                markets represent restaurants located in Novi, Michigan; King of
                Prussia,
                Pennsylvania; and Raleigh, North Carolina.




37
 *Table
            of Contents*




***Long-Term
      Debt***




We
      are a
      highly leveraged company. Our long-term debt of approximately $38 million at
      December 26, 2005 is held by three principal lenders. We expect to pay interest
      on this debt of $4.0 million in 2006 and we expect to pay down principal by
      at
      least $3.3 million. Interest rates have increased significantly in the last
      year. If interest rates continue to rise in 2006, our annualized interest
      expense will increase by approximately $380,000 for each one percentage point
      increase in short-term interest rates (as measured by LIBOR). As a result of
      the
      impact of our swap agreements, approximately 63% of our loans are tied to
      variable interest.





In
      addition, we have two interest rate swaps, with notional amounts of $18,627,468,
      whose value or obligation changes with the change in long-term interest rates.
      On October 31, 2005, we refinanced the debt associated with our interest rate
      swaps (see Note 5 to our financial statements for details regarding refinance)
      and “hedge accounting” no longer applies although the swaps remain in place. As
      a result, we recorded the fair value of the obligation of approximately $939,000
      as an expense in the fourth quarter of 2005. In the future, we will record
      market changes in the value or obligation on these swaps as additional income
      or
      expense, directly in our statement of operations.




***Sale
      of Assets***





We
      consider selling operating or other assets from time to time, and we have an
      active program of reviewing our options and opportunities on a regular basis.
      We
      may enter into a transaction to sell non-strategic assets, or as part of a
      program to raise cash. We may sell these assets at either a gain or loss and
      this gain or loss could be material. There were no asset sale transactions
      in
      2005.




***Outlook
      2006***





A
      number
      of factors serve as the basis for optimism for 2006: (i) 2005 saw a strong
      economic rebound demonstrated by strong increasing same store sales, and the
      national economy shows positive signs so far in early 2006; (ii) the 2006 TGI
      Friday's advertising campaign; and (iii) we plan to open four to six new TGI
      Friday’s restaurants in 2006 in our strong markets of Southern California,
      Nevada, and Arizona. We expect our EBITDA to be approximately $18.0 million
      to
      $19.0 million in 2006 (see table below). This level of cash flow should allow
      us
      to meet all of our obligations as they come due and to provide sufficient cash
      flow to pay our debt obligations of principal and interest, to comply with
      our
      debt covenants, to build four to six restaurants, to remodel four to ten of
      our
      existing TGI Friday’s locations, and to provide our stores with routine capital
      equipment replacement needs.


Forecasted
                  EBITDA Reconciliation:
              **Forecasted
                  Twelve Months Ending December 25, 2006****(in
                  millions)**Net
                  Income (*)
              **$4.2**Add-Income
                  taxes
              **.3**-Interest
                  expense
              **4.0**-Depreciation
                  and Amortization
              **9.5**EBITDA
              **$18.0**


* Before
      the impact of non-cash charges such as stock options expense, asset impairments,
      write-downs or lease termination expenses in 2006, if any.





38
 *Table
            of Contents*





**Critical
      Accounting Policies**





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires a company to make
      a
      number of 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. Such estimates and assumptions affect the reported
      amounts of revenues and expenses during the reporting period. On an ongoing
      basis, we evaluate estimates and assumptions based upon historical experience
      and various other factors and circumstances. We believe our estimates and
      assumptions are reasonable in the circumstances; however, actual results may
      differ from these estimates under different future conditions.





We
      believe that the estimates and assumptions that are most important to the
      portrayal of our financial condition and results of operations, in that they
      require our most difficult, subjective, or complex judgments form the basis
      for
      the accounting policies deemed to be most critical to our operations. These
      critical accounting policies relate to the valuation and amortizable lives
      of
      long-lived assets, goodwill, and other identifiable intangible assets, valuation
      of deferred tax assets, and reserves related to self-insurance for workers
      compensation and general liability and reserves related to litigation:





(1) We
      periodically perform asset impairment analysis of long-lived assets related
      to
      our restaurant locations, goodwill, and other identifiable intangible assets.
      We
      perform these tests whenever we experience a “triggering” event, such as a
      decision to close a location or a major change in a location’s operating
      environment, or other event that might impact our ability to recover our asset
      investment. Also, we have a policy of reviewing the financial operations of
      our
      restaurant locations on at least a quarterly basis. Locations that are not
      meeting expectations are identified and continue to be watched closely
      throughout the year. Primarily in the fourth quarter, we review actual results
      and analyze budgets for the ensuing year. If we deem that a location’s results
      will continue to be below expectations, we analyze alternatives for its
      continued operation. At that time, we perform an asset impairment test. If
      we
      determine that the asset’s fair value is less than book and we will be unable to
      recover the value through operations, we record an impairment charge. Upon
      an
      event such as a formal decision to close a restaurant we may record additional
      impairment of assets, including an allocation of goodwill, and may also incur
      a
      cash cost to terminate a lease. Any carryover basis of assets is depreciated
      over the respective remaining useful lives.





(2) Periodically,
      we record (or reduce) the valuation allowance against our deferred tax assets
      to
      the amount that is more likely than not to be realized based upon recent past
      financial performance, tax reporting positions, and expectations of future
      taxable income. We expect to continue to record a full valuation allowance
      on
      any future tax benefits until we sustain profitable
      operations.





(3) We
      use an
      actuarial based methodology utilizing our historical experience factors to
      adjust periodically self-insurance reserves for workers compensation and general
      liability claims and settlements. These estimates are adjusted based upon annual
      information received in July of each year in connection with policy renewals.
      Estimated costs for the following year are accrued on a monthly basis, and
      progress against this estimate is re-evaluated based upon actual claims data
      provided to us each quarter from our insurance claims
      administrators.




(4) We
      currently use the method of accounting for employee stock options allowed under
      APB Opinion No. 25 and have adopted the disclosure provisions of SFAS No.123,
      which require pro forma disclosure of the impact of using the fair value at
      date
      of grant method of recording stock-based employee compensation. The Financial
      Accounting Standards Board (“SFAS”) issued Statement of Financial Accounting
      Standards 123-revised 2004 (“SFAS 123R”) “Share-Based Payment" which requires
      the measurement of all employee share-based payments to employees, including
      grants of employee stock options, using a fair-value-based method and the
      recording of such expense in our consolidated statements of income. The
      accounting provisions of SFAS 123R are effective for reporting periods beginning
      after June 15, 2005.




39
 *Table
            of Contents*




We
      have
      adopted the provisions of SFAS 123R effective December 27, 2005, the beginning
      of our fiscal year. Based on the options previously granted and unvested, we
      expect to record estimated stock compensation expense of $400,000 in 2006.




(5) We
      are
      from time to time the subject of complaints or litigation from guests alleging
      food-borne illness, injury, or other food quality, health, or operational
      concerns. We may be adversely affected by publicity resulting from such
      allegations regardless of whether such allegations are valid or whether we
      are
      liable. We are also subject to complaints or allegations from former or
      prospective employees from time to time. A lawsuit or claim could result in
      an
      adverse decision against us that could have a material adverse effect on our
      business. We record estimated reserves when a loss becomes probable and we
      are
      able to reasonably estimate the amount of the loss.





We
      believe estimates and assumptions related to these critical accounting policies
      are appropriate under the circumstances; however, should future events or
      occurrences result in unanticipated consequences, there could be a material
      impact on our future financial condition or results of operations.





**Results
      of Operations**





The
      following table sets forth, for the periods indicated, the percentages that
      certain items of income and expense bear to total revenue:





Fiscal
                Year EndedDecember
                26,2005
            
            December
                27,2004
            
            December
                29,2003Revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Restaurant
                operating expenses:Cost
                of sales
            
            
            26.4
            
            
            26.3
            
            
            26.9Payroll
                and benefits
            
            
            30.5
            
            
            30.8
            
            
            31.4Depreciation
                and amortization
            
            
            3.7
            
            
            3.8
            
            
            3.7Other
                operating expenses
            
            
            31.7
            
            
            31.8
            
            
            31.3Total
                restaurant operating expenses
            
            
            92.6
            
            
            92.7
            
            
            93.3Amortization
                of intangibles
            
            
            0.4
            
            
            0.3
            
            
            0.3General
                and administrative expenses(a)
            
            
            4.8
            
            
            4.1
            
            
            4.0Preopening
                expenses
            
            
            0.1
            
            
            0.1
            
            
            0.4New
                manager training expenses
            
            
            --
            
            
            --
            
            
            0.1Impairment
                charges and other
            
            
            2.9
            
            
            0.6
            
            
            2.6Operating
                income (loss)
            
            
            (0.8
            )
            
            2.1
            
            
            (0.6
            )Gain
                from sale of assets
            
            
            --
            
            
            --
            
            
            (1.7
            )Interest
                expense and other, net (b)
            
            
            2.3
            
            
            1.7
            
            
            2.0Income
                (loss) before income taxes
            
            
            (3.2
            )%
            
            0.4
            %
            
            (1.0
            )%





(a)
            Includes
                an estimated legal settlement reserve of $1.5 million (see Note 7
                to our
                financial statements).


(b)
            Reduction
                in swap liability of $939,000 recorded as additional interest expense
                upon
                debt refinance.





40
 *Table
            of Contents*




**Fiscal
      2005 Compared to Fiscal 2004**





Revenue
      for the fiscal year ended December 26, 2005 increased approximately $15 million,
      or 6.7%, to $239.7 million compared with $224.8 million for the fiscal year
      ended December 27, 2004. This increase was primarily the result of (i) sales
      of
      $2.9 million from three new restaurants opened in 2005, (ii) the full year
      of
      revenues, $1.1 million in 2005 versus $461,000 in 2004, from one new restaurant
      opened in 2004, and (iii) same store sales increase of 7.7% in 2005 (versus
      a
      2.4% increase in 2004). These increases were offset by revenues lost of
      approximately $1.0 million as a result of closed restaurants in 2005 from the
      revenue levels of these locations in 2004. Same store sales percentages
      represent sales for stores that have been open for at least 18 months. Revenue
      from alcoholic beverages accounted for 24.6% of revenue in 2005 and 25.0% in
      2004.





Cost
      of
      sales as a percentage of revenue increased to 26.4% in 2005 from 26.3% in 2004.
      This increase was due primarily to higher delivery fees and a fuel surcharge
      implemented in late 2005 by our primary food supplier, U.S. Foodservice.
      Commodity costs remained relatively stable during the year and any cost
      increases were effectively offset by slight menu pricing increases.





Payroll
      and benefits consist of restaurant management salaries, hourly payroll expenses,
      and other payroll related benefits, including bonuses and health care. Payroll
      and benefit costs decreased as a percentage of revenue to 30.5% in 2005 from
      30.8% in 2004. This decrease was related to the implementation of labor
      reduction programs in the form of labor scheduling standards beginning late
      in
      the third quarter of 2005 combined with a reduction in our group health costs.
      In addition, we paid $1.9 million in 2005 under our new general manager bonus
      program, versus $1.4 million paid in 2004.





Depreciation
      and amortization before income from restaurant operations includes depreciation
      of restaurant property and equipment and amortization of franchise fees and
      liquor licenses. Depreciation and amortization decreased as a percentage of
      revenue to 3.7% in 2005 from 3.8% in 2004. Although we continued to experience
      increased depreciation related to asset acquisitions for new stores and
      accelerated depreciation related to the two Bamboo Club restaurants we closed
      in
      2005, these increases were offset by the reduction in depreciation as a result
      of asset impairments recorded during prior years.





Other
      operating expenses include rent, real estate taxes, common area maintenance
      (CAM) charges, royalties and advertising, workers’ compensation and property
      insurance, maintenance, and utilities. Other operating expenses increased by
      $4.8 million but as a percentage of revenue, remained constant at 31.7% for
      2005
      and 2004. The increased spending was principally due to (i) higher marketing
      fees of $1.5 million over 2004 paid to TGI Friday’s for the national TGI
      Friday’s advertising campaign (the fee was 4.0% of sales in 2005 versus 3.5% of
      sales in 2004) which consisted of 27 weeks in 2004 versus 35 weeks in 2005,
      (ii)
      increased occupancy expenses related to higher CAM charges, property taxes,
      and
      relatively higher lease costs for our Bamboo Club locations, and (iii) higher
      local marketing costs.





Depreciation
      and amortization after income from restaurant operations includes depreciation
      of corporate property and equipment and amortization of identifiable
      intangibles. Depreciation and amortization increased slightly as a percentage
      of
      revenue to 0.4% in 2005 from 0.3% in 2004. This increase was the result of
      additional depreciation related to the implementation of our new ERP system.





