# UNITED STATESSECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549FORM 10-K

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# (Check One)

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

# For The Fiscal Year
Ended June 27, 2004

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

# For the transition period from ___ to ___

# Commission File Number:000-22639

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

|                                                                                           |                                               
|------------------------------------------------------------------------------------------ | ----------------------------------------------
|Delaware (State or other jurisdictionof incorporation or organization)                     | 04-3370491(I.R.S. Employer Identification No.)
|10375 Park Meadows
Drive, Suite 560, Littleton, CO(Address of principal executive offices) | 80124 (Zip Code)                              

303-804-1333(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, par value $.01 per share

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months 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  Resolution  S-K is not
contained herein, and will not be contained to the best of the registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K: [X]

Indicate by check mark if the  registrant  is an  accelerated  filer (as defined in Rule 12b-2 of the  Exchange
Act): YES   [X]   NO   [ ]

The  aggregate  market value of Common Stock held by  non-affiliates  of the  Registrant as of September 1, 2004,
based on the closing  price of the Common  Stock as reported by the Nasdaq  National  Market on September 1, 2004
of $8.34 per share,  was  $74,372,042.  Solely for purposes of this  computation,  shares held by all officers,
directors and 10% or more  beneficial  owners of the registrant have been excluded.  Such exclusion  should not
be deemed a determination or an admission that such officers,  directors or 10% or more beneficial  owners are,
in fact, affiliates of the registrant.

Number of shares of Common Stock,
$.01 par value, outstanding at August 31, 2004: 12,821,423

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DOCUMENTS INCORPORATED
BY REFERENCE

Certain  portions of the Companys  definitive  proxy statement to be used in connection with its 2004
Annual Meeting of Stockholders  and to be filed within 120 days of June 27, 2004 are  incorporated by reference
into Part III, Items 10-14, of this report on Form 10-K.

Our annual reports on Form 10-K,  quarterly  reports on
Form 10-Q and current reports on Form 8-K, and
any  amendments to the reports will be provided  without  charge upon written  request  addressed to:  Investor
Relations,  Champps  Entertainment,  Inc., 10375 Park Meadows Drive, Suite 560,  Littleton,  Colorado 80124 and
will also be available on our web site at  www.champps.com  under the heading "Investor  Relations," as soon as
reasonably  practicable after we  electronically  file such material with, or furnish it to, the Securities and
Exchange  Commission.  Our Code of Business  Conduct and Ethics is available  on our website  under the heading
"The Company."

[THE REMAINDER OF THIS PAGE WAS
INTENTIONALLY LEFT BLANK]

i

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# FORM 10-K INDEX

# PART I

|                               |                                                                                                                                                                      |              
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
|Item 1 
Item 2 
Item 3 
Item 4 | Business
Properties                                         
Legal Proceedings                                  
Submission of Matters to a Vote of Security Holders | 2
 18
 18
 19

# PART II

|Item 5
Item 6    
Item 7    
Item 7A   
Item 8    
Item 9    
Item 9A | Market for the Registrants Common Stock and Related
Stockholder Matters                                         
Selected Financial Data                                     
Managements Discussion and Analysis of Results of 
Operations and Financial Condition                          
Quantitative and Qualitative Disclosure About Market Risk   
Financial Statements and Supplementary Data                 
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure                         
Controls and Procedures | 20
 21
 21
 36
 36
 36
 37
|--------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------

# PART III

|                                                |                                                                                                                                                                                                                                                                                                                                    |                   
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------
|Item 10  
Item 11  
Item 12  
Item 13  
Item 14 | Directors and Executive Officers of the Registrant    
Executive Compensation                                
Security Ownership of Certain Beneficial Owners and 
Management                                            
Certain Relationships and Related Transactions        
Independent Registered Public Accountant and Fees | 37
 38
 38
 38
 38

# PART IV

|        |                                                                  |   
|------- | ---------------------------------------------------------------- | --
|Item 15 | Exhibits, Financial Statement Schedules, and Reports on
Form 8-K | 39

ii

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# FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K
and the documents incorporated by reference into the Annual Report on Form 10-K include
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. We use words such as
may, believe, estimate, expect,
plan, intend, project, anticipate and
similar expressions to identify forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about future
events, activities or developments. Our actual results could differ materially from those
discussed in or implied by these forward-looking statements. Forward-looking statements
include, without limitations, statements relating to, among other things:

| | (1) | the highly competitive nature of the casual dining restaurant industry;
| | --- | -----------------------------------------------------------------------

| | (2) | our ability to open and operate additional restaurants profitably;
| | --- | ------------------------------------------------------------------

| | (3) | our ability to raise capital in the future;
| | --- | -------------------------------------------

| | (4) | our ability to control restaurant operating costs, which are impacted by commodity prices;
| | --- | ------------------------------------------------------------------------------------------

| | (5) | potential fluctuation in our quarterly operating results due to
               seasonality and other factors including the levels of pre-opening
               expenses for our new restaurants;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | the continued service of key management personnel;
| | --- | --------------------------------------------------

| | (7) | consumer perceptions of food safety;
| | --- | ------------------------------------

| | (8) | changes in consumer tastes and trends and general business and economic conditions;
| | --- | -----------------------------------------------------------------------------------

| | (9) | our ability to attract, motivate and retain qualified associates;
| | --- | -----------------------------------------------------------------

| | (10) | labor shortages or increased labor charges;
| | ---- | -------------------------------------------

| | (11) | our ability to protect our name and logo and other proprietary
               information;
| | ---- | ------------------------------------------------------------------------------------------

| | (12) | the impact of litigation;
| | ---- | -------------------------

| | (13) | the impact of federal, state or local government regulations
               relating to our associates, such as increases in mimimum wage, or the sale of food and alcoholic beverages;
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (14) | the ability to fully utilize income tax operating loss and credit
               carryforwards; and,
| | ---- | ----------------------------------------------------------------------------------------------------

| | (15) | the impact of rising energy costs or the availabilty of energy sources.
| | ---- | -----------------------------------------------------------------------

These forward-looking statements
are subject to numerous risks, uncertainties and assumptions about us, including the
factors described under Item 1. Business  Risk Factors. The
forward-looking events we discuss in this Annual Report on Form 10-K might not occur in
light of these risks, uncertainties and assumptions. We undertake no obligation and
disclaim any obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.  Readers are cautioned that any
such forward-looking statements are not guarantees of future performance and involve risks and
uncertainties, and, therefore, readers should not place undue reliance on these forward-looking statements.

Unless otherwise provided in this
Annual Report on Form 10-K, references to the Company, Champps,
we, us and our refer to Champps Entertainment, Inc.
and our consolidated subsidiaries. Our fiscal years ended June 27, 2004, June 29, 2003 and
June 30, 2002 are referred to as fiscal 2004, 2003 and 2002, respectively. Fiscal 2004,
2003 and 2002 each contained 52 weeks.

1

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# PART I

# Item 1.           Business.

# Overview

Champps offers an energetic, upscale
casual dining experience with uncompromising service and an extensive menu of freshly
prepared items, set in a comfortable atmosphere that promotes social interaction among our
guests. As of September 1, 2004, we owned and operated 48 restaurants in 18 states and had
12 additional restaurants operating under franchise or license agreements in five states
under the names Champps Americana, Champps Restaurant and Champps Restaurant and Bar. We operate
and franchise in a total of 22 states. Our menu is comprised of approximately 90 items,
primarily made from scratch on the premises. We typically include a selection of 15
appetizers, 11 main plate salads, 30 high-end sandwiches, specialty burgers and wraps and
26 entrée selections, along with an additional five to eight regularly changing
specials. Our menu selection includes not only traditional American favorites such as
Champps Baby Back Ribs and Grilled Salmon, but also a variety of ethnic cuisine such
as our Mongolian Egg Rolls and Shanghai Steamer. This diversity is designed to provide our
guests with appropriate choices to meet their dining preference throughout our four
distinct day-parts: lunch, after-work, dinner and late night. We believe that our enticing
offerings and generous portions, combined with an average check per dining room guest of
approximately $13.27 in fiscal 2004, excluding alcoholic beverages, offer our guests
exceptional value.