General
      and administrative expenses are those expenses associated with corporate and
      administrative functions that support new restaurant development and restaurant
      operations and provide administrative, accounting, and management
      infrastructure. These costs consist primarily of management and staff salaries,
      employee benefits, travel, legal and professional fees, and technology support.
      General and administrative expenses increased to $12 million, or 4.8% of
      revenue, in 2005 from $9.0 million, or 4.1% of revenue, in 2004. We experienced
      increases related primarily to higher legal costs and increases in technology
      support fees. Additionally, we accrued approximately $1.5 million for claims
      and
      legal expenses related to the estimated costs to settle the California meal
      and
      break lawsuits (see Note 7 -“Commitments and Contingencies” of the accompanying
      Notes to Consolidated Financial Statements).





41
 *Table
            of Contents*





Pre-opening
      expenses are costs incurred prior to opening a new restaurant and consist
      primarily of manager salaries and relocation and training costs. Historically,
      we have experienced variability in the amount and percentage of revenues
      attributable to pre-opening expenses. We typically incur the most significant
      portion of pre-opening expenses associated with a given restaurant in the two
      months immediately preceding opening and in the month the restaurant opens.
      Pre-opening expenses were $307,000, or 0.1% of revenue, in 2005 compared with
      $260,000, or 0.1% of revenue, in 2004. The increase in dollars spent was the
      result of opening two new stores during 2005 versus only one in 2004.





New
      manager training expenses are those costs incurred in training newly hired
      or
      promoted managers, as well as those costs incurred to relocate those managers
      to
      permanent management positions. New manager training expenses were $21,000,
      or
      less than 0.1% of revenue, in 2004 compared with $50,000, or less than 0.1%
      of
      revenue, in 2004.





In
      2005,
      the impairment charges and other account included (i) $5.6 million for the
      non
      cash write-off or write-down of certain leasehold improvements, equipment,
      and
      other assets primarily related to underperforming Bamboo Club locations in
      Fairfax, Virginia (closed in January 2006), Novi, Michigan, and Raleigh, North
      Carolina and asset impairments related to our Alice Cooper’stown Restaurant in
      Cleveland, Ohio (ii) $1.0 million for the write-down of goodwill and the lease
      termination fee related to a Bamboo Club location we closed in January 2006
      and
      the write-down of goodwill for a second Bamboo Club location, and (iii) $250,000
      in a one-time lease cancellation charge associated with the termination of
      the
      lease in Fairfax, Virginia.





Interest
      expense and other was approximately $5.1 million, or 2.3% of revenue, in 2005
      compared with $3.8 million, or 1.7% of revenue, in 2004. The increase in
      interest expense was primarily the result of prepayment penalties, the write-off
      of deferred financing fees, and the loss recorded on the write-down of our
      interest rate swaps associated with the refinancing of our debt in October
      2005,
      coupled with higher interest rates in 2005 versus 2004.





We
      recorded $201,000 in income tax expense related to alternative minimum taxes
      (AMT) and state income tax expense. At December 26, 2005, we had approximately
      $12.0 million of net operating loss carryforwards and tax credits available
      to
      offset future book income and federal income taxes.








**Fiscal
      2004 Compared to Fiscal 2003**





Revenue
      for the fiscal year ended December 27, 2004 was essentially flat, increasing
      by
      $200,000, or 0.1%, to $224.7 million compared with $224.5 million for the fiscal
      year ended December 29, 2003. This slight increase was primarily the result
      of
      (i) sales from the one new restaurant in 2004, (ii) the full year of revenues
      from the three restaurants opened in 2003, and (iii) same store sales increase
      of 2.4% in 2004 (versus a 1.1% increase in 2003). These increases were offset
      by
      revenues lost of approximately $6.5 million as a result of sold or closed
      restaurants in 2004 from the revenue levels of these locations in 2003. Same
      store sales percentages represent sales for stores that have been open for
      at
      least 18 months. Revenue from alcoholic beverages accounted for 25.0% of revenue
      in 2004 and 25.1% in 2003.





Cost
      of
      sales as a percentage of revenue decreased to 26.3% in 2004 from 26.9% in 2003.
      This decrease was due primarily to lower contractual prices on meat, shrimp,
      and
      other seafood, partially offset by higher costs in poultry as a result of supply
      and demand, stronger supply chain buying efforts, and slight menu pricing
      increases. The decrease was also attributable to promotional driven product
      mix
      changes throughout the year.





42
 *Table
            of Contents*





Payroll
      and benefits consist of restaurant management salaries, hourly payroll expenses,
      and other payroll related benefits, including bonuses and health care. Payroll
      and benefit costs decreased slightly as a percentage of revenue to 30.8% in
      2004
      from 31.4% in 2003. We experienced increases related to a substantial increase
      in California’s state unemployment rate during 2004 (which was an across the
      board increase and was not related to our claims experience) and higher labor
      costs related to our Bamboo Club opening (labor costs are higher in the initial
      four to six months of operation). These increases were more than offset by
      a
      reduction in our group health costs combined with a slight reduction in labor
      costs related to labor efficiencies resulting from the maturation of newer
      Bamboo Club restaurants.





Depreciation
      and amortization before income from restaurant operations includes depreciation
      of restaurant property and equipment and amortization of franchise fees and
      liquor licenses. Depreciation and amortization increased as a percentage of
      revenue to 3.8% in 2004 from 3.7% in 2003. This increase was primarily the
      result of depreciation related to asset acquisitions for new stores and
      accelerated depreciation of the assets of two California locations that we
      closed in 2004. The increase was partially offset by the reduction in
      depreciation as a result of asset impairments recorded during 2004 and 2003.





Other
      operating expenses include rent, real estate taxes, common area maintenance
      (CAM) charges, royalties and advertising, workers’ compensation and property
      insurance, maintenance, and utilities. Other operating expenses increased by
      $1.2 million and as a percentage of revenue to 31.8% in 2004 from 31.7% in
      2003.
      The increase was principally due to (i) higher marketing fees of $600,000 paid
      to TGI Friday’s for the national TGI Friday’s advertising campaign (the fee was
      3.5% of sales in 2004 versus 3.2% of sales in 2003) which consisted of seven
      4-week flights in 2004 versus five 4-week flights in 2003, (ii) increased
      occupancy expenses related to higher CAM charges, property taxes, and relatively
      higher lease costs for our Bamboo Club locations, and (iii) higher local
      marketing costs.





Depreciation
      and amortization after income from restaurant operations includes depreciation
      of corporate property and equipment and amortization of identifiable
      intangibles. Depreciation and amortization remained constant as a percentage
      of
      revenue at 0.3% for both 2004 and 2003.





General
      and administrative expenses are those expenses associated with corporate and
      administrative functions that support new restaurant development and restaurant
      operations and provide administrative, accounting, and management
      infrastructure. These costs consist primarily of management and staff salaries,
      employee benefits, travel, legal and professional fees, and technology support.
      General and administrative expenses increased to $9.2 million, or 4.1% of
      revenue, in 2004 from $9.0 million, or 4.0% of revenue, in 2003. We experienced
      increases related primarily to higher legal costs and increases in technology
      support fees. The increases were partially offset by lower salaries and benefits
      resulting from a reduction in the number of employees from a corporate wide
      restructuring in July 2004, and due to the slow-down in new store openings
      during 2004.





Pre-opening
      expenses are costs incurred prior to opening a new restaurant and consist
      primarily of manager salaries and relocation and training costs. Historically,
      we have experienced variability in the amount and percentage of revenues
      attributable to pre-opening expenses. We typically incur the most significant
      portion of pre-opening expenses associated with a given restaurant in the two
      months immediately preceding opening and in the month the restaurant opens.
      Pre-opening expenses were $260,000, or 0.1% of revenue, in 2004 compared with
      $907,000, or 0.4% of revenue, in 2003. These decreases were the result of fewer
      new store openings, one in 2004 compared with five in 2003, and the timing
      of
      incurring the expenses related to these openings.





43
 *Table
            of Contents*





New
      manager training expenses are those costs incurred in training newly hired
      or
      promoted managers, as well as those costs incurred to relocate those managers
      to
      permanent management positions. New manager training expenses were $50,000,
      or
      less than 0.1% of revenue, in 2004 compared with $195,000, or 0.1% of revenue,
      in 2003. This decrease was primarily a result of fewer new store openings in
      2004 compared with 2003.





In
      2004,
      the impairment charges and other account included the write-off or write-down
      of
      asset impairments of certain leasehold improvements, equipment, other operating
      assets, real estate held for sale, and lease termination fees to cancel three
      leases. The account included (i) $200,000 primarily to reduce the carrying
      value
      of real property in El Paso, Texas, which is currently under a sales contract,
      to its estimated fair value, (ii) $310,000 in asset impairments, primarily
      related to an underperforming Bamboo Club location in Miami, Florida, and (iii)
      $875,000 in one-time lease cancellation charges and other costs associated
      with
      the termination of three leases, one in Columbus, Ohio where we did not build
      a
      restaurant, and one each for Miami, Florida and Newport, Kentucky Bamboo Club
      locations.





Interest
      expense and other was approximately $3.8 million, or 1.7% of revenue, in 2004
      compared with $4.5 million, or 2.0% of revenue, in 2003. This reduction was
      primarily attributable to lower average outstanding borrowings, as we paid
      down
      debt principal in 2004, somewhat lower interest rates, and a one-time gain
      on
      the termination of an interest rate swap of $178,000.





At
      December 27, 2004, we had approximately $13.0 million of net operating loss
      carryforwards and tax credits available to offset future book income and federal
      income taxes. As a result, we did not record any income tax expense in
      2004.





**Liquidity
      and Capital Resources**





Our
      primary use of funds has been for the development and construction of new TGI
      Friday's and Bamboo Club restaurants. During 2006, we will continue to build
      new
      TGI Friday’s and remodel existing TGI Friday’s restaurants.




On
      April
      28, 2005, we sold 2,325,581 shares of common stock at $2.15 per share and issued
      581,395 warrants to purchase shares at $3.01 per share to Dallas-based CIC
      Partners LP, a private equity fund. The proceeds before expenses were
      approximately $5.0 million and have been used to reduce debt and fund TGI
      Friday's development.




On
      October 31, 2005, we entered into a $45 million credit facility with Bank of
      America, N.A., as administrative agent and letter of credit issuer, and for
      a
      syndicate of lending financial institutions that includes Bank of America,
      GE
      Franchise Finance and Wells Fargo. The proceeds available under the credit
      facility were used to refinance certain existing long-term debt, and will be
      used (i) to fund the development of new TGI Friday’s restaurant locations and
      remodel existing TGI Friday’s restaurants, and (ii) for capital expenditures and
      general corporate working capital purposes.





The
      credit facility consists of the following:





(1)
      A $25
      million term loan with principal to be amortized over a ten-year period with
      a
      five-year balloon payment of unpaid principal. The term loan bears interest
      at
      the Eurodollar rate (LIBOR) plus 250 basis points.





(2)
      A $20
      million revolving line of credit to be used for new restaurant construction
      and
      expansion, and remodeling of existing TGI Friday’s restaurants.





(3)
      A $4
      million sublimit of the revolving line of credit for use of letters of credit
      issued by Bank of America for our benefit. Letters of credit are limited so
      that
      the total aggregate lending commitment of $20 million is not
      exceeded .





44
 *Table
            of Contents*





As
      a
      result of the refinancing discussed above, at December 26, 2005, we had
      long-term debt of approximately $38 million, including the current portion
      of
      $3.3 million. We made regular principal and interest payments of approximately
      $8.2 million in 2005.





In
      addition, the lenders have issued letters of credit (LOCs) totaling $2.9 million
      to provide security under our 2004 and 2005 workers’ compensation insurance
      program. The amount available for borrowing under the line of credit is reduced
      by the amount of the LOCs.





At
      December 26, 2005, we had no outstanding balance on our line of
      credit.





The
      credit facility contains customary affirmative covenants for transactions of
      this type, some of which are; (i) the timely delivery of financial statements,
      (ii) compliance with all franchise agreements and material contracts, and (iii)
      notice to the administrative agent upon the signing of any new
      leases.




The
      credit facility also contains customary negative covenants, such that we will
      not permit:





(i)
            The
                creation of other liens on our assets or
                revenues.


(ii)
            Investments
                or the extensions of credit to others, including employees and
                officers.


(iii)
            The
                incurrence of any additional
                indebtedness


(iv)
            Any
                fundamental change in our business, such as a merger, acquisition
                or
                disposition of assets or restaurants, except as are permitted under
                the
                credit facility.


(v)
            The
                payment of cash dividends, distributions to stockholders or the repurchase
                of our common stock.




The
      credit facility also contains customary financial covenants including (i)
      Consolidated Debt Coverage, defined as Senior Debt to EBITDA (as modified for
      capital expenditures and lease expense), to be no greater than 3.00 to 1.00,
      (ii) Fixed Charge Coverage Ratio of 1.15 to 1.00 through September 2006, 1.20
      to
      1.00 through September 2007, and 1.25 to 1.00 thereafter, and (iii) all capital
      expenditures to be limited to $15 million per year.





We
      believe we will remain in compliance with our current debt agreements in 2006.
      We believe that our current cash resources, additional debt available under
      the
      credit facility, sale of assets, and expected cash flows from operations will
      be
      sufficient to fund our general obligations, capital expenditures, planned
      development and remodels through 2006.




Pursuant
      to our development agreements with TGI Friday’s Inc. we expect to open four to
      six new locations in 2006. Our location in the Orleans Hotel and Casino in
      Las
      Vegas, Nevada should open early in the second quarter of 2006, our locations
      in
      Rancho Cucamonga, California and Flagstaff, Arizona are planned to open in
      the
      third quarter of 2006, and a fourth location in Chandler, Arizona is expected
      to
      open in the last quarter of 2006. We also are under lease for two additional
      sites in Corona and Chino Hills, California which will likely open in 2007.
      In
      addition, we will obtain plans and permits for four remodels in both California
      and Arizona and will evaluate the remodel program at the
      completion.





We
      believe that our cash flow from operations and our line of credit will be
      sufficient to meet all of our capital obligations in 2006; however, we will
      likely need to obtain capital to fund additional growth beyond 2006. Potential
      sources of such capital include selling assets, bank financing, strategic
      alliances, and additional offerings of our equity or debt securities. We cannot
      provide assurance that such capital will be available from these or other
      potential sources, and the lack of capital could have a material adverse effect
      on our business.





45
 *Table
            of Contents*





Net
      cash
      flows from operating activities were $14,230,000 in 2005, $13,184,000 in 2004,
      and $7,267,000 in 2003. Cash flows from operating activities were reduced by
      approximately $8,493,000 for funds used to make regular principal payments
      as
      well as pay down debt during 2005.





Net
      cash
      used in investing activities was $6,733,000 in 2005, $6,768,000 in 2004, and
      $5,473,000 in 2003, which we used primarily to fund property and equipment
      purchases for our new restaurants. Funds used in investing activities were
      offset by cash received from the sale of land in El Paso, Texas ($691,000)
      and
      cash received from notes receivable ($750,000) in 2005, from the early
      termination of our lease in Oakland, California in October 2004 ($847,000)
      and
      by the sale of assets of three restaurants in the Sacramento, California area
      in
      2003 ($3,773,000).





At
      December 26, 2005, our current liabilities exceeded our current assets by
      approximately $18,069,000 due in part to cash expended on our new restaurant
      development requirements and because the restaurant business receives
      substantially immediate payment for sales, while payables related to inventories
      and other current liabilities normally carry longer payment terms, usually
      15 to
      30 days. At December 26, 2005, we had a cash balance of $10,124,000 and
      long-term debt of $38,285,000, including current portion of long-term debt
      of
      $3,383,000. Cash received from operations have been and are expected to be
      sufficient to pay all obligations as they become due.





Our
      debt
      is comprised of term loans payable to five lenders. The notes bear interest
      at
      rates ranging from 6.36 to 9.46% per annum and mature at various times over
      the
      next 7 years.




From
      time
      to time, we may enter into interest rate swap agreements with certain financial
      institutions for the purpose of adjusting our ratio of fixed rate debt over
      a
      certain period of time at varying notional amounts. At December 26, 2005, there
      were approximately $19 million in net notional amounts of interest rate swap
      agreements outstanding that carried a weighted average interest rate of 6.0%.
      The effective amount of interest we pay on the notional amounts of these swap
      agreements is calculated using the interest rate of the swap against the
      notional amount of each swap. These swaps effectively adjust the ratio of fixed
      rate debt on 84% of our total outstanding debt.




As
      of
      December 26, 2005, we were participating in two derivative financial instruments
      for which fair value disclosure is required under Statement of Financial
      Accounting Standards No. 133, as amended. The fair value liability of the
      interest rate swap agreements decreased during the quarter ended December 26,
      2005, to $947,913 using “hedge accounting” per SFAS No. 133, as
      amended.





As
      a
      result of our debt refinancing referenced in note 5 to our consolidated
      financial statements, “hedge accounting” no longer applies after the third
      quarter of 2005, although the interest rate swaps will remain in place. We
      recorded the fair value obligation of approximately $939,000 as additional
      interest expense, and we will record future quarterly market adjustments on
      the
      change in value of these swaps to income or expense directly in our statement
      of
      operations.





**Contractual
      Obligations and Commitments:**





We
      lease
      all of our restaurants under operating leases, with initial terms ranging from
      10 to 20 years, with various renewal options of 10 to 20 years. Our future
      debt,
      lease, and purchase obligations are summarized by year as follows (in
      thousands):





46
 *Table
            of Contents*





Total
            
            Less
                thanone
                year
            
            One
                to threeyears
            
            Three
                to fiveyears
            
            Greater
                thanfive
                yearsDebt
                Maturities
            
            $
            38,285
            
            $
            3,383
            
            $
            7,660
            
            $
            9,017
            
            $
            18,225Minimum
                Lease Commitment
            
            
            162,180
            
            
            12,981
            
            
            27,031
            
            
            26,673
            
            
            95,493Purchase
                Commitments
            
            
            16,800
            
            
            11,200
            
            
            5,600
            
            
            --
            
            
            --Total
            
            $
            217,265
            
            $
            27,564
            
            $
            40,291
            
            $
            34,535
            
            $
            106,310






Minimum
      lease commitments represent operating leases on our restaurant locations. We
      have no other off-balance sheet financings. A default under a lease agreement
      could result in damages or the acceleration of amounts due under the lease.
      Total purchase commitments include estimated construction costs for the four
      to
      six new TGI Friday’s restaurants we have contracted to open in
      2006.





We
      believe that our current resources, debt capacity, and expected cash flows
      from
      operations will be sufficient to fund our capital needs and debt maturities
      during the next 12 months. Prolonged future adverse geopolitical conditions,
      oil
      prices, and economic conditions could have a material adverse effect on our
      financial capabilities.





**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**





As
      of
      December 26, 2005, we were participating in two derivative financial instruments
      for which fair value accounting is required under SFAS No. 133, as amended.
      The
      fair value of the liability related to these interest rate swap agreements,
      discussed in note 2 to our consolidated financial statements, decreased to
      $947,913.





Our
      market risk exposure is limited to interest rate risk associated with our credit
      instruments. We incur interest on loans made at a variable interest rate of
      2.50% over LIBOR. At December 26, 2005, we had outstanding borrowings on these
      loans of approximately $24,854,720. Our net interest expense for 2005 was
      $5,171,000, including prepayment penalties and the loss recorded on the
      write-down of our interest rate swaps of $512,000 and $939,000, respectively;
      a
      one percent variation on the variable rate debt would have increased or
      decreased our total interest expense by approximately $249,000 for the year,
      not
      including the impact of our swaps.





**ITEM
                8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**





Reference
      is made to the consolidated financial statements, the reports thereon, the
      notes
      thereto, and the supplementary data commencing at page F-1 of this report,
      which
      consolidated financial statements, reports, notes, and data are incorporated
      by
      reference.





**ITEM9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





None.





47
 *Table
            of Contents*





**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





Our
      Chief
      Executive Officer and Chief Financial Officer have reviewed and evaluated the
      effectiveness of our disclosure controls and procedures, which included inquires
      made to certain other of our employees as of December 26, 2005. Based on their
      evaluations, our Chief Executive Officer and Chief Financial Officer have each
      concluded that our disclosure controls and procedures are effective and
      sufficient to ensure that we record, process, summarize, and report information
      required to be disclosed by us in our periodic reports filed under the
      Securities Exchange Act within the time period specified by the Securities
      and
      Exchange Commission’s rules and forms.





**ITEM
                9B.**
            **OTHER
                INFORMATION**





None.




48
 *Table
            of Contents*





**PART
      III**





**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**





The
      information required by this Item relating to our directors is incorporated
      by
      reference to our Proxy Statement to be filed for our 2006 Annual Meeting of
      Stockholders. The information required by this Item relating to our executive
      officers is included in Item 1, "Business - Executive Officers."





**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**





The
      information required by this Item is incorporated by reference to our Proxy
      Statement to be filed for our 2006 Annual Meeting of Stockholders.





**ITEM12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**





The
      information required by this Item relating to security ownership of certain
      beneficial owners and management is incorporated by reference to our Proxy
      Statement to be filed for our 2006 Annual Meeting of Stockholders. The
      information required by this Item relating to securities authorized for issuance
      under equity compensation plans is included in Item II, “Market for the
      Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities - Equity Compensation Plan Information.”





**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**





The
      information required by this Item is incorporated by reference to our Proxy
      Statement to be filed for our 2006 Annual Meeting of Stockholders.





**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTING FEES AND
                SERVICES**





The
      information required by this Item is incorporated by reference to our Proxy
      Statement to be filed for our 2006 Annual Meeting of Stockholders.





**PART
      IV**





**ITEM15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**





(a)
            Financial
                Statements and Financial Statement
                Schedules.





(1)
            Financial
                statements are listed in the index to the consolidated financial
                statements on page F-1 of this
                Report.





(2)
            No
                financial statement schedules are included because they are not applicable
                or are not required or the information required to be set forth therein
                is
                included in the consolidated financial statements or notes
                thereto.





Exhibit
              Number
            Exhibit3.1
            Restated
                Certificate of Incorporation of the Company (1)3.2
            Certificate
                of Amendment of Restated Certificate of Incorporation
                (l)3.3
            Amended
                and Restated Bylaws of the Company (1)3.4
            Certificate
                of Amendment of Restated Certificate of Incorporation
                (2)3.5
            Certificate
                of Elimination of the Class A Preferred Stock (3)3.6
            Certificate
                of Elimination of the Class B Preferred Stock
                (3)





49
 *Table
          of Contents*


Exhibit
              Number
            Exhibit3.7
            Certificate
                of Designations of Series A Junior Participating Preferred Stock
                (3)4.1
            Sergio
                Zyman registration rights (4)4.2
            Warrant
                issued to CIC MSRG LP (5)4.3
            Registration
                Rights Agreement, dated as of April 27, 2005, between the Company
                and CIC
                MSRG LP (5)4.4
            Rights
                Agreement, dated as of May 23, 2005, between the Company and Computershare
                Trust Company, Inc., as Rights Agent (3)10.1
            Company's
                1990 Stock Option Plan (6)10.5
            Form
                of Franchise Agreement between the Company and TGI Friday’s Inc.
                (7)10.8
            General
                Release and Retirement Separation Agreement, dated November 19, 2003,
                between the Company and Bart A. Brown, Jr. (8)10.9
            Development
                Agreement, dated March 15, 2004, between TGI Friday’s Inc. and Cornerstone
                Productions, Inc., a wholly owned subsidiary of the Company
                (8)10.10
            Development
                Agreement, dated March 15, 2004, between TGI Friday’s Inc. and Main St.
                California, Inc., a wholly owned subsidiary of the Company
                (8)10.11
            First
                Amendment to Development Agreement, dated February 17, 2005, between
                TGI
                Friday’s Inc. and Main St. California, Inc., a wholly owned subsidiary of
                the Company (8)10.12
            CA
                Development Incentive Agreement, dated March 25, 2004, between Main
                Street
                California, Inc. and TGI Friday’s Inc. (8)10.13
            Promissory
                Note between the Company and CNL Financial I, Inc. (9)10.14
            Promissory
                Note between the Company and CNL Financial I, Inc. (9)10.15
            Promissory
                Note between the Company and CNL Financial I, Inc. (9)10.16
            1995
                Stock Option Plan (10)10.22
            Stock
                Option Agreement, dated August 5, 1996, between the Company and John
                F.
                Antioco for 800,000 shares of Common Stock (10)10.22A
            Stock
                Option Agreement, dated June 15, 1998, between the Company and John
                F.
                Antioco amending the Stock Option Agreement dated August 5, 1996
                (10)10.23
            Stock
                Option Agreement, dated December 16, 1996, between the Company and
                Bart A.
                Brown, Jr. for 250,000 shares of Common Stock. (The Company issued
                three
                additional Stock Option Agreements that are substantially identical
                in all
                material respects, except as to number of shares. The four Stock
                Option
                Agreements give rights to purchase a total of 625,000 shares of Common
                Stock. (10)10.23A
            Schedule
                of Stock Option Agreements substantially identical to Exhibit 10.23
                (10)10.24
            Stock
                Option Agreement, dated July 14, 1997, between the Company and Bart
                A.
                Brown, Jr. for 75,000 shares of Common Stock. (The Company issued
                one
                additional Stock Option Agreement that is substantially identical
                in all
                material respects, except as to number of shares. The two Stock Option
                Agreements give rights to purchase a total of 175,000 shares of Common
                Stock. (10)10.24A
            Schedule
                of Stock Option Agreements substantially identical to Exhibit 10.24
                (10)10.25
            Stock
                Option Agreement, dated June 15, 1998, between the Company and James
                Yeager for 15,000 shares of Common Stock. (The Company issued two
                additional Stock Option Agreements that are substantially identical
                in all
                material respects, except as to option holder and number of shares.
                The
                three Stock Option Agreements give rights to purchase a total of
                50,000
                shares of Common Stock. (10)10.25A
            Schedule
                of Stock Option Agreements substantially identical to Exhibit 10.25
                (10)10.26
            Stock
                Option Agreement, dated December 31, 1998, between the Company and
                Tim
                Rose for 10,000 shares of Common Stock. (The Company issued one additional
                Stock Option Agreement that is substantially identical in all material
                respects, except as to option holder and number of shares. The two
                Stock
                Option Agreements give rights to purchase a total of 160,000 shares
                of
                Common Stock. (10)