Our restaurants are designed to
create an engaging and socially interactive dining experience. Through the use of multiple
levels and other design elements such as ceramic Italian style tile, slate style floors
and extensive wood accents, we are able to create a variety of dining atmospheres to
satisfy a wide range of diners including families with children, business professionals,
couples and singles, as well as sports fans of all ages. Our restaurants range in size from
approximately 7,500 to nearly 12,100 square feet and seat 217 to 360 guests. We position
multiple video walls and large televisions strategically throughout each restaurant to
create an energetic and participatory dining experience. Our bar area, which is located
away from the main dining area, creates a focal gathering point for our guests to
socialize. We offer music, television broadcasts and special promotional events to
increase guest traffic and promote repeat visits. During fiscal 2004, the average unit
sales of our restaurants opened for the entire 12 months was approximately $4.7 million,
which is among the highest in the casual dining industry.

We locate our restaurants in areas
that have a combination of commercial office space, residential housing and high traffic
areas such as shopping malls or multi-screen movie theaters to attract guests during all of
our day-parts. Our restaurants principally rely on frequent visits and loyalty from our
guests who work, reside or shop nearby, rather than tourist traffic. Typically, our
restaurants are located within large metropolitan areas that draw fan interest in
professional and collegiate sport teams to allow us to promote the broadcasting of these
sporting events in our restaurants.

We opened seven restaurants in fiscal
2004. We expect to open six restaurants in fiscal 2005 primarily by expanding our presence in existing
markets. We have increased our number of company-owned restaurants from 18 in fiscal 1999
to 48 restaurants in fiscal 2004, representing a compounded annual growth rate of 27.8%.
We believe that the flexibility of our day-part model, the diversity and quality of our
freshly prepared menu items, our unique entertainment and excellent service have created
an attractive, high sales volume restaurant model that provides us with considerable
growth opportunities to develop our brand nationwide.

Our financial results for the year ended June 27, 2004 included:

| |  |  | Growth of
consolidated revenues by 17.0% to $211.5 million.
| | - |  | -----------------------------------------------------------

| |  |  | Growth of
income before income taxes by 59.8% to $6.2 million from $3.9 million.
| | - |  | --------------------------------------------------------------------------------

| |  |  | A decrease
 of net  income of $12.1  million to $5.0  million.  Fiscal  2003 net income was higher
in part  because we recorded a $13.2  million  income tax  benefit  related to a decrease
in the valuation allowance associated with deferred tax assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

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# Business strategy

Our objectives are to build our brand
awareness and guest loyalty and provide our guests with exceptional food, uncompromising
service and an exciting ambiance during each of our four day-parts. To achieve our
objectives, we have developed the following strategies:

Offer a comprehensive menu
featuring enticing foods and beverages.We offer an extensive and varied menu in each
of our four day-parts. Our menu is designed to suit a wide variety of dining occasions
that broadens our consumer appeal and keeps the menu fresh for our frequent diners. In
contrast to many competing restaurant operations, substantially all of our menu items are
prepared on the premises from scratch using high quality, fresh ingredients and
proprietary recipes. Champps is recognized by our guests for providing exceptional value
by offering generous food portions at moderate prices. Our sophisticated, full service bar
offers approximately 18 selections of wine, 20 domestic and imported bottled and draft
beers, as well as premium liquor and specialty drinks. For fiscal 2004, sales of alcoholic
beverages represented approximately 28.2% of our total food and beverage sales.

Provide service that
WOWs our guests. We strive to personalize the dining experiences of our
guests by instilling both high standards and a sense of urgency among our associates to
exceed each guests dining expectations. We position associates to greet guests when
they enter our restaurants and train our managers to interact with guests. We also encourage
our bartenders to introduce themselves to each patron at the bar, and our servers
typically are responsible for no more than three to four tables at a time. Our entire
staff is dedicated to executing our standard of delivering orders within 12 minutes of
being placed. We encourage a strong, team-oriented atmosphere among our associates that we
believe creates uncompromising guest service and a sense of pride in the Champps brand.

Create a fun, high energy, social
dining and entertainment experience. Our distinct dining experience features extensive
entertainment and socially interactive activities designed to encourage guest frequency
and attract guests outside of normal peak dining hours. For example, we increase guest
traffic in our late night day-part by encouraging guest participation in a variety of
promotional events we offer, such as the Big Bike Give-Away and Karaoke. Our
special design elements, multiple dining levels, patio areas and sizable bar area allow us
to comfortably serve guests seeking different dining experiences and further promote
frequent visits. Our two to three video walls and ten to 12 televisions located throughout
our restaurants, as well as our state-of-the-art audio systems, enable us to provide an
exciting and socially interactive environment to view major sporting events. Our open
display kitchens afford our guests the opportunity to observe our kitchen staff in action.

Capitalize on our proven multiple
day-part model. Champps restaurants generally are open seven days a week from 11:00
a.m. to 1:00 a.m. We serve our guests during lunch, after work, during dinner and after
dinner during our late night periods. For fiscal 2004, we generated 33.9% of our sales
during lunch, 60.7% after work and during dinner and 5.4% during late night, demonstrating
the versatility of our concept and our ability to serve guests for a variety of occasions
such as professional lunches and everyday dining, as well as social and special occasions.
We adjust our ambiance throughout the day by changing the lighting and choice of
programming for each day-part. According to a market research study of over 1,100 of our
guests completed during fiscal 2002, on average our guests visit Champps 2.7 times per
month while 10.0% of our guests visit our restaurants on an average of 11 times per month.
By operating in multiple day-parts, we are able to maximize revenue and leverage both
development and operating costs. We believe the versatility of our operating strategy has
allowed us to build strong guest loyalty with a high percentage of repeat business.

3

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Deliver strong unit economics.
We believe our company-owned restaurants provide strong unit level economics. Our
company-owned restaurants open throughout fiscal 2004 generated average restaurant sales
of approximately $4.7 million and restaurant level operating cash flows of approximately
$748,000, or 15.9% of average annual restaurant sales. The average cash
investment cost net of tenant improvement allowances received from landlords for all of
our restaurants opened since the beginning of fiscal 2001 was approximately $1.8 million,
excluding pre-opening expense, which averaged approximately $0.4 million per restaurant.
Although the reporting of restaurant level operating cash flows is a non-GAAP measure of
our performance, we believe it provides investors with a useful industry comparative
and is a measure used by management to assess the financial performance
of our Company.  We believe inclusion of restaurant level operating cash flows will assist
investors to better understand the economic model
of Champps and assist in making an informed investment decision. Reconciliation of restaurant operating
cash flows to the most comparable GAAP measure, income from operations, is provided in footnote 1 below.

Build awareness of the Champps
brand.We believe that the Champps name has achieved substantial brand recognition among
our guests and has become well known within our markets for our high quality, innovative
menu items, generous portions, uncompromising service and a fun, engaging dining
experience. We have a first time guest program that is intended to strengthen our brand
loyalty by educating our first time guests about the Champps concept. In addition, we
believe the most effective way to build brand awareness is to consistently deliver a
dining experience that exceeds our guests expectations.