50
 *Table
          of Contents*


Exhibit
              Number
            Exhibit10.26A
            Schedule
                of Stock Option Agreements substantially identical to Exhibit 10.26
                (10)10.27
            Registration
                Rights Agreement, dated August 5, 1996, between the Company and John
                F.
                Antioco (11)10.28
            1999
                Incentive Stock Plan (12)10.29
            Employment
                Agreement, dated November 19, 2004, between the Company and William
                G.
                Shrader (8)10.30
            Employment
                Agreement, dated November 19, 2004, between the Company and Michael
                Garnreiter (8)10.31
            Securities
                Purchase Agreement, dated as of April 27, 2005, between the Company
                and
                CIC MSRG LP (5)10.40
            401(k)
                Profit Sharing Plan (13)10.42
            Credit
                Agreement, dated as of October 31, 2005, among the Company, Bank
                of
                America, N.A., as Administrative Agent and L/C Issuer, and the other
                Lending Parties thereto (14)10.43
            Security
                Agreement, dated as of October 31, 2005, among the Company, each
                of its
                subsidiaries, and Bank of America, N.A., as Administrative Agent
                (14)10.44
            Guaranty
                Agreement, dated as of October 31, 2005, among each of the Company’s
                subsidiaries and Bank of America, N.A., as Administrative Agent
                (14)21
            List
                of Subsidiaries23.1
            Consent
                of Mayer Hoffman McCann P.C.31.1
            Certification
                of President and Chief Executive Officer pursuant to Rule 13a-14(a)
                and
                Rule 15d-14(a), promulgated under the Securities Exchange Act of
                1934, as
                amended31.2
            Certification
                of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
                15d-14(a), promulgated under the Securities Exchange Act of 1934,
                as
                amended32.1
            Certification
                of President and Chief Executive Officer pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                200232.2
            Certification
                of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002


________________________


(1)
            Incorporated
                by reference to the Company's Form 10-K for the year ended December
                30,
                1991,filed
                with the Securities and Exchange Commission on March 30,
                1992.





(2)
            Incorporated
                by reference to the Company's Form 8-K Report filed with the Commission
                on
                July 15, 2004.





(3)
            Incorporated
                by reference to the Company's Form 8-A filed with the Securities
                and
                Exchange Commission on May 24,
                2005.





(4)
            Incorporated
                by reference to the Company's Form 10-K for the year ended December
                29,
                2003, filed with the Securities and Exchange Commission on March
                23,
                2004.





(5)
            Incorporated
                by reference to the Company’s Form 8-K filed with the Securities and
                Exchange Commission on May 4, 2005.





(6)
            Incorporated
                by reference to the Company's Registration Statement on Form S-1
                (Registration No. 33-40993), which became effective in September
                1991.





(7)
            Incorporated
                by reference to the Company's Form 8-K filed with the Securities
                and
                Exchange Commission on April 15,
                1994.





51
 *Table
            of Contents*





(8)
            Incorporated
                by reference to the Company's Form 10-K for the year ended December
                27,
                2004, filed with the Securities and Exchange Commission on March
                8,
                2005.





(9)
            Incorporated
                by reference to the Company's Form 10-K for the year ended December
                30,
                1996, filed with the Securities and Exchange Commission on April
                14,
                1997.





(10)
            Incorporated
                by reference to the Company's Registration Statement on Form S-8
                (Registration No. 333-78155) filed with the Securities and Exchange
                Commission on May 10, 1999.





(11)
            Incorporated
                by reference to the Company's Registration Statement on Form S-3
                (Registration No. 333-78161) filed with the Securities and Exchange
                Commission on May 10, 1999.





(12)
            Incorporated
                by reference to Company's Registration Statement on Form S-8 (Registration
                No. 333-89931) filed with the Securities and Exchange Commission
                on
                October 29, 1999.





(13)
            Incorporated
                by reference to the Company's Registration Statement on Form S-8
                (Registration No. 333-55100) filed with the Securities and Exchange
                Commission on February 6, 2001.





(14)
            Incorporated
                by reference to the Company's Form 8-K filed with the Securities
                and
                Exchange Commission on November 4,
                2005.





52
 *Table
            of Contents*




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.





MAIN
                STREET RESTAURANT GROUP, INC.Date:
                March 22, 2006
            By:
            /s/
                William G. Shrader.William
                G. ShraderChief
                Executive Officer and President





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






Signature
            
            Position
            
            Date/s/
                John F. Antioco
            
            Chairman
                of the Board
            
            March
                22, 2006John
                F. Antioco/s/
                William G. Shrader
            
            Chief
                Executive Officer, President and Director
            
            March
                22, 2006William
                G. Shrader
            
            (Principal
                Executive Officer)/s/
                Michael Garnreiter
            
            Chief
                Financial Officer, Executive Vice President
            
            March
                22, 2006Michael
                Garnreiter
            
            and
                Treasurer (Principal Financial and Accounting Officer)/s/
                Kenda B. Gonzales
            
            Director
            
            March
                22, 2006Kenda
                B. Gonzales/s/
                Wanda Williams
            
            Director
            
            March
                22, 2006Wanda
                WilliamsDirectorSergio
                S. Zyman/s/
                Michael Rawlings
            
            Director
            
            March
                22, 2006Michael
              Rawlings




53
 *Table
            of Contents*





**MAIN
      STREET RESTAURANT GROUP, INC.**





INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





PageReport
                of Independent Registered Public Accounting Firm.
            F-2Consolidated
                Balance Sheets as of December 26, 2005 and December 27,
                2004
            F-3Consolidated
                Statements of Operations for the fiscal years ended December 26,
                2005,
                December 27, 2004, and December 29, 2003
            F-4Consolidated
                Statements of Changes in Stockholders' Equity and Comprehensive Income
                (Loss) for the fiscal years ended December 26, 2005, December 27,
                2004,
                and December 29, 2003
            F-5Consolidated
                Statements of Cash Flows for the fiscal years ended December 26,
                2005,
                December 27, 2004, and December 29, 2003
            F-6Notes
                to Consolidated Financial Statements
            F-7




F-1
 *Table
            of Contents*


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**









To
      the
      Stockholders





MAIN
      STREET RESTAURANT GROUP, INC.





We
      have
      audited the accompanying consolidated balance sheets of Main Street Restaurant
      Group, Inc. and subsidiaries as of December 26, 2005 and December 27, 2004,
      and
      the related consolidated statements of operations, changes in stockholders'
      equity and comprehensive income (loss) and cash flows for each of the three
      years in the period ended December 26, 2005. 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 auditing standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated 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 Main Street Restaurant
      Group, Inc. and subsidiaries as of December 26, 2005 and December 27, 2004,
      and
      the results of their operations and their cash flows for each of the three
      years
      in the period ended December 26, 2005, in conformity with U.S. generally
      accepted accounting principles.







/s/
      Mayer
      Hoffman McCann P.C.





MAYER
      HOFFMAN MCCANN P.C.





Phoenix,
      Arizona


February
      23, 2006




F-2
 *Table
            of Contents*





**MAIN
      STREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEETS


(In
      Thousands, Except Par Value and Share Data)





December
                26,
            
            December
                27,2005
            
            2004ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            10,124
            
            $
            5,593Accounts
                receivable
            
            
            2,826
            
            
            1,208Inventories
            
            
            2,796
            
            
            2,758Prepaid
                expenses
            
            
            341
            
            
            477Total
                current assets
            
            
            16,087
            
            
            10,036Property
                and equipment, net
            
            
            58,263
            
            
            66,444Other
                assets, net
            
            
            1,982
            
            
            1,804Notes
                receivable, net
            
            
            516
            
            
            1,212Goodwill
            
            
            20,255
            
            
            21,255Franchise
                fees, net
            
            
            1,735
            
            
            1,815Purchased
                franchise territories, net
            
            
            571
            
            
            606Total
                assets
            
            $
            99,409
            
            $
            103,172LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt
            
            $
            3,383
            
            $
            3,851Accounts
                payable
            
            
            7,194
            
            
            6,626Other
                accrued liabilities
            
            
            23,579
            
            
            19,260Total
                current liabilities
            
            
            34,156
            
            
            29,737Long-term
                debt, net of current portion
            
            
            34,902
            
            
            42,232Other
                liabilities and deferred credits
            
            
            1,402
            
            
            1,918Total
                liabilities
            
            
            70,460
            
            
            73,887Commitments,
                contingencies and subsequent events (see notes 7 and 9)Stockholders’
                equity:Preferred
                stock, $.001 par value, 2,000,000 shares authorized, no shares issued
                and
                outstanding in 2005 and 2004
            
            
            —
            
            
            —Common
                stock, $.001 par value, 25,000,000 shares authorized, 17,309,550
                and
                14,642,000 shares issued and outstanding in 2005 and 2004,
                respectively
            
            
            17
            
            
            15Additional
                paid-in capital
            
            
            60,854
            
            
            54,927Unearned
                compensation-restricted stock
            
            
            (314
            )
            
            —Accumulated
                other comprehensive loss
            
            
            —
            
            
            (1,845
            )Accumulated
                deficit
            
            
            (31,608
            )
            
            (23,812
            )Total
                stockholders’ equity
            
            
            28,949
            
            
            29,285Total
                liabilities and stockholders’ equity
            
            $
            99,409
            
            $
            103,172


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





F-3
 *Table
            of Contents*





**MAIN
      STREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(In
      Thousands, Except Per Share Amounts)





Years
                EndedDecember
                26,
            
            December
                27,
            
            December
                29,2005
            
            2004
            
            2003Revenue
            
            $
            239,729
            
            $
            224,751
            
            $
            224,494Restaurant
                operating expensesCost
                of sales
            
            
            63,265
            
            
            59,025
            
            
            60,299Payroll
                and benefits
            
            
            73,222
            
            
            69,287
            
            
            70,415Depreciation
                and amortization
            
            
            8,944
            
            
            8,591
            
            
            8,386Loss
                on disposal of assets
            
            
            480
            
            
            148
            
            
            --Other
                operating expenses
            
            
            76,089
            
            
            71,290
            
            
            70,257Total
                restaurant operating expenses
            
            
            222,000
            
            
            208,341
            
            
            209,357Other
                operating expenses and income:Amortization
                of intangible assets
            
            
            952
            
            
            758
            
            
            606(Gain)
                loss on disposal of assets
            
            
            (3
            )
            
            13
            
            
            --General
                and administrative expenses
            
            
            11,581
            
            
            9,197
            
            
            8,977Pre-opening
                expenses
            
            
            307
            
            
            260
            
            
            907New
                manager training expenses
            
            
            21
            
            
            50
            
            
            195Impairment
                charges and other
            
            
            6,867
            
            
            1,385
            
            
            5,906Operating
                income (loss)
            
            
            (1,996
            )
            
            4,747
            
            
            (1,454
            )Gain
                on sale of assets
            
            
            —
            
            
            —
            
            
            3,831Interest
                expense and other, net
            
            
            5,598
            
            
            3,794
            
            
            4,521Net
                income (loss) before income taxes
            
            
            (7,594
            )
            
            953
            
            
            (2,144
            )Income
                tax expense
            
            
            202
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            (
                7,796
            )
            $
            953
            
            $
            (2,144
            )Basic
                earnings per share:Net
                income (loss)
            
            $
            (0.48
            )
            $
            0.07
            
            $
            (0.15
            )Diluted
                earnings per share:Net
                income (loss)
            
            $
            (
                0.48
            )
            $
            0.07
            
            $
            (0.
                15
            )Weighted
                average number of shares outstanding:Basic
            
            
            16,321
            
            
            14,642
            
            
            14,179Diluted
            
            
            16,321
            
            
            14,649
            
            
            14,179





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




F-4
 *Table
            of Contents*





**MAIN
      STREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
      (LOSS)


(In
      Thousands)




Common
                StockShares
            
            Par
                Value
            
            Additional
              Paid-in
              Capital
            
            Accumulated
                Deficit
            
            Accumulated
                Other Comprehensive Income
            
            Deferred
                Compensation
            
            TotalsBalances,
                December 30, 2002
            
            
            14,142
            
            
            14
            
            
            53,927
            
            
            (22,621
            )
            
            (2,504
            )
            
            --
            
            
            28,816Shares
                issued, common stock.
            
            
            500
            
            
            1
            
            
            1,000
            
            
            --
            
            
            --
            
            
            --
            
            
            1,001Comprehensive
                income (loss):Unrealized
                gain on interest rate swap
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            451
            
            
            --
            
            
            451Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,144
            )
            
            --
            
            
            --
            
            
            (2,144
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,693
            )Balances,
                December 29, 2003
            
            
            14,642
            
            
            15
            
            
            54,927
            
            
            (24,765
            )
            
            (2,053
            )
            
            --
            
            
            28,124Comprehensive
                income (loss):Unrealized
                gain on interest rate swap
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            208
            
            
            --
            
            
            208Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            953
            
            
            --
            
            
            --
            
            
            953Comprehensive
                Income:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,161Balances,
                December 27, 2004
            
            
            14,642
            
            
            15
            
            
            54,927
            
            
            (23,812
            )
            
            (1,845
            )
            
            --
            
            
            29,285Shares
                issued, common stock.
            
            
            2,669
            
            
            2
            
            
            5,927
            
            
            --
            
            
            --
            
            
            --
            
            
            5,929Comprehensive
                income (loss):Unrealized
                gain on interest rate swap
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,845
            
            
            --
            
            
            1,845Deferred
                compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (
                314
            )
            
            (314
            )Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            (7,796
            )
            
            --
            
            
            --
            
            
            (7,796
            )Comprehensive
                income (loss):
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,266
            )Balances,
                December 26, 2005
            
            
            17,311
            
            
            17
            
            
            60,854
            
            
            (31,608
            )
            
            --
            
            
            (314
            )
            
            28,949





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





F-5
 *Table
            of Contents*




**MAIN
      STREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(In
      Thousands)





Years
                EndedDecember
                26,2005
            
            December
                27,2004
            
            December
                29,2003CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income (loss)
            
            $
            (7,796
            )
            $
            953
            
            $
            (2,144
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            9,897
            
            
            9,349
            
            
            8,992Amortization
                of note receivable discount
            
            
            (54
            )
            
            (54
            )
            
            (22
            )Loss
                on sale of assets
            
            
            432
            
            
            51
            
            
            —Impairment
                charges and other
            
            
            6,867
            
            
            1,385
            
            
            5,906Loss
                on early extinguishment of debt
            
            
            427(Gain)
                loss on settlement of interest rate swap
            
            
            939
            
            
            (178
            )
            
            —Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (1,618
            )
            
            286
            
            
            (390
            )Inventories
            
            
            (38
            )
            
            4
            
            
            (55
            )Prepaid
                expenses
            
            
            136
            
            
            494
            
            
            1,133Other
                assets, net
            
            
            (77
            )
            
            238
            
            
            56Accounts
                payable
            
            
            705
            
            
            218
            
            
            (1,665
            )Other
                accrued liabilities
            
            
            4,410
            
            
            438
            
            
            (713
            )Net
                cash provided by operating activities
            
            
            14,230
            
            
            13,184
            
            
            7,267CASH
                FLOWS FROM INVESTING ACTIVITIES:Additions
                to property and equipment
            
            
            (8,124
            )
            
            (8,115
            )
            
            (10,253
            )Cash
                received from notes receivable
            
            
            691
            
            
            500
            
            
            325Cash
                paid to acquire franchise rights and goodwill
            
            
            (50
            )
            
            —
            
            
            (50
            )Cash
                received from the sale of assets
            
            
            —
            
            
            —
            
            
            4,505Cash
                received from termination of lease
            
            
            750
            
            
            847
            
            
            —Net
                cash used by investing activities
            
            
            (6,733
            )
            
            (6,768
            )
            
            (5,473
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from sale of common stock
            
            
            4,863
            
            
            —
            
            
            1,001Proceeds
                received on settlement of interest rate swap
            
            
            —
            
            
            178
            
            
            —Proceeds
                received from the exercise of stock options
            
            
            664
            
            
            —
            
            
            —Principal
                repayment upon debt refinancing
            
            
            (4,843
            )
            
            —
            
            
            —Regular
                principal payments on long-term debt
            
            
            (3,650
            )
            
            (5,601
            )
            
            (3,816
            )Net
                cash used by financing activities
            
            
            (2,966
            )
            
            (5,423
            )
            
            (2,815
            )NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            4,531
            
            
            993
            
            
            (1,021
            )CASH
                AND CASH EQUIVALENTS, BEGINNING
            
            
            5,593
            
            
            4,600
            
            
            5,621CASH
                AND CASH EQUIVALENTS, ENDING
            
            $
            10,124
            
            $
            5,593
            
            $
            4,600SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid during the year for interest
            
            $
            5,143
            
            $
            3,938
            
            $
            4,629Cash
                paid during the year for income taxes
            
            $
            177
            
            $
            59
            
            $
            3





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





F-6
 *Table
            of Contents*





**MAIN
      STREET RESTAURANT GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


1.
              ORGANIZATION
                  AND BASIS OF PRESENTATION




Main
      Street Restaurant Group, Inc. is a Delaware corporation engaged in the business
      of acquiring, developing, and operating restaurants. We currently own 55 TGI
      Friday's restaurants, 10 Bamboo Club restaurants (as of February 1, 2006),
      four
      Redfish Grill and Bar restaurants, and one Alice Cooper’stown
      restaurant.





*(a)
      Principles of Consolidation*





The
      consolidated financial statements include the accounts of Main Street Restaurant
      Group, Inc. and our wholly owned subsidiaries. All material intercompany
      transactions have been eliminated in consolidation. All references herein refer
      to our company and our subsidiaries.





*(b)
      Fiscal Year*





We
      operate on a fiscal year that ends on the Monday on or before December
      31.





*(c)
      Use of Estimates*





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires a company to make
      a
      number of 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. Such estimates and assumptions affect the reported
      amounts of revenues and expenses during the reporting period. On an ongoing
      basis, we evaluate estimates and assumptions based upon historical experience
      and various other factors and circumstances. We believe our estimates and
      assumptions are reasonable in the circumstances; however, actual results may
      differ from these estimates under different future conditions.





We
      believe that the estimates and assumptions that are most important to the
      portrayal of our financial condition and results of operations, in that they
      require our most difficult, subjective, or complex judgments, form the basis
      for
      the accounting policies deemed to be most critical to our operations. These
      critical accounting policies relate to the valuation and amortizable lives
      of
      long-lived assets, goodwill, and other identifiable intangible assets, valuation
      of deferred tax assets, and reserves related to self-insurance for workers
      compensation and general liability and reserves related to litigation:





(1) We
      periodically perform asset impairment analysis of long-lived assets related
      to
      our restaurant locations, goodwill, and other identifiable intangible assets.
      We
      perform these tests whenever we experience a “triggering” event, such as a
      decision to close a location or a major change in a location’s operating
      environment, or other event that might impact our ability to recover our asset
      investment. Also, we have a policy of reviewing the financial operations of
      our
      restaurant locations on at least a quarterly basis. Locations that are not
      meeting expectations are identified and continue to be watched closely
      throughout the year. Primarily in the fourth quarter, we review actual results
      and analyze budgets for the ensuing year. If we deem that a location’s results
      will continue to be below expectations, we analyze alternatives for its
      continued operation. At that time, we perform an asset impairment test. If
      we
      determine that the asset’s fair value is less than carrying value and we will be
      unable to recover the value through operations, we record an impairment charge.
      Upon an event such as a formal decision for abandonment (restaurant closure),
      we
      may record additional impairment of assets, including an allocation of goodwill.
      Any carryover basis of assets is depreciated over the respective remaining
      useful lives.





F-7
 *Table
            of Contents*





(2)  Periodically,
      we record (or reduce) the valuation allowance against our deferred tax assets
      to
      the amount that is more likely than not to be realized based upon recent past
      financial performance, tax reporting positions, and expectations of future
      taxable income. We expect to continue to record a full valuation allowance
      on
      any future tax benefits until we sustain profitable operations.





(3)  We
      use an
      actuarial based methodology utilizing our historical experience factors to
      adjust periodically self-insurance reserves for workers compensation and general
      liability claims and settlements. These estimates are adjusted based upon annual
      information received in July of each year in connection with policy renewals.
      Estimated costs for the following year are accrued on a monthly basis and
      progress against this estimate is re-evaluated based upon actual claims data
      each quarter.





(4)  We
      use
      the method of accounting for employee stock options under Accounting Principles
      Board (APB) Opinion No. 25 and have adopted the pro forma disclosure provisions
      of Statement of Financial Accounting Standards (SFAS) No. 123, which require
      disclosure of the impact of using the fair value at date of grant method of
      recording stock-based employee compensation. We adopted the requirements of
      SFAS
      123(R) effective December 27, 2005, the beginning of our 2006 fiscal year.





(5)  We
      are
      from time to time the subject of complaints or litigation from guests alleging
      food-borne illness, injury, or other food quality, health, or operational
      concerns. We may be adversely affected by publicity resulting from such
      allegations regardless of whether such allegations are valid or whether we
      are
      liable. We are also subject to complaints or allegations from former or
      prospective employees from time to time. A lawsuit or claim could result in
      an
      adverse decision against us that could have a material adverse effect on our
      business. We record estimated reserves when a loss becomes probable and we
      are
      able to reasonably estimate the amount of the loss.





We
      believe estimates and assumptions related to these critical accounting policies
      are appropriate under the circumstances; however, should future events or
      occurrences result in unanticipated consequences, there could be a material
      impact on our future financial condition or results of operations.





*(e)
      New Accounting Pronouncements*





On
      October 6, 2005, the FASB issued Staff Position No. 13-1 (“FSP 13-1”), *Accounting
      for Rental Costs Incurred During a Construction Period.* Generally, the staff position requires companies to expense rental costs
      incurred during a construction period. We are required to adopt FSP 13-1 in
      our
      fiscal year beginning December 27, 2005. We
      adopted FSP 13-1 on December 27, 2005, the beginning of our fiscal year. The
      adoption of this staff position did not have a material impact on our results
      of
      operations or financial position.




In
      December 2004, the Financial Accounting Standards Board ("FASB") enacted
      Statement of Financial Accounting Standards 123-revised 2004 ("SFAS 123R"),
      "Share-Based Payment" which replaces Statement of Financial Accounting Standards
      No. 123 ("SFAS 123"), “Accounting for Stock-Based Compensation" and supersedes
      APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
      SFAS
      123R requires the measurement of all employee share-based payments to employees,
      including grants of employee stock options, using a fair-value-based method
      and
      the recording of such expense in our consolidated statements of income. We
      are
      required to adopt SFAS 123(R) with our fiscal period beginning December 27,
      2005. See
      note
      2 in our Notes to Consolidated Financial Statements for the pro forma net income
      and net income per share amounts, for fiscal 2003 through fiscal 2005, as if
      we
      had used a fair-value-based method similar to the methods required under SFAS
      123(R) to measure compensation expense for employee stock incentive awards.





F-8
 *Table
            of Contents*




As
      permitted by SFAS No. 123, for our fiscal year 2005 we accounted for
      share-based payments to employees using the intrinsic value method and, as
      such,
      generally recognized no compensation cost for employee stock options.
      Accordingly, the adoption of SFAS 123(R)’s fair value method will not have
      a material impact on our results of operations and will have no impact on
      our overall financial position or cash flow. The estimated impact of adopting
      SFAS 123(R) for 2006, relating to prior year grants only, will be
      approximately $400,000. This estimate includes costs related to unvested stock
      options and our current stock compensation programs.





In
      the
      third quarter of 2005, our Board of Directors made the decision to accelerate
      the vesting of approximately 115,000 stock options granted prior to 2005.
      Generally, these options were due to vest by June 2006. Management expects
      no
      employee will terminate prior to the original vesting date and has not recorded
      any additional expense in the financial statements. The effects of the
      acceleration in vesting are reflected in our pro forma disclosures.