# Growth strategy

We adhere to a disciplined growth
strategy and believe that there are significant opportunities to expand our concept in
existing and new markets throughout the United States. The future development of Champps
restaurants will be accomplished primarily through the development of company-owned
restaurants in existing markets. Opening multiple units in existing markets enables us to
leverage costs and gain efficiencies associated with regional supervision, marketing,
purchasing and hiring. We believe opening new restaurants in our existing markets reduces the risks involved with opening
new restaurants because we better understand the existing competitive conditions,
consumer tastes, demographics and discretionary spending patterns. In addition, our
ability to hire and train qualified associates is enhanced in markets in which we are well
known and we are able to utilize existing associates in new restaurants and capitalize on
our brand awareness. We plan to open approximately 80% of our new
restaurants in existing markets.

Our current expansion plans do not
include adding new franchisees. Although our existing franchisees do not have the right to
open additional restaurants, under certain circumstances we may permit our existing
franchisees to open additional restaurants. A new franchised Champps
restaurant opened in Des Moines, Iowa in August 2004. Although we have no obligation to do
so, in the future we may seek to acquire some or all of our 12 franchised restaurants
from our franchisees. This may require additional capital.

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(1) Average restaurant level operating cash flow for 2004 in 000's

|                                        | Total | Stores open greaterthan one year | Stores open less than one year
|--------------------------------------- | ----- | -------------------------------- | ------------------------------
|
|Income from operations                  |       |                                  | $                             
|less franchise and royalty, net         |       |                                  |                               
|plus general and administrative expense |       |                                  |                               
|plus depreciation and amortization      |       |                                  |                               
|plus other (income) expense, net        |       |                                  |                               
|plus pre-opening expense                |       |                                  |                               
|plus equipment operating leases         |       |                                  |                               
|                                        |       |                                  |                               
|Restaurant level operating cash flows   |       |                                  |                               
|                                        |       |                                  |                               
|Divided by stores open greater than one |       |                                  |                               
|                                        |       |                                  |                               
|Average restaurant level operating cash |       |                                  |                               
|                                        |       |                                  |                               

Restaurant  level  operating cash flow is not a measure of financial  performance  or liquidity  under
accounting  principles  generally  accepted  in the  United  States  of  America  ("GAAP")  and  should  not be
considered  in isolation or construed  as a  substitute  for net income or other  operations  data or cash flow
data prepared in  accordance  with GAAP for purposes of analyzing our  profitability  or liquidity.  Restaurant
level  operating  cash flow, as  calculated,  may not be comparable to similarly  titled  measures  reported by
other companies.

4

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In fiscal 2002, fiscal 2003 and
fiscal 2004, we opened six, seven and seven new restaurants, respectively. We plan to open
six restaurants in fiscal 2005. As of September 1, 2004, we have begun construction on three
restaurants that will open in fiscal 2005. In addition, we have identified other sites
for our growth objectives for fiscal 2005.

We believe that our site selection
strategy is critical to our success and we devote substantial effort to evaluating each
potential site at the highest levels within our organization. Our chief executive officer,
chief operating officer, regional vice presidents of operations, and the respective regional directors of operations must approve
each restaurant site that is presented by our real estate professional. Our site selection
criteria focuses on locating suitable facilities within larger metropolitan areas with an average household income of
at least $75,000 and population density in excess of 75,000 within a three mile radius. In
addition, site visibility, traffic patterns, accessibility, adequate parking, competitive
restaurants, associate availability, proximity to entertainment activities, as well as
areas near a combination of commercial office space, residential housing and high traffic
areas, influence our site selection criteria. Potential sites are also evaluated by our
vice president of construction and development to insure we meet our construction obligations and capital
expenditure projections, our legal counsel to insure we negotiate favorable terms in our
leases and our chief financial officer to insure we meet our profit and investment return
objectives.

# Unit level economics and
day-part allocation

Our current restaurants range in size
from approximately 7,500 to 12,100 square feet and have approximately 207 to 360 indoor
seats and approximately 42 additional patio seats on average. We lease 47 of our
restaurants and own one. During fiscal 2004, our base of restaurants opened for the entire
12-month period, generated average sales of approximately $4.7 million and restaurant
level operating cash flows, as defined, of approximately $748,000, or 15.9% of restaurant
sales. Based on the Companys average net cash investment to build a restaurant of
approximately $1.8 million, our restaurants opened for the entire 12-month period
generated a cash-on-cash return of over 40.0%.

Our current prototype restaurant is
approximately 7,800 to 8,800 square feet in size depending on patio configurations and has
seating for approximately 250 to 320 guests. The average net cash investment for our
restaurants varies depending on whether we lease the restaurant or complete the restaurant
through a build-to-suit transaction, the terms of the lease entered into, the amount of
tenant improvement allowance we receive and whether we enter into an operating lease for
any equipment. The average cash investment to construct a restaurant based on all of our
restaurants opened since the beginning of fiscal 2001 was approximately $1.8 million, net
of tenant improvement allowances and excluding an average pre-opening expense of $0.4
million.

Our success in our four distinct
day-parts demonstrates the strength of our concept. The following table depicts the dollar amount
and percentage of overall company-owned restaurant sales
during fiscal 2004 attributable to each of our day-parts. During this period, our food and alcoholic beverage sales as a ratio
of total food and beverage sales was 71.8% and 28.2%, respectively. In fiscal 2004, our bar area generated approximately 18.0% of our
total restaurant sales, 62.7% of which are generated from 4:00 p.m. to 10:00 p.m., signifying
our strong after work and happy hour business. Champps merchandise and other
sales totaled $333,000 and were 0.2% of overall sales in fiscal 2004 and are not included below.

5

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Sales By Day PartFiscal 2004(in 000s)

|Day Part          | Food Sales | Alcoholic Beverage Sales | Food & Alcoholic Beverage Sales
|----------------- | ---------- | ------------------------ | -------------------------------
|
|Lunch             |            |                          |                                
|Open to 4:00 P.M  |            |                         
|After Work        |            |                          |                                
|4:00 to 7:00 PM   |            |                         
|Dinner            |            |                          |                                
|7:00 to 10:00 PM  |            |                         
|Late Night        |            |                          |                                
|10:00 PM to Close |            |                          |                                
|                  |            |                         
|Total All Day     |            |                          |                                
|                  |            |                          |                                

# Restaurant design and
ambiance

Our restaurants have an ambiance
enhanced by a layout that encourages social interaction and promotes a high-energy
environment. All of our restaurants have multiple levels that enable us to seat our guests
towards a specific location depending upon their dining preferences while also creating an
open atmosphere and the ability for guests to have a panoramic view of the entire
restaurant. Our restaurants have large bar areas typically
located on the first level. The bars numerous angles and bends provide our guests
with a place to meet and socialize. We place large video walls and additional televisions
strategically throughout each restaurant, which together with a state of the art sound
system, provide a source of entertainment for our guests. We monitor the selection of our
broadcasts, music and volume in each dining area to create the appropriate dining environment.
We also use plasma televisions to incorporate the latest technologies and keep our
restaurants up to date.