2.
            SIGNIFICANT
                ACCOUNTING POLICIES AND PROCEDURES





The
      consolidated financial statements reflect the application of the following
      accounting policies:





*Cash
      and Cash Equivalents*





Cash
      and
      cash equivalents include funds on hand, short-term money market investments,
      and
      certificate of deposit accounts with original maturities of 90 days or
      less.





*Revenue
      Recognition*





Our
      principal source of revenue is from customer dining transactions. Revenue is
      recognized at the time the meal is paid for by the customer, in the form of
      cash
      or credit card. Proceeds from the sale of gift cards are deferred as sold and
      recorded as revenue when the cards are presented as payment for dining
      transactions.





*Deferred
      Gains*





Deferred
      gains on sale-leaseback transactions are accreted to income as a reduction
      of
      rent expense over the related lease terms in accordance with SFAS No. 98,
      Accounting for Leases.





*Consideration
      Received from Vendors*





We
      record
      vendor rebates on products purchased by us as a reduction of cost of sales
      when
      the rebates are received.





*Inventories*





Inventories
      consist primarily of food, beverages, and supplies and are stated at the lower
      of cost, determined on a first-in, first-out basis (FIFO), or net realizable
      value.





*Fair
      Market Value of Financial Instruments*





The
      carrying value of cash equivalents, accounts receivable, other assets, accounts
      payable, accrued liabilities, and other liabilities approximate fair value
      due
      to the short-term nature of these instruments. Fixed rate long-term debt is
      currently at rates similar to current quotations for similar debt.





F-9
 *Table
            of Contents*




*Property
      and Equipment*





Property
      and equipment are stated at cost and depreciated on a straight-line basis over
      the estimated useful lives, while leaseholds are amortized over the shorter
      of
      20 years or the lease term including option periods, which have economic
      penalties, and consisted of the following (in thousands):




Useful
                Lives (years)
            
            December
                26, 2005
            
            December
                27, 2004Land
            
            
            --
            
            $
            534
            
            $
            534Land
                held for sale
            
            
            --
            
            
            --
            
            
            653Building
                and leasehold improvements
            
            
            4-20
            
            
            64,477
            
            
            66,016Kitchen
                equipment
            
            
            5-7
            
            
            24,409
            
            
            24,359Restaurant
                equipment
            
            
            5-10
            
            
            9,147
            
            
            8,160Smallwares
                and décor
            
            
            5-10
            
            
            7,742
            
            
            10,467Office
                equipment, software, and furniture
            
            
            5-7
            
            
            7,135
            
            
            6,816113,444
            
            
            117,006Less:
                Accumulated depreciation and amortization
            
            
            
            
            
            (58,490
            )
            
            (51,026
            )54,953
            
            
            65,980Construction
                in progress
            
            
            
            
            
            3,309
            
            
            464Total
            
            
            
            
            $
            58,263
            
            $
            66,444







Depreciation
      expense was $9,566,000 for 2005, $9,005,000 for 2004, and $8,651,000 for
      2003.





Construction
      in progress (CIP) represents costs incurred by us during the development of
      future restaurant sites for fixtures and building improvements and remodel
      costs. Construction in progress for 2005 includes primarily the costs incurred
      on construction for three of the TGI Friday’s restaurants that will open in
      2006. Construction in progress for 2004 included the costs incurred on
      construction of two of the new TGI Friday’s locations that were opened in 2005
      and the costs associated with a remodel project of another TGI Friday’s
      location.





*Franchise
      Fees*





Franchise
      fees represent the value assigned to the franchise agreements in the regions
      acquired and to the licenses to operate the restaurants. These agreements
      provide for an initial term of 20 to 30 years, with two renewal terms of 10
      years each. Franchise area goodwill represents goodwill allocated to the
      geographic area for developing purchased TGI Friday’s restaurants, and it
      qualifies as an intangible asset with a determinable life. These costs are
      being
      amortized on a straight-line basis over the life of the agreement and consisted
      of the following (in thousands):





F-10
 *Table
            of Contents*





Amortization
                Period (years)
            
            December
                26, 2005
            
            December
                27, 2004Purchased
                franchise territories
            
            
            20
            
            $
            719
            
            $
            719Franchise
                fees and license costs
            
            
            20-30
            
            
            3,073
            
            
            3,023Less:
                Accumulated amortization
            
            
            
            
            
            (1,486
            )
            
            (1,321
            )Total
            
            
            
            
            $
            2,306
            
            $
            2,421





*Goodwill*





We
      have
      recorded significant goodwill in conjunction with major acquisitions. We have
      adopted SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      which
      eliminates the amortization of all existing and newly acquired goodwill on
      a
      prospective basis and requires companies to assess goodwill impairment, at
      least
      annually, based on the fair value of the reporting unit. We no longer amortize
      goodwill.





During
      2004, we wrote off $430,000 in allocated goodwill associated with the closure
      of
      our Oakland, California TGI Friday’s, where we elected not to renew a lease. We
      also wrote off $50,000 of the purchased franchise territory related to the
      closure of this location. During 2005, we wrote off $1,000,000 in allocated
      goodwill associated with two underperforming Bamboo Club locations. At December
      26, 2005, we performed a valuation in accordance with SFAS No.142 for the
      purpose of determining the amount of goodwill impairment. Based on the results
      of the valuation, no additional impairment was required.





Goodwill
                allocated to areas (in thousands):
            
            December
                26,2005
            
            December
                27,2004Acquisition
                of California TGI Friday’s
            
            $
            9,460
            
            $
            9,460Acquisition
                of Midwest and Arizona TGI Friday’s
            
            
            1,495
            
            
            1,495Acquisition
                of Redfish
            
            
            300
            
            
            300Acquisition
                of Bamboo Club
            
            
            9,000
            
            
            10,000Total
            
            $
            20,255
            
            $
            21,255





*Other
      Accrued Liabilities*





Other
      accrued liabilities consisted of the following (in thousands):





F-11
 *Table
            of Contents*





December
                26,2005
            
            December
                27,2004Accrued
                payroll
            
            $
            3,943
            
            $
            3,404Accrued
                property and sales tax
            
            
            2,222
            
            
            2,085Accrued
                insurance
            
            
            2,310
            
            
            766Accrued
                rent
            
            
            6,834
            
            
            6,112Gift
                certificate liability
            
            
            2,370
            
            
            1,636Lease
                termination fees
            
            
            1,300
            
            
            2,175California
                meal & break legal accrual (a)
            
            
            1,500
            
            
            --Royalty
                and marketing fees
            
            
            1,442
            
            
            1,265Interest
                rate swap liability (b)
            
            
            947
            
            
            --Other
                accrued liabilities
            
            
            711
            
            
            1,817Total
            
            $
            23,579
            
            $
            19,260


(a)
            See
                Note 7 in our notes to consolidated financial
                statements


(b)
            See
                Note 2 - ,“Derivative Financial Instruments”, in our notes to consolidated
                financial statements.





*Income
      Taxes*





We
      utilize the asset and liability method of accounting for income taxes. Under
      the
      asset and liability method, deferred taxes are provided based on temporary
      differences between the financial reporting basis and the tax basis of our
      assets and liabilities, using enacted tax rates in the years in which the
      differences are expected to reverse. Deferred tax assets are reviewed
      periodically for recoverability and valuation allowances are provided as
      necessary.





*Earnings
      (Loss) Per Share*





Basic
      earnings (loss) per share (“EPS”) is computed by dividing earnings (loss)
      available to common stockholders by the weighted average number of shares
      outstanding for the period. Diluted earnings (loss) per share reflects the
      potential dilution that could occur if securities or contracts to issue common
      stock were exercised or converted to stock or resulted in the issuance of stock
      that then shared in our earnings or losses.





For
      the
      years ended December 26, 2005, December 27, 2004, and December 29, 2003, there
      were 646,000, 3,386,000, and 3,842,000, respectively, of outstanding stock
      options and warrants excluded from the calculation due to their anti-dilutive
      effect.





We
      have
      calculated EPS in accordance with SFAS No. 128, *Earnings
      Per Share* .
      The
      following table sets forth basic and diluted EPS computations for the years
      ended December 26, 2005, December 27, 2004, and December 29, 2003 (in thousands,
      except per share amounts):




2005
              2004
              2003Net
                  income (loss) per share
              $(7,796)
              $
                  953
              $(2,144)Weighted
                  average shares-basic
              16,321
              14,642
              14,179Effect
                  of dilutive securities
              914
              7
              1Anti-dilutive
                  securities
              (914)
              --
              (1)Weighted
                  average shares-adjusted for assumed conversions...
              16,321
              14,649
              14,179Earnings
                  per share - basic
              $
                  (0.48)
              $
                  0.07
              $
                  (0.15)Earnings
                  per share - diluted
              $
                  (0.48)
              $
                  0.07
              $
                  (0.15)





F-12
 *Table
            of Contents*




*Segment
      Reporting*





We
      have
      three operating segments that are managed based on our restaurant concepts:
      (i)
      TGI Friday's, (ii) Bamboo Club, and (iii) Redfish and Alice Cooper'stown. SFAS
      No. 131 allows for aggregation of similar operating segments into a single
      reportable operating segment if the components are considered similar under
      certain criteria. The restaurants operate in the U.S. within the casual dining
      segment, providing similar products to similar customers. The restaurants also
      possess similar pricing structures, resulting in similar long-term expected
      financial performance characteristics. Revenues from customers are derived
      principally from food and beverage sales. We do not rely on any major customers
      as a source of revenue. As a result of the foregoing, we believe that our
      restaurants meet the criteria supporting aggregation of all restaurants into
      one
      reporting unit.





However,
      because of each brand’s age and relative business maturity, and because of
      differing levels of marketing and brand recognition, each brand currently has
      somewhat different economic results. Also, we do not allocate any cost of
      capital or general and administrative cost directly to the
      restaurants.





The
      following table reflects TGI Friday’s and Bamboo Club brand financial data only
      (Redfish Bar and Grill and Alice Cooper’stown represent less than 10% of total
      revenue):


**Year
        ended December 26, 2005 (dollar amounts in thousands):**
 **TGI
                  Friday’s**
              **Bamboo
                  Club**Brand
                  Revenues
              $203,800
              $26,044Restaurant
                  Level Operating Profit (Loss)
              $
                  19,656
              $(2,497)Average
                  Number of Restaurants
              53.6
              11.6Average
                  Annual Unit Volumes
              $
                  3,802
              $
                  2,245
 
 **Year
        ended December 27, 2004 (dollar amounts in thousands):**
 **TGI
                  Friday’s**
              **Bamboo
                  Club**Brand
                  Revenues
              $188,538
              $26,106Restaurant
                  Level Operating Profit (Loss)
              $
                  16,527
              $(1,129)Average
                  Number of Restaurants
              53.0
              12.3Average
                  Annual Unit Volumes
              $
                  3,557
              $
                  2,122




*Stock-Based
      Compensation Plans*





SFAS
      No.123, *Accounting
      for Stock-Based Compensation* ,
      changed
      the methods for recognition of cost on plans similar to those of our company.
      Adoption of SFAS No. 123 was optional; however, pro forma disclosures as if
      we
      had adopted the cost recognition method are required. Had compensation cost
      for
      stock options awarded under these plans been determined consistent with SFAS
      No.
      123, our net income (loss) and EPS would have reflected the following pro forma
      amounts:





F-13
 *Table
            of Contents*




Year
                Ended December 26, 2005
            
            Year
                Ended December 27, 2004
            
            Year
                Ended December 29, 2003(In
                Thousands, Except Per Share Amounts)Net
                income (loss) as reported
            
            $
            (7,796
            )
            $
            953
            
            $
            (2,144
            )Employee
                stock compensation expense included in net income (loss), as reported:
                pro
                forma employee compensation expense
            
            $
            (675
            )
            $
            (731
            )
            $
            (944
            )Pro
                forma net income (loss)
            
            $
            (8,471
            )
            $
            222
            
            $
            (3,088
            )Earnings
                (loss) per share:Shares,
                basic
            
            
            16,321
            
            
            14,642
            
            
            14,179Shares,
                diluted
            
            
            16,321
            
            
            14,649
            
            
            14,179As
                reported-basic and diluted
            
            $
            (0.48
            )
            $
            0.07
            
            $
            (0.15
            )Pro
                forma-basic and diluted
            
            $
            (0.52
            )
            $
            0.02
            
            $
            (0.21
            )





The
      weighted average fair value at the date of grant for options granted during
      fiscal 2005, 2004, and 2003 were estimated using the Black-Scholes option
      pricing model with the following assumptions: weighted average risk-free
      interest rate of 4.14%, 3.03%, and 3.00%, respectively; weighted average
      volatility of 38.77%, 68.94%, and 65.6%, respectively; average life of the
      option of three years, three years, and four years, respectively; and weighted
      average dividend yield of 0.0% in all years.





Details
      regarding the options outstanding as of December 26, 2005 are as
      follows:


Outstanding
              
              ExercisableRange
                  of Exercise Price
              
              Number
                  of Shares
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighted
                  Average Exercise Price
              
              Number
                  of Shares
              
              Weighted
                  Average Exercise Price$1.67
                  - $2.75
              
              
              1,412,584
              
              
              3.92
                  years
              
              $
              2.23
              
              
              1,390,084
              
              $
              2.23$2.76-
                  $4.00
              
              
              1,185,251
              
              
              3.70
                  years
              
              $
              3.34
              
              
              1,185,251
              
              $
              3.34$4.01
                  - $6.01
              
              
              773,000
              
              
              7.33
                  years
              
              $
              5.20
              
              
              428,000
              
              $
              4.91Total
              
              
              3,370,835
              
              
              
              
              
              
              
              
              3,003,335





F-14
 *Table
            of Contents*





*Derivative
      Financial Instruments*





We
      have
      only limited involvement with derivative financial instruments and generally
      do
      not use them for trading purposes. These interest rate swap agreements were
      originally entered into to hedge the effects of fluctuations in interest rates
      related to our long-term debt instruments. As a result of our debt refinancing
      referenced in Note 5 to the consolidated financial statements, “hedge
      accounting” no longer applies after the third quarter of 2005. Although, we have
      elected to keep the interest rate swaps in place as a hedge against rising
      interest rates. On October 31, 2005, we recorded the fair value liability of
      approximately $939,000 as an expense, and on a go-forward basis, we will record
      quarterly market adjustments on these swaps, income or expense, directly in
      our
      statement of operations as a component of interest expense.





As
      of
      December 26, 2005, we were participating in two derivative financial instruments
      for which fair value disclosure is required under Statement of Financial
      Accounting Standards No. 133, as amended. As of December 26, 2005 and December
      27, 2004, the fair value of the interest rate swaps resulted in a liability
      of
      $947,913 and $1,162,473, respectively.





Comprehensive
                Income (Loss)
            
            December
                26, 2005
            
            December
                27, 2004
            
            December
                29, 2003Net
                income (loss)
            
            $
            (7,796
            )
            $
            953
            
            $
            (2,144
            )Other
                comprehensive income (loss), for the periods ended December 26 2005,
                December 27, 2004, and December 29, 2003, respectively
            
            
            1,845
            
            
            208
            
            
            451Comprehensive
                income (loss)
            
            $
            (5,951
            )
            $
            1,161
            
            $
            (1,693
            )





*Accounting
      for Long-Lived Assets and Impairment Charges*





Long-lived
      assets are reviewed for impairment whenever events or circumstances indicate
      that the carrying amount of the asset may not be recoverable. If the sum of
      the
      expected future cash flows (undiscounted and without interest charges) from
      an
      asset to be held and used in operations is less than the carrying value of
      the
      asset, an impairment loss must be recognized in the amount of the difference
      between the carrying value and the fair value of the assets.





We
      have a
      policy of reviewing the financial operations of our restaurant locations on
      at
      least a quarterly basis. Locations that are not meeting expectations are
      identified and continue to be monitored closely throughout the year. Primarily
      in the fourth quarter, we review actual results and analyze budgets for the
      ensuing year. If we deem that a location’s results will continue to be below
      expectations, we consider alternatives for its continued operation. At that
      time, we perform asset impairment testing. If it is determined that the fair
      value of an asset is greater than its carrying value, an impairment charge
      is
      recorded. Upon a triggering event such as a formal decision for abandonment
      (restaurant closure), we may record additional impairment of assets, including
      an allocation of goodwill. Any carryover basis of assets is depreciated over
      the
      respective remaining useful lives.





F-15
 *Table
            of Contents*





Fair
      value of assets is determined primarily on the likelihood of future use of
      the
      assets through operations or by the value that could be received for the asset
      if sold.





Other
      charges include write-offs of allocated goodwill, severance costs, lease and
      contract termination fees, professional service costs, and other non-recurring
      charges. During fiscal years 2005, 2004, and 2003, we recorded asset impairment
      charges and other as follows (in thousands):








December
                26, 2005
            
            December
                27, 2004
            
            December
                29, 2003Long-lived
                asset impairments and other
            
            $
            5,617
            
            $
            310
            
            $
            3,051Write-off
                of goodwill allocated to closed or impaired stores
            
            
            1,000
            
            
            --
            
            
            905Provision
                for severance
            
            
            --
            
            
            --
            
            
            300Lease
                termination costs
            
            
            250
            
            
            875
            
            
            500Impairment
                of receivables (management agreement)
            
            
            --
            
            
            --
            
            
            800Write-down
                of land (El Paso, Texas)
            
            
            --
            
            
            200
            
            
            350Total
                impairment charges and other
            
            $
            6,867
            
            $
            1,385
            
            $
            5,906





The
      long-lived asset impairment amount in the table above includes the net book
      value of the fixed assets that will not be recovered through regular operations,
      computed on a discounted cash flow basis. The amount in 2005 is attributable
      to
      the impairment of three underperforming Bamboo Club restaurants and our Alice
      Cooper’stown restaurant. The amount in 2004 is attributable primarily to the
      impairment of one Bamboo Club location. The amount in 2003 is attributable
      primarily to impairments of two Bamboo Club locations and the closure of one
      Redfish location.





*Valuation
      Reserves*





Valuation
      reserves for the years ended December 26, 2005, December 27, 2004, and December
      29, 2003, consisted of the following:





Balance
                at Beginning of Period
            
            Expense
                Recorded
            
            Payments
                Made
            
            Balance
                at End of PeriodInsurance
                and claims reserves(prepaids):Year
                ended December 26, 2005
            
            $
            766,262
            
            $
            5,450,814
            
            $
            (3,907,104
            )
            $
            2,309,972Year
                ended December 27, 2004
            
            $
            (73,108
            )
            $
            5,992,668
            
            $
            (5,153,298
            )
            $
            766,262Year
                ended December 29, 2003
            
            $
            1,415,300
            
            $
            6,694,400
            
            $
            (8,182,808
            )
            $
            (73,108
            )





F-16
 *Table
          of Contents*


3.
            INCOME
                TAXES





We
      did
      not record a federal income tax provision during 2005 due to the utilization
      of
      net operating loss and tax credit carryforwards. However, we recorded $201,000
      in income tax expense related to alternative minimum taxes (AMT) and state
      income tax expense.





Income
      tax expense consisted of the following (in thousands):





Current
            
            Deferred
            
            TotalYear
                ended December 26, 2005:U.S.
                Federal
            
            $
            51,142
            
            $
            --
            
            $
            --State
                and local
            
            
            150,747
            
            
            --
            
            
            --$
            201,889
            
            $
            --
            
            $
            --Year
                ended December 27, 2004:U.S.
                Federal
            
            $
            --
            
            $
            --
            
            $
            --State
                and local
            
            
            --
            
            
            --
            
            
            --$
            --
            
            $
            --
            
            $
            --Year
                ended December 29, 2003:U.S.
                Federal
            
            $
            --
            
            $
            --
            
            $
            --State
                and local
            
            
            --
            
            
            --
            
            
            --$
            --
            
            $
            --
            
            $
            --




Deferred
      income taxes arise due to differences in the treatment of income and expense
      items for financial reporting and income tax purposes. The effect of temporary
      differences and carryforwards that gave rise to deferred tax balances at
      December 26, 2005 and December 27, 2004, were as follows (in
      thousands):


Net
                Deferred Tax Assets/(Liabilities)
            
            December
                26, 2005
            
            December
                27, 2004
              (as
                restated)(In
                Thousands)Temporary
                differences:Basis
                differences in investments
            
            $
            160
            
            $
            112Basis
                differences in depreciable and amortizable assets
            
            
            (3,144
            )
            
            (4,714
            )Provision
                for estimated expenses
            
            
            6,494
            
            
            4,330Revenue
                recognition
            
            
            2,359
            
            
            2,006Interest
                rate swap
            
            
            --
            
            
            738Deferred
                compensation
            
            
            31
            
            
            --Tax
                carryforwards:General
                business and AMT credits
            
            
            5,682
            
            
            5,631Charitable
                contribution
            
            
            --
            
            
            --Net
                operating loss and capital loss
            
            
            2,510
            
            
            3,026Valuation
                reserve
            
            
            (14,092
            )
            
            (11,129
            )Total
            
            $
            --
            
            $
            --




The
      amount of specific components of the deferred tax asset was incorrectly stated
      in 2004. The 2004 amounts have been revised to correctly state the accumulated
      balances. This misclassification had no impact on the overall financial
      statements since there is a full valuation allowance against the deferred tax
      asset.





F-17
 *Table
            of Contents*





At
      December 26, 2005, we had approximately $12 million in federal net operating
      and
      tax credit carryforwards to be used to offset future income for federal income
      tax purposes. These carryforwards expire in the years 2011 to 2023. As a result,
      we did not record a federal income tax provision in 2005. However, we recorded
      $201,000 in income tax expense related to alternative minimum taxes (AMT) and
      state income tax expense.





We
      believe that our ability to utilize our net operating loss carryforwards and
      certain of our general business and AMT credits to offset future taxable income
      within the carryforward periods under existing tax laws and regulations is
      subject to future profitability. However, because we have suffered significant
      net losses in the past, we have concluded that a 100% valuation allowance
      against our net deferred tax assets continues to be warranted.





The
      net
      change in the total valuation allowance for the year ended December 26, 2005
      and
      December 27, 2004 is the result of providing a full valuation allowance against
      all deferred tax assets because we have a history of losses.





Reconciliations
      of the federal income tax rate to our effective tax rate were as
      follows:





December
                26, 2005
            
            December
                27, 2004
            
            December
                29, 2003Statutory
                federal rate
            
            
            34.0
            %
            
            (34.0
            )%
            
            (34.0
            )%State
                taxes, net of federal benefit
            
            
            3.19
            
            
            --
            
            
            --Nondeductible
                expenses
            
            
            (.22
            )
            
            1.92
            
            
            0.66Other
            
            
            (.38
            )
            
            --
            
            
            --Change
                in valuation allowance
            
            
            (39.27
            )
            
            (35.92
            )
            
            33.34(2.68
            )%
            
            0.0
            %
            
            0.0
            %





4.
            LINE
                OF CREDIT





Under
      our
      new five-year financing agreement (see note 5 to our notes to consolidated
      financial statements), we have a $20 million revolving line of credit to be
      used
      for new restaurant construction and expansion, and remodeling of existing TGI
      Friday’s restaurants.





This
      line
      includes a $4 million sublimit of the revolving line of credit for use of
      letters of credit issued by Bank of America for our benefit. Letters of credit
      are limited so that the total aggregate lending commitment of $20 million is
      not
      exceeded .





The
      bank
      has issued letters of credit (LOCs) totaling $2.9 million to provide security
      under our 2004 and 2005 workers’ compensation insurance program. The amount
      available for borrowing under the line of credit is reduced by the amount of
      the
      LOCs. At December 26, 2005, we had no outstanding balance on our line of
      credit.





5.
            LONG-TERM
                DEBT





Long-term
      debt consists of the following (in thousands):





F-18
 *Table
            of Contents*





Maturity
                Dates
            
            Interest
                Rates as of December 26,2005
            
            Annual
                PrincipalPayments
            
            December
                26, 2005
            
            December
                27, 2004CNL
                Term Loan II, secured by assets of 16 TGI Friday’s
                restaurants
            
            
            2012-13
            
            
            9.457
            %
            $
            1,297
            
            $
            11,902
            
            $
            13,199Bank
                of America
            
            
            --
            
            
            --
            
            
            15,085
            
            
            --
            
            
            15,085Bank
                of America
            
            
            2010
            
            
            6.36
            %
            
            --
            
            
            24,855
            
            
            --Merrill
                Lynch
            
            
            --
            
            
            --
            
            
            3,858
            
            
            --
            
            
            3,858GE
                Capital
            
            
            --
            
            
            --
            
            
            11,487
            
            
            --
            
            
            11,487GMAC
            
            
            2013
            
            
            8.75
            %
            
            926
            
            
            1,528
            
            
            2,454Total
            
            
            
            
            
            
            
            $
            32,653
            
            
            38,285
            
            
            46,083Less
                current portion
            
            
            
            
            
            
            
            
            
            
            
            (3,383
            )
            
            (3,851
            )Total
            
            
            
            
            
            
            
            
            
            
            $
            34,902
            
            $
            42,232





On
      October 31, 2005, we entered into a five-year $45 million credit facility with
      Bank of America, N.A., as administrative agent and letter of credit issuer,
      and
      for a syndicate of lending financial institutions that includes Bank of America,
      GE Franchise Finance and Wells Fargo. The proceeds available under the credit
      facility were used to refinance certain existing long term debt, and will be
      used (i) to fund the development of new TGI Friday’s restaurant locations and
      remodel existing TGI Friday’s restaurants, and (ii) for capital expenditures and
      general corporate working capital purposes.