Our restaurant interiors utilize a
combination of dark cherry stained wood and brick throughout the dining area, Italian
style ceramic tile in the kitchen and bathrooms, slate style tile in the bar area and
noise reducing carpet in the dining room. Our bars are generally stainless steel and we
use accented black granite or wood trim at our specially designed hostess stands to
enhance our contemporary feel. The majority of our restaurants include an indoor patio
area with a large fireplace and several have outdoor patios, all of which provide our
guests with multiple settings to choose from. Our display kitchens are presented behind a
floor-to-ceiling glass wall to provide a focal point for the dining room. We use a variety
of directional lighting and chandeliers to create a warm environment
in our dining rooms and bar area.

The exterior of our restaurants
typically employ brick, stone and stucco to create a highly visible restaurant that
features a well-lit, large Champps sign and logo. We extensively landscape our restaurants
and where appropriate, vary the exterior design to coordinate with the surrounding area.
Lighted trees, directional lighting on our buildings and large entries further increase
our visual appeal.

# Menu

We offer our guests a comprehensive
selection of approximately 90 items, primarily made on the premises from scratch, which
typically includes a selection of 15 appetizers, 11 main plate salads, 30 high-end
sandwiches, specialty burgers and wraps and 26 entrée selections. Our menu
selection includes not only traditional American favorites such as Champps Baby Back
Ribs and Grilled Salmon, but also a variety of ethnic cuisine such as Mongolian Egg Rolls
and Shanghai Steamer. For example, one of our most popular entrees is the Parmesan Crusted
Chicken that is created with three large chicken breasts crusted with an Italian herb mix
and shredded parmesan cheese before pan frying in olive oil and accompanied by tender
angel hair noodles, our freshly prepared traditional marinara sauce and fresh garlic
buttered toasted crostini. We continuously experiment with food and beverage items to
develop proprietary recipes with high flavor profiles to ensure that our menu is
imaginative and exciting to our guests. We also feature five to eight specials that change
regularly, allowing us to continually refine our menu offerings and keep our selections
fresh for our frequent users. We believe that the broad range of our menu provides
multiple dining options during each of our day-parts.

6

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We emphasize freshness and quality in
our food preparation and focus on maintaining our reputation for creative and high quality
menu offerings. Our fresh sauces, salad dressings, batters and mixes are prepared daily in
our restaurants using high-quality and fresh ingredients.

The food items on our menu range from
$5.95 to $13.45 for appetizers, $7.95 to $14.45 for burgers and sandwiches, and $7.95 to
$21.95 for dinner salads and entrees. For fiscal 2004, our average guest check in our
dining room was approximately $13.27, excluding alcoholic beverages. Our sophisticated,
full service bar offers approximately 18 selections of wine, most of which are available
by the glass, 20 draft and bottled domestic and imported beers, as well as premium liquor
and specialty drinks. Sales of alcoholic beverages represented approximately 28.2% of
total food and beverage sales during fiscal 2004.

# Food preparation and
quality control

We believe our food quality and
control standards are among the highest in the industry. Our systems are designed to
provide freshly prepared items based on the specifications set by our corporate executive
chef and overseen at each of our restaurants by an assistant general manager and up to three management assistants.
We invest substantial time in training and testing of our kitchen associates to adhere to
our strict standards and preparation guidelines to maintain our quality control. The
design of our facilities enables us to ensure food is maintained in accordance with the
requirements of the Food and Drug Administration. We audit our sanitary conditions at each
restaurant and train all of our management associates regarding safe handling practices of
all perishable food products.

# Guest loyalty

We believe our restaurants generate
higher than average repeat visits due to our four day-part offerings of lunch, after work,
dinner and late night, as well as the increased guest traffic generated from the
broadcasting of major sporting events. Based upon a market research study of over 1,100 of
our guests completed during fiscal 2002, we determined that on average our guests visit
Champps 2.7 times per month as compared to approximately 1.9 visits per month for the
casual dining industry, while 10.0% of our guests visit our restaurants on average 11
times per month. The social interaction that is created within our restaurants also
provides our guests with a comfortable setting to meet family, friends and co-workers. We
rely on frequent visits and loyalty from our guests to generate the high volume of sales
in our restaurants.

# Marketing and advertising

Historically, we have relied
primarily on guest referrals rather than external marketing initiatives to promote our
brand. Within our restaurants we continually promote special events and upcoming
entertainment activities as well as special menu items or drinks to drive guest frequency
and sales. We have implemented a first time guest program that is intended to strengthen
our brand loyalty by educating our first time guests about the Champps concept. During
fiscal 2004, 2003 and fiscal 2002, our expenditures for advertising and promotions were
less than 1.5% of total restaurant sales.

Our associates are integral to the
success of our in-store marketing strategy. Our hosts introduce our specials to our guests
upon seating, and at the end of each dining experience, our wait staff is instructed to
inform our guests of upcoming special or promotional events. We communicate special events
to our guests with poster stanchions or special displays, as well as table displays.
Finally, when exiting our restaurants, the greeters thank each guest for coming to Champps
and invite them to come back soon.

7

---

On occasion, we engage in paid
advertising for individual restaurant locations, including newspaper and radio
advertisements and have tested cable television advertising in select markets. We utilize
a variety of printed marketing materials, including restaurant location brochures, hotel
concierge cards, take-out menus and direct and electronic mailings.

# Operations

Restaurant management. As of
September 1, 2004, we had ten directors of operations who typically oversee approximately
four to six restaurants each and supervises the general managers at each restaurant in their area.
Each director of operations reports to one of two regional vice presidents.  Due
to the complexity of our operations and to ensure our high level of guest service, our
restaurant management is divided into three areas, the general manager, front-of-house
managers and back-of-house managers, each of whom are supported by additional staff
members. Our managers are frequently promoted from within Champps to encourage continuity
and opportunities for development, as well as enhance our corporate culture. We compensate
our management team through a combination of base salary and bonuses based on achieving
established performance levels for revenue, profit and guest service.

Restaurant associates and service.We believe that our uncompromising service is one of our differentiating factors. Our
service is based on a team concept to ensure that guests are made to feel that any
associate can help them and that they are never left unattended. To maintain these high
standards, we seek to hire and train personnel who believe in our philosophy and are
passionate about guest service. We strive to personalize the dining experiences of our
guests by instilling both high standards and a sense of urgency among our associates. All
associates meet with their managers at two daily pre-shift motivational and informational
meetings in which service standards, restaurant promotions, specials and quality control
are reviewed. We frequently reward individual and restaurant achievement through several
recognition programs intended to build and maintain associate morale. For example, our
Pin Program rewards and recognizes the efforts of associates with pins that
are worn proudly on uniforms to publicly acknowledge their commitment to guest service.

Training.The restaurant management team
is provided with an intensive ten-week training program to ensure they have appropriate knowledge to
excel in their position. All members of management are required to receive kitchen training to
understand the importance of the food preparation process and how the quality of
our menu is a significant driver of repeat guest visits. We also host an annual
general managers conference focusing on strategic issues in addition to
conducting other training classes. This conference also serves as a platform to
recognize the general managers who exceeded our expectations.

We provide all new associates with
complete orientation and training for their positions to ensure they are able to meet our
high standards and understand our company policies. For servers, we require a minimum of
six days training on how to serve our food, the composition and preparation techniques for
each menu item, direction on how to treat and serve our guests and ways to promote our
business. Our food preparation staff undergoes an intensive five-day hands-on training
program for their respective positions, which includes a review of our safety procedures.
The training encompasses classroom instruction, on-the-job training programs for each
position, and testing of the new associates progress at pre-determined stages within
the training schedule.

When we open a new restaurant, we
provide an extensive and varied level of training to associates in each position to ensure
the smooth and efficient operation of the restaurant from the first day it opens to the
public. We believe this training helps provide our guests with a quality dining experience from
opening day on. Our training programs enable us to promote existing associates and
managers as new restaurants open. We believe that we can support our expansion strategy since we have
a large manager base in existing restaurants that can be promoted or
transferred to new restaurants, combined with our thorough training programs and hiring of
outside personnel.

8

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# Restaurant franchise and
licensing agreements

As of September 1, 2004, we had 12
franchised restaurants that began operations between 1991 and 2004. A new franchised
location opened in Des Moines, Iowa in August 2004. The franchises in Duluth, Minnesota
and Charlotte, North Carolina were closed by franchisees in July 2002 and July 2004, respectively.
Seven of our current franchised restaurants are located in the Minneapolis, Minnesota
area. We also have one franchised restaurant in Des Moines, Iowa, Sioux City, South
Dakota, Omaha, Nebraska, and two in Milwaukee, Wisconsin. Three franchisees own nine of
the 12 franchised restaurants.

Our revenue from current franchisee
agreements represented approximately 0.3% of our revenue in fiscal 2004. The franchisee is
responsible for all direct costs involved in the construction and maintenance of their
restaurants. We provide menu development and marketing support on a limited basis.
Franchisees are required to provide periodic financial reports and annual financial
statements to our corporate office for performance measurement and fee calculations.
Currently, we are not actively seeking additional franchisees. Although our existing
franchisees do not have the right to open additional restaurants, under certain
circumstances we may permit our existing franchisees to open additional restaurants.
Although we have no obligation to do so, we may seek to acquire one or more
of our existing franchised restaurants if they meet our acquisition criteria.

# Accounting and
management information systems

We use an automated data processing
system and standardized reporting procedures to provide each of our company-owned
restaurants with centralized financial and management controls. Our management information
system tracks each restaurants weekly sales reports, vendor invoices, payroll
information and other operating information which is connected to our centralized
accounting and management information systems at our corporate headquarters in real time.
By having a system where data can be input remotely and controlled centrally, our overhead
functions are streamlined and administrative expenses are reduced.

While we continue to monitor our
computer hardware and financial software for potential upgrades, we believe our existing
management information systems are sufficient to support our long-term expansion plans.

# Purchasing

We endeavor to obtain high quality
menu ingredients and other supplies and services for our operations from reliable sources
at competitive prices. We rely on SYSCO Corporation, a national food distributor, as the
primary supplier of our food. In August 2003, we entered into a new five-year distribution
agreement with SYSCO. By utilizing a distribution company with a national presence, we are
able to ensure consistent application of menu specifications throughout the country at a
pre-negotiated price. We also periodically enter into selective short-term agreements for
the products we use most extensively. This helps us to consistently maintain our product
costs. We believe that all essential food and beverage products are available from several
qualified suppliers at competitive prices should an alternative source be required.

To maximize purchasing efficiencies
and to provide for the freshest ingredients for our menu items, each restaurants
management determines the quantities of food and supplies required. Our centralized
purchasing staff, under the direction of our chief operating officer, specifies the
products to be used at our restaurants, designates the vendors, from whom to purchase these products, and provides suppliers with
detailed ingredient specifications.

9

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# Competition

The restaurant industry is highly
competitive. We compete with other national and international restaurant chains as well as
local and regional operations. Competition within the industry is based principally on the
quality, variety and price of food products served. Changes in consumer preferences,
economic conditions, environmental conditions, demographic trends and the location and
number of, and type of food served by, competing restaurants could adversely affect our
business as could the availability of experienced management and hourly associates. We
believe that the flexibility of our multiple day-part model, the diversity and quality of
our freshly prepared menu items and our unique entertainment and excellent service have
created an attractive, high sales volume restaurant model that provides us with
considerable growth opportunities to develop our brand nationwide.

# Associates

As of September 1, 2004, we had
approximately 5,400 associates on the Champps team, approximately 418 of which were
restaurant management and field support personnel and 44 whom worked at our corporate
headquarters. We do not have any collective bargaining agreements. We consider our
associate relations to be good.

# History

The original Champps concept began
operations in 1984 and grew to eight restaurants by December 1995. In 1996, William H.
Baumhauer, chief executive officer and president of DAKA International, Inc. ("DAKA"), a large
publicly traded food service management and restaurant company, led DAKAs purchase
of Champps to add to its portfolio of restaurant concepts. As part of a corporate
restructuring in 1997, DAKA's food service businesses were spun off and the shareholders
retained ownership of the restaurant businesses, which included Champps, Fuddruckers, the
Great Bagel & Coffee Company, Casual Dining Ventures and Restaurant Consulting
Service. The new company was named Unique Casual Restaurants, Inc. At the end of 1998 and
early 1999, Fuddruckers and Restaurant Consulting Services were sold to separate buyers.
In June 1999, Unique Casual Restaurants closed Great Bagel & Coffee Company and Casual
Dining Ventures and changed its name to Champps Entertainment, Inc.

Shortly thereafter, Mr. Baumhauer,
who had left the DAKA organization in May 1998, was recruited back to Champps as president
and chief executive officer. Upon his return, Mr. Baumhauer set in motion a series of
strategic initiatives that included hiring a new management team, consolidating our
headquarters, improving our operational and financial reporting procedures, standardizing
the purchasing process and establishing new associate training and retention practices. As
a result of these efforts, our restaurant level operating profit margin increased from 7.6% in 1999 to
10.6% in fiscal 2004. In addition, our income from continuing operations increased from a
negative $14.1 million in fiscal 1999 to a positive $6.2 million in fiscal 2004. We have
also implemented a disciplined expansion strategy and have added 34 restaurants since Mr.
Baumhauers return.

# Operating locations

We lease all but one of our
restaurants. The leases for our restaurants expire at varying times commencing in 2009.
Nearly all of our leases are for fifteen to twenty year terms with renewal options
extending our leases from five to twenty additional years. Currently, our leases, with
option periods, expire between 2010 and 2041.

10

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The following table sets forth data
regarding our 48 company-operated restaurants at June 27, 2004. All restaurants are leased
except the restaurant located in Lombard, Illinois, which the Company owns.

Company-operated restaurants

|State                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | City                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Approx.ConditionedSquare Footage                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ApproximateTotal Seating                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ARIZONA          
CALIFORNIA       
COLORADO         
                 
                 
DELAWARE         
FLORIDA          
                 
GEORGIA          
ILLINOIS         
                 
                 
                 
                 
INDIANA          
                 
MARYLAND         
MICHIGAN         
                 
                 
                 
                 
MINNESOTA        
                 
                 
NORTH CAROLINA   
                 
NEW JERSEY       
                 
NEW YORK         
OHIO             
                 
                 
                 
                 
                 
                 
PENNSYLVANIA     
TEXAS            
                 
                 
                 
                 
                 
VIRGINIA | Phoenix              
 Irvine               
 Colorado Springs     
 Littleton            
 Denver               
 Wilmington           
 Ft. Lauderdale       
 Tampa                
 Alpharetta           
 Lincolnshire         
 Lombard              
 Orland Park          
 Schaumburg           
 Skokie               
 Indianapolis         
 Indianapolis         
 Columbia             
 Lansing              
 Livonia              
 Troy                 
 Utica                
 West Bloomfield      
 Eden Prairie         
 Minnetonka           
 Richfield            
 Durham               
 Raleigh              
 Edison               
 Marlton              
 Rochester            
 Cincinnati           
 Columbus             
 Columbus             
 Columbus             
 Dayton               
 Lyndhurst            
 Valley View          
 King of Prussia      
 Addison              
 San Antonio          
 Las Colinas          
 Houston              
 Houston              
 Houston              
 Fairfax              
 Reston               
 Richmond             
 Pentagon City | 8,047   
 9,809   
 7,191   
 9,163   
 9,810   
 8,639   
 8,517   
 8,697   
10,182   
 9,165   
10,480   
 8,578   
10,967   
 9,846   
10,270   
 9,119   
 8,590   
 7,002   
10,059   
10,059   
 7,565   
 7,498   
 9,040   
12,085   
 7,890   
 9,596   
 8,114   
 7,619   
10,150   
10,000   
 7,918   
 8,170   
 8,930   
10,128   
 9,368   
 8,170   
 9,163   
 9,160   
 9,900   
 8,878   
10,182   
11,384   
 9,160   
10,180   
 8,498   
11,469   
 8,660   
 9,487 | 251
  245
  228
  300
  274
  280
  257
  259
  288
  291
  302
  282
  310
  328
  286
  273
  291
  228
  285
  275
  261
  248
  299
  360
  241
  288
  288
  244
  287
  348
  315
  291
  291
  317
  314
  224
  300
  334
  318
  217
  316
  331
  325
  328
  310
  327
  270
  293

11

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Restaurants to open

As of September 1, 2004, we had begun construction
on restaurants located in Cleveland, Ohio and two locations in Philadelphia, Pennsylvania.
The Philadelphia restaurants are expected to open in the second quarter of fiscal 2005 while the Cleveland
restaurant is expected to open in the third quarter of fiscal 2005.  We anticipate opening a total of six
restaurants in fiscal 2005.

Franchised restaurants

As of September 1, 2004, we had 12
franchised restaurants, seven of which are located in the Minneapolis, Minnesota area, two
in Milwaukee, Wisconsin, and one in each of Des Moines, Iowa, Sioux City, South Dakota and
Omaha, Nebraska. Franchises located in Charlotte, North Carolina and Duluth, Minnesota
were closed by franchisees in July 2004 and July 2002, respectively.

# Trademarks

Through our operating subsidiaries,
we have registered a number of trademarks and service marks with the United States Patent
and Trademark Office and with certain states, including, but not limited to the trade
names: Champs, Champps, and Champps Americana.

Pursuant to a Master Agreement dated
February 1, 1994, whereby Champps acquired the Champs and
Champps service marks, trademarks and trade names, we agreed to pay the seller
an annual fee. For fiscal 2004, the maximum fee was equal to the lesser of $322,422or one-quarter percent (0.25%) of the gross sales of certain Champps restaurants
excluding two of our oldest restaurants and we paid the maximum amount payable under this
agreement. The maximum fee payable is increased annually by the lesser of the increase in
the consumer price index or 4.0%.

# Government regulation

Our business is subject to various
federal, state and local laws, including health, sanitation and safety standards, federal
and state labor laws, zoning restrictions and state and local licensing. We are also
subject to federal and state laws regulating franchise operations and sales, which impose
registration and disclosure requirements on franchisors in the offer and sale of
franchises or impose substantive standards on the relationship between franchisor and
franchisee.

Our restaurants are subject to state
and local licensing and regulation with respect to selling and serving alcoholic
beverages. Typically, licenses must be renewed annually and may be revoked or suspended
for cause. The failure to receive or retain, or a delay in obtaining, a liquor license in
a particular location would adversely affect ours, or a franchisees, operation in
that location.

In addition, our restaurants are
subject to dram shop statutes in certain states, which generally give a person
injured by an intoxicated person the right to recover damages from the establishment that
has wrongfully served alcoholic beverages to the intoxicated person. We carry liquor
liability coverage in the amount of $1.0 million per occurrence subject to an aggregate
annual policy limit of $5.0 million, with a $0.25 million deductible per occurrence.

The Americans with  Disabilities Act (the "ADA") prohibits  discrimination  on the basis of disability
in public  accommodations  and  employment.  The ADA , which mandates  accessibility  standards for individuals
with physical  disabilities,  may increase the cost of construction of new restaurants and of remodeling  older
restaurants.

We are also subject to the Fair Labor  Standards  Act,  which  governs such matters as minimum  wages,
overtime,  and other  working  conditions.  A  significant  portion of our food service  personnel  are paid at
rates  related to federal or state  minimum  wage rates,  and  accordingly,  increases in any such minimum wage
will increase our labor costs.

12

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# Risk factors related to
our business

Our growth strategy depends on our
ability to open new restaurants, and we may not be able to achieve our planned unit
expansion

Our ability to expand our operations
through the opening of new restaurants is important to our future financial success. Since
fiscal 1997 through fiscal 2004, we have expanded our operations from 12 company-owned
restaurants in nine states to 48 company-owned restaurants in 18 states. We expect to open
an additional six restaurants in fiscal 2005. We have experienced delays in restaurant
openings from time to time and may experience delays in the future. We cannot guarantee
that we will be able to achieve our expansion goals or that new restaurants will be
operated profitably. Further, we cannot assure that any restaurant we open will obtain
operating results similar to those of our existing restaurants or will not adversely
affect the results of other Champps restaurants in the same market. The success of our
planned expansion will depend upon numerous factors, many of which are beyond our control,
including the following:

| | identification
and availability of suitable restaurant sites;
|- | -------------------------------------------------------------

| | competition
for restaurant sites;
|- | ---------------------------------

| | negotiation
of favorable lease terms;
|- | -------------------------------------

| | timely
development in certain cases of commercial,  residential,  street or highway
 construction near our restaurants;
|- | -----------------------------------------------------------------------------------------------------------------------

| | management
of construction and development costs of new restaurants;
|- | --------------------------------------------------------------------

| | securing
of required governmental approvals and permits in a timely manner, or at all;
|- | --------------------------------------------------------------------------------------

| | recruitment
of qualified  operating  personnel,  particularly  general  managers and other
 restaurant managers;
|- | ----------------------------------------------------------------------------------------------------------------

| | competition
in our markets; and
|- | -------------------------------

| | general
economic conditions.
|- | ----------------------------

In addition, we may enter new markets
in which we have no operating experience. These new markets may have different demographic
characteristics, competitive conditions, consumer tastes and discretionary spending
patterns than our existing markets, which may cause the new restaurants to be less
successful in these new markets than in our existing markets.

Our growth strategy may strain our
management, financial and other resources. For instance, our existing systems and
procedures, restaurant management systems, financial controls, information systems,
management resources and human resources may be inadequate to support our planned
expansion of new restaurants. We may not be able to respond on a timely basis to all of
the changing demands that the planned expansion will impose on our infrastructure and
other resources.

The inability to develop and
construct our restaurants within budget and projected time periods will adversely affect
our business and financial condition

Critical to our success is our
ability to construct our restaurants within budget and on a timely basis. Many factors may
affect the costs associated with the development and construction of our restaurants,
including:

| | labor
disputes;
|- | ---------------

| | general
contractor disputes;
|- | ----------------------------

| | shortages
of material and skilled labor;
|- | ----------------------------------------

13

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| | weather
interference;
|- | ---------------------

| | unforeseen
engineering problems;
|- | --------------------------------

| | environmental
problems;
|- | -----------------------

| | construction
or zoning problems;
|- | --------------------------------

| | local
government regulations and approvals; and
|- | -----------------------------------------------

| | unanticipated
increases in costs, any of which could give rise to delays or cost overruns.
|- | ------------------------------------------------------------------------------------------

If we are unable to develop new
restaurants within anticipated budget or time periods, our revenue will not meet our
expectations and pre-opening costs may exceed our projections. In addition, returns on our
investments may be impaired and the amount of capital available for other new restaurants
may not be available.

The failure of our existing or new
restaurants to perform as anticipated could adversely affect our business

As of June 27, 2004, we owned and
operated 48 restaurants, seven of which were opened within the preceding 12-month period.
The results achieved by these restaurants may not be indicative of longer-term performance
or the potential market acceptance of restaurants in other locations. We cannot assure you
that any new restaurant we open will have similar operating results to those of prior
restaurants. We anticipate that our new restaurants will take at least several months to
reach our long term profitability levels due to inefficiencies typically associated with new
restaurants.

Because of our small restaurant
base, our operating results could be materially and adversely affected by the negative
performance of a small number of restaurants

Due to our small restaurant base,
poor operating results at any one or more of our restaurants could materially and
adversely affect our business, financial condition, results of operations or cash flows.
In addition, we locate our restaurants close to areas that have a combination of
commercial office space, residential housing and high traffic areas, such as shopping
malls or multi-screen movie theaters. Changes in levels of office occupancy, new or
competing real estate development projects, or delays in the development of the projects
where we are located may adversely affect the performance of a restaurant. In addition,
our operating results achieved to date may not be indicative of our future operating
results with a larger number of restaurants.

We may require additional capital
to expand our business in accordance with our growth strategy

Changes in our operating plans,
acceleration of our expansion plans through internal growth or acquisitions, lower than
anticipated sales, increased expenses or other events may cause us to seek additional debt
or equity financing on an accelerated basis. Additional 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 debt financing, if available, may involve significant cash payment
obligations and covenants or financial ratios that restrict our ability to operate or grow
our business. See Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources.

Our franchisees could
take actions that could harm our business

Franchisees are independent operators
and are not employed by us. We provided training and support to franchisees, but any
number of factors beyond our control may diminish the quality of franchised restaurant
operations. Consequently, franchisees may not successfully operate restaurants in a manner
consistent with our standards and requirements or may not hire and train qualified
managers and other restaurant personnel. If franchisees do not operate in accordance with
our standards, our image and reputation may suffer materially and system-wide sales could
significantly decline. Also, the presence of franchised restaurants may limit our ability
to expand in a desired market.

14

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Our operations are susceptible to
changes in food availability and costs, which could adversely affect our operating results

Our profitability depends in part on our
ability to anticipate and react to changes in food costs. We rely on SYSCO Corporation, a
national distributor, as the primary supplier of our food. Any increase in distribution
prices or failure of SYSCO to perform could cause our food costs to increase. There also
could be a significant short-term disruption in our supply chain if SYSCO failed to meet
our distribution requirements or our relationship was terminated. Further, various factors
beyond our control, including adverse weather conditions, governmental regulation,
production, availability and seasonality may affect our food costs or cause a disruption
in our supply. 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 materially and adversely affect our operating results.

Changes in consumer
preferences or discretionary consumer spending could negatively impact our results of operations

Our continued success depends, in
part, upon the popularity of the menu items served in the Champps environment and our
dining style. For example, the recent popularity of low carbohydrate diets has
caused us to modify our menu and add approximately eight "carb consious" items to our menu.
Shifts in consumer preferences away from our cuisine or dining style could
materially and adversely affect our future profitability. In addition, our success depends
to a significant extent on numerous factors affecting discretionary consumer spending,
including economic conditions, disposable consumer income and consumer confidence. Adverse
changes in these factors could reduce guest traffic or impose practical limits on pricing,
either of which could materially and adversely affect our operating results.

Health concerns relating to the
consumption of our food products could negatively impact our results of operations

We are subject to the risk that
consumer preferences could be affected by health concerns about the consumption of
particular food products. Beef and chicken are the key ingredients in many of our menu
items. Negative publicity concerning food quality, illness and injury, publication of
government or industry findings concerning food products served by us, or other dietary
and health concerns or operating issues stemming from one restaurant or a limited number
of restaurants may adversely affect demand for our food and could result in a decrease in
guest traffic to our restaurants.

If we lose the services of our
president or other key associates, our business could suffer

Our future success significantly
depends on the continued service and performance of William H. Baumhauer, our president
and chief executive officer, as well as other key executives. Our future performance will
depend on our ability to motivate and retain Mr. Baumhauer and other executive officers
and key associates, such as regional directors of operation, restaurant general managers
and kitchen managers. Competition for these associates is intense. In May 2003, Mr.
Baumhauers employment agreement was amended and extended through June 30, 2005. The
loss of the services of Mr. Baumhauer or members of our senior management and key
associates or the inability to attract additional qualified personnel as needed could
materially harm our business. We do not currently have key person life insurance for any
of our officers or directors.

15

---

We face indemnification
liability from our predecessor companies

In connection with the spin-off of DAKA International ("DAKA")in
late 1997, we assumed certain contingent liabilities of DAKA
and its subsidiary, Daka, Inc.("Daka"). Under our Post-Closing Covenant Agreement with DAKA, we
are responsible for handling the defense of these claims, including the appeals. In
March 2000, a former associate of Daka was awarded approximately $0.2 million in
compensatory damages, $4.8 million in punitive damages and $0.3 million in legal fees in a
jury trial based on the associates claim of negligent supervision and retaliation
due to alleged conduct that occurred in 1996 at a former Daka food service location. On
September 20, 2000, Daka filed a Notice of Appeal with the Court of Appeals for the
District of Columbia. The Court of Appeals affirmed the award of compensatory damages in
the amount of $187,500 and attorneys fees in the amount of $276,000. However, the
Court of Appeals vacated the $4.8 million punitive damages award as constitutionally
excessive and remanded the case to the trial court for re-determination of punitive
damages in accordance with legal principles outlined in its opinion. In January 2004 we
paid approximately $0.6 million for compensatory damages and attorneys fees
including interest. On remand, by Order dated May 26, 2004, the trial court awarded
punitive damages in the amount of $937,500. We accrued a liability for the full amount of
this award in the fourth quarter of fiscal 2004. On July 9, 2004, Daka filed a Notice of
Appeal with the Court of Appeals for the District of Columbia and this matter is now
pending in that court. In addition, on June 23, 2004, plaintiffs counsel filed a
motion for additional attorneys fees in the amount of $375,000. Daka plans to
vigorously oppose this motion and in the event the trial court grants the motion for
attorneys fees in whole or in part, Daka plans to file a Notice of Appeal for the
award of the legal fees. Depending on the timing and nature of the ruling by the Court of
Appeals, we also could incur substantial additional legal expenses in pursuing Dakas
appeal and the ultimate resolution of this matter.

We provide reserves in our financial
statements for these and other matters. The approximate amounts of these reserves are
reviewed periodically to determine their adequacy. Although we believe that our current
reserves are adequate in light of our analyses of the potential outcomes of the matters,
there can be no guarantees that we will not have torecognize additional charges as
these matters are ultimately resolved. Any resulting charges could be significant.

Litigation could have a
material adverse affect on our business

We are subject to complaints or
allegations from current and former or prospective associates from time to time. In
addition, we are subject to complaints or litigation from guests alleging discrimination,
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, whether we are liable, or whether such allegations involve one of
our franchisees or licensees. A lawsuit or claim could result in an adverse decision or
result that could have a material adverse affect on our business.

We are also 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 alcohol 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.

If we are unable to protect our
intellectual property rights, it could reduce our ability to capitalize on our brand names

Pursuant to a Master Agreement dated
February 1, 1994, we acquired the Champps, Champs and
Champps Americana service mark, trademark and trade name. Our business
prospects depend, in part, on our ability to develop favorable consumer recognition
of the Champps name and logo. Our trademarks could be infringed in ways that leave us
without redress, such as by imitation. In addition, we rely on trade secrets and
proprietary know-how, and we employ various methods to protect our concepts and recipes.
However, such methods may not afford adequate protection and others could independently
develop similar know-how or obtain access to our know-how, concepts and recipes. Moreover,
we may face claims of infringement that could both interfere with our use of our
proprietary know-how, concepts, recipes, trade secrets or trademarks or subject us to
damages. Defending against such claims may be costly and, if unsuccessful, may prevent us
from continuing to use such proprietary information in the future.

16

---

Although Champps,
Champs and Champps Americana are federally registered
trademarks, there are other restaurants and bars that operate under similar names. If
these restaurants or bars are affected by negative publicity and consumers confuse these
competitors with our Champps branded restaurants, our operating results could be adversely
affected.

We are subject to extensive
governmental regulations including, but not limited to, the sale and serving of alcoholic
beverages and wages paid to our associates that could adversely affect our operations and
our ability to expand and develop our restaurants

The restaurant industry is subject to
various federal, state and local governmental regulations. While at this time we have been
able to obtain and maintain the necessary governmental licenses, permits and approvals,
the failure to maintain these licenses, permits and approvals, including food and liquor
licenses, could adversely affect our operating results. Difficulties or failure in
obtaining the required licenses and approvals could delay or result in our decision to
cancel the opening of new restaurants. Local authorities may suspend, revoke or deny
renewal of our food and liquor licenses if they determine that our conduct or facilities do not meet
applicable standards or if there are changes in regulations. Smoking bans in some locations could
also have an adverse effect on our business.

For fiscal 2004, approximately 28.2%
of our restaurant food and beverage sales was attributable to the sale of alcoholic
beverages, and we believe our ability to serve these beverages is an important factor in
attracting guests. Alcoholic beverage control regulations require each of our restaurants
to apply to a state authority and, in certain locations, county or municipal authorities
for a license or permit to sell alcoholic beverages on the premises and to provide service
for extended hours and on Sundays. Typically, licenses must be renewed annually and may be
revoked or suspended for cause at any time, which could include sales to minors or
intoxicated persons. Alcoholic beverage control regulations relate to numerous aspects of
daily operations of our restaurants. The failure of a restaurant to obtain or retain
liquor or food service licenses would adversely affect the restaurants operations.

Various federal and state labor laws
govern our relationship with our associates and affect our operating costs. These laws
include minimum wage requirements, overtime pay, unemployment tax rates, workers
compensation rates, and citizenship requirements. Additional government imposed increases
in minimum wages, overtime pay, paid leave of absence and mandated health benefits,
increased tax reporting and tax payment requirements for associates who receive gratuities
or a reduction in the number of states that allow tips to be credited toward minimum wage
requirements could harm our operating results. We are also subject to the ADA which may
increase the cost of construction or remodeling.

On June 17, 2002, the United States
Supreme Court ruled that the Internal Revenue Service (IRS) can use aggregate
tip estimates to ensure that the employer is paying FICA taxes on allegedly underreported
tips. Under the ruling, the IRS does not need to examine individual associates
records and it is permissible for the IRS to estimate the amount of cash tips given to
associates based on tips included on credit card receipts.

The reporting of tips is the
responsibility of the associates receiving the tips. We encourage our associates to abide
by the law and report 100% of the tips that they receive. While we believe our associates
adequately report tips, we have implemented tip reporting policies and procedures that are
in full compliance with the recommended IRS policies and procedures as defined in our Tip
Reporting Alternative Commitment agreement that was executed by the Company and the IRS in
fiscal 2003.

Our success depends on our ability
to compete effectively in the restaurant industry

The restaurant industry is highly
competitive. Although we believe that our operating concept, quality of food, ambiance and
overall dining experience differentiates us from competitors, we may be unable to compete
effectively with new restaurant concepts or with larger, better-established competitors,
which have substantially greater financial resources and operating histories than ours.

17

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We may not be able to generate
sufficient future taxable income to fully utilize our income tax operating loss and credit
carryforwards

As of June 27, 2004, we had federal
net operating loss (NOL) carryforwards of approximately $50.9 million and FICA
tax credit carryforwards of approximately $5.6 million. The federal NOLs expire at
various times through 2020 and the FICA tip tax credits expire at various times through
2024. While we expect to fully utilize the carryforwards to reduce our income tax
liabilities, future income may not be sufficient for full utilization of the
carryforwards.

Our revenues may be adversely impacted by work stoppages,
strikes or lock-outs associated with professional sports teams

A portion of our revenues are generated from patrons who eat and drink at Champps while watching
sports events. A work stoppage, strike or lock-out by any professional sports league would adversely impact
our revenues.

Our financial results are subject to fluctuations
due to the seasonal nature of our business

Our sales fluctuate  seasonally and therefore our quarterly results are not necessarily  indicative of
results  that may be achieved  for the full fiscal year.  For fiscal  years 2004 and 2003,  our relative  sales
were highest in our second quarter (October through  December),  followed by our third quarter (January through
March),  then by our fourth quarter (April through June). Our first quarter (July through  September)  recorded
the lowest relative sales for those years.  Factors  influencing  sales  variability in addition to those noted
above include the frequency and popularity of sporting  events,  holidays  (including which day of the week the
holiday occurs) and weather.

# Strategic alternatives

From time to time, as a matter of
standard business practice, our management investigates various strategic
alternatives in an attempt to maximize shareholder value. These strategic alternatives
include potential acquisitions, mergers with other companies and going private
transactions. As of September 1, 2004, the Company has not entered into any definitive
agreements relative to any strategic alternative that has been considered or brought
before management. Should a material strategic alternative be presented that has the
potential to maximize shareholder value, the board of directors would assign an
independent committee to determine the merits of the proposed transaction and seek
shareholder approval, if necessary.

# Item 2.           Properties.

The Company leases approximately
15,800 square feet of office space at its corporate headquarters in Littleton (Douglas
County), Colorado, at an average annual rent of $348,000. The lease term for the office
space ends October 2009. See Item 1. Business  Operating Locations for a
listing of the Companys owned and franchised restaurant locations, which is incorporated
herein by reference.

# Item 3.           Legal
Proceedings.

In connection with the spin-off of DAKA International, Inc. ("DAKA") in
late 1997, we assumed certain contingent liabilities of DAKA
and its subsidiary, Daka, Inc. Under our Post-Closing Covenant Agreement with DAKA, we
are responsible for handling the defense of these claims, including the appeals. In
March 2000, a former associate of Daka was awarded approximately $0.2 million in
compensatory damages, $4.8 million in punitive damages and $0.3 million in legal fees in a
jury trial (McCrae vs. Daka) based on the associates claim of negligent supervision and retaliation
due to alleged conduct that occurred in 1996 at a former Daka food service location. On
September 20, 2000, Daka filed a Notice of Appeal with the Court of Appeals for the
District of Columbia. The Court of Appeals affirmed the award of compensatory damages in
the amount of $187,500 and attorneys fees in the amount of $276,000. However, the
Court of Appeals vacated the $4.8 million punitive damages award as constitutionally
excessive and remanded the case to the trial court for redetermination of punitive damages
in accordance with legal principles outlined in its opinion. In January 2004 we paid
approximately $0.6 million for compensatory damages and attorneys fees including
interest. On remand, by Order dated May 26, 2004, the trial court awarded punitive damages