The
      credit facility consists of the following:





(1)
      A $25
      million term loan with principal to be amortized over a ten-year period with
      a
      five- year balloon payment of unpaid principal. The term loan bears interest
      at
      the Eurodollar rate (LIBOR) plus 250 basis points.





(2)
      A $20
      million revolving line of credit to be used for new restaurant construction
      and
      expansion, and remodeling of existing TGI Friday’s restaurants.





(3)
      A $4
      million sublimit of the revolving line of credit for use of letters of credit
      issued by Bank of America for our benefit. Letters of credit are limited so
      that
      the total aggregate lending commitment of $20 million is not
      exceeded .





As
      a
      result of the refinancing discussed above, at December 26, 2005, we had
      long-term debt of approximately $38 million, including the current portion
      of
      $3.3 million, with three banks and financial institutions. We made regular
      and
      accelerated principal and interest payments of approximately $8.2 million in
      2005.





F-19
 *Table
          of Contents*




The
      credit facility contains customary affirmative covenants for transactions of
      this type, some of which are (i) the timely delivery of financial statements,
      (ii) compliance with all franchise agreements and material contracts, and (iii)
      notice to the administrative agent upon the signing of any new
      leases.




The
      credit facility also contains the customary negative covenants, such that we
      will not permit:





(i)
            The
                creation of other liens on our assets or
                revenues.


(ii)
            Investment
                or the extensions of credit to others, including employees and
                officers.


(iii)
            The
                incurrence of an additional
                indebtedness.


(iv)
            Any
                fundamental change in our business, such as merger, acquisition,
                or
                disposition of assets or restaurants, except as permitted under the
                credit
                facility.


(v)
            The
                payment of cash dividends, distributions to stockholders, or the
                repurchases of our common stock.





The
      credit facility also contains customary financial covenants including (i)
      Consolidated Debt Coverage, defined as Senior Debt to EBITDA (as modified for
      capital expenditures and lease expense), to be no greater than 3.00 to 1.00,
      (ii) Fixed Charge Coverage Ratio of 1.15 to 1.00 through September 2006, 1.20
      to
      1.00 through September 2007, and 1.25 to 1.00 thereafter, and (iii) all capital
      expenditures to be limited to $15 million per year.





At
      December 26, 2005, we met all of the financial covenants for all debt
      agreements. All long-term debt is secured by certain assets of various
      restaurant locations.





Maturities
      of long-term debt, giving effect to the borrowings discussed above, were as
      follows at December 26, 2005 (in thousands):





2006
            
            $
            3,3822007
            
            
            3,6742008
            
            
            3,9872009
            
            
            4,3252010
            
            
            4,691Thereafter
            
            
            18,226Total
            
            $
            38,285





At
      December 26, 2005, we wrote off $427,000 in deferred financing fees related
      to
      the debt extinguished as a result of the debt refinancing discussed above.
      This
      amount is recorded as additional interest expense in our financial statements.





6.
            STOCKHOLDERS'
                EQUITY





*Stock
      Options*





We
      have
      an Incentive Stock Option Plan (the “2002 Plan”) that provides for the issuance
      of options to acquire up to 1,000,000 shares of our common stock. The options
      are intended to qualify as incentive stock options within the meaning of Section
      422A of the Internal Revenue Code or as options which are not intended to meet
      the requirements of such section (“non-qualified stock options”). Awards granted
      under the 2002 Plan also may include stock appreciation rights and restricted
      stock awards.





The
      exercise price of all incentive stock options granted under the 2002 Plan must
      be at least equal to the fair market value of such shares as of the date of
      grant or, in the case of incentive stock options granted to a holder of 10%
      or
      more of the our common stock, at least 110% of the fair market value of such
      shares on the date of grant. The plan administrator (currently the Board of
      Directors) sets the term of each stock option, but no incentive stock option
      may
      be exercisable more than 10 years after the date such option is granted. We
      also
      have granted options under the 1990, 1995, and 1999 Incentive Stock Option
      Plans, all of which contain similar terms to the 2002 Plan.





F-20
 *Table
            of Contents*





During
      2005, we issued 377,500 options to directors, management, and key employees
      with
      a weighted average exercise price of $5.36 per share, the fair market value
      of
      our common stock on the date of grant.





We
      are
      also authorized to issue or have outstanding options under all of our unexpired
      stock option plans. During 2004, we issued 22,500 stock options.





A
      summary
      of the status of our stock option plans at December 26, 2005, December 27,
      2004,
      and December 29, 2003, and changes during the years then ended is presented
      in
      the table below:





2005
            
            2004
            
            2003Wtd.
                Avg.
            
            
            
            Wtd.
                Avg.
            
            
            
            Wtd.
                Avg.Shares
            
            Price
            
            Shares
            
            Price
            
            Shares
            
            PriceOptions
                outstanding at beginningof
                period
            
            
            3,310,501
            
            $
            2.87
            
            
            3,857,754
            
            $
            3.10
            
            
            3,487,420
            
            $
            3.30Granted
            
            
            377,500
            
            
            5.36
            
            
            22,500
            
            
            2.10
            
            
            630,250
            
            
            2.15Exercised
            
            
            (
                118,916
            )
            
            3.15
            
            
            -
            
            
            -
            
            
            -
            
            
            -Canceled
            
            
            (198,250
            )
            
            3.42
            
            
            (569,753
            )
            
            3.30
            
            
            (259,916
            )
            
            3.64Options
                outstanding at endof
                period
            
            
            3,370,835
            
            
            3.30
            
            
            3,310,501
            
            
            2.87
            
            
            3,857,754
            
            
            3.10Exercisable
                at end of period (a)
            
            
            3,003,335
            
            
            3.05
            
            
            2,839,425
            
            
            2.89
            
            
            2,828,254
            
            
            3.12Weighted
                average fair value of options granted
            
            
            
            
            $
            3.00
            
            
            
            
            $
            1.42
            
            
            
            
            $
            1.50





(a)
      Options become fully exercisable upon certain events, including a change in
      ownership control.





*Common
      Stock Warrants*




On
      April
      28, 2005, we sold 2,325,581 shares of common stock at $2.15 per share and issued
      581,395 warrants to purchase shares at $3.01 per share to Dallas-based CIC
      Partners LP, a private equity fund. These warrants expire in April 2010.





7.
            COMMITMENTS
                AND CONTINGENCIES





*Development
      Agreements*





We
      are
      obligated under separate development agreements with TGI Friday’s Inc. to open
      14 additional new TGI Friday's restaurants through 2009. The development
      agreements give TGI Friday’s Inc. certain remedies in the event we fail to
      timely comply with the development agreements, including the right, under
      certain circumstances, to terminate our exclusive rights to develop restaurants
      in the related franchise territory. Our development territories include most
      of
      Arizona, Nevada, New Mexico, and Southern California, and the El Paso, Texas
      metropolitan area. We anticipate building four to six new TGI Fridays during
      2006 and we are currently negotiating leases on two new TGI Friday’s restaurant
      sites for 2007.





F-21
 *Table
            of Contents*




*Franchise,
      License, and Marketing Agreements*





In
      accordance with the terms of the TGI Friday's restaurant franchise agreements,
      we are required to pay franchise fees of $50,000 ($25,000 for our Southern
      California locations) for each restaurant opened. We also are required to pay
      a
      royalty of up to 4% of gross sales, although we have entered into a California
      Development Incentive Agreement that will reduce a portion of these fees. In
      addition, TGI Friday's Inc. has agreed to reduce royalties for one year for
      any
      new TGI Friday's restaurant opened by June 30, 2006. Royalty expense was
      approximately $7.5 million, $7.2 million, and $7.5 million under these
      agreements during 2005, 2004, and 2003, respectively. In addition, we could
      be
      required to spend up to 4% of gross sales on marketing. Marketing expense for
      TGI Friday’s restaurant locations under these agreements was approximately $8.1
      million, $6.5 million, and $5.3 million during 2005, 2004, and 2003,
      respectively.





*Operating
      Leases*





We
      lease
      land and restaurant facilities under operating leases having terms (including
      option periods) expiring at various dates through October 2022. The restaurant
      leases have from two to three renewal clauses of five years each at our option,
      and have provisions for contingent rentals based upon a percentage of gross
      sales. Our minimum future lease payments as of December 26, 2005, were as
      follows (in thousands):





2006
            
            $
            12,9802007
            
            
            13,4992008
            
            
            13,5332009
            
            
            13,3822010
            
            
            13,292Thereafter
            
            
            95,494Total
            
            $
            162,180





Rent
      expense during 2005, 2004, and 2003, was approximately $12.5 million, $12.3
      million, and $12.5 million, respectively. In addition, we paid contingent
      rentals of $1.3 million, $840,000, and $958,000 during 2005, 2004, and 2003,
      respectively. The difference between rent expense and rent paid due to recording
      expenses on the straight-line method is included in other liabilities and
      deferred credits in the accompanying consolidated balance sheets.





*Contingencies*





In
      the
      normal course of business, we are named as a defendant in various claims and
      litigation matters. From time to time, we are subject to routine contract,
      negligence, employment related, and other litigation in the ordinary course
      of
      business.





We
      have
      been served with two lawsuits filed on behalf of current employees, seeking
      damages, under California law, for both missed breaks and missed meal breaks
      the
      employees allege they did not receive. These lawsuits seek to establish a class
      action relating to our California operations. We have vigorously defended these
      lawsuits, both on the merits of the employees’ cases and the issues relating to
      class action status. In July 2005, the court ruled to grant class action status
      in one of these cases. During the fourth quarter of 2005, the appellate Court
      in
      California ruled on the same issues involved in our cases, which effectively
      characterizes damages as a penalty and not wages, which shortens the period
      for
      which we could be liable to one year versus three and eliminates the exposure
      for the employees’ attorney’s fees. Subsequent
      to that ruling, additional appellate court rulings were made including one
      which
      ruled that the claim was a claim for wages. As
      a
      result of the overall developments in our cases and the appellate court rulings
      over similar facts in unrelated cases in the fourth quarter of 2005, we recorded
      an estimated settlement reserve of $1.5 million. We continue to aggressively
      defend our company and we are unable to predict the ultimate amount, if any,
      of
      a settlement or the timing of any payments.





F-22
 *Table
            of Contents*




The
      state
      of California initiated a sales tax audit of our restaurants and determined
      that
      the optional 15% gratuity added to checks for parties of eight or more should
      have been subject to sales tax and, as such, has assessed taxes and related
      penalties of initially approximately $900,000, but which have since been reduced
      to approximately $500,000. We have vigorously contested this assessment. The
      first of various appeal conferences was held in November 2003. In February
      2004,
      we were notified that our appeal was denied by the appeals officer. We were
      in
      the process of preparing a second appeal to the full state of California
      Franchise Tax Board, but this appeal is being held in abeyance pending our
      ability to reach a settlement with the state. In February 2006, we were notified
      by the California Settlement Bureau that our offer was rejected. We plan to
      continue to see if an acceptable settlement can be reached and, failing that,
      we
      plan to appeal this decision and continue to contest this assessment. We are
      unable to predict the outcome of this proceeding.





Other
      than the preceding, we are not subject to any pending litigation that we believe
      will have a material adverse effect on our business, financial condition,
      results of operations, or liquidity.





We
      are
      also subject, from time to time, to audit by various taxing authorities
      reviewing our income, property, sales, use, and payroll taxes. We believe that
      any finding from such audits will not have a material impact on our financial
      condition, results of operations, or liquidity.





8.
            BENEFIT
                PLANS





We
      maintain a 401(k) Savings Plan for all of our employees. We currently match
      50%
      of the participants' contributions up to the first 4%. Contributions made by
      us
      were approximately $226,000, $234,000, and $235,000 during 2005, 2004, and
      2003,
      respectively.





On
      December 1, 2005, we adopted a Deferred Compensation Plan for our executive
      management. We currently match 50% of the participant’s contributions up to the
      first $10,000 of contributions. Contributions made by us in 2005 were
      approximately $28,000.





9.
            SUBSEQUENT
                EVENTS





In
      December 2005, we entered into a lease termination to close a Bamboo Club
      restaurant in Fairfax, Virginia and we accrued $250,000. Subsequent to year
      end,
      we paid the lease termination fee and closed the restaurant in Fairfax, Virginia
      in January 2006.






F-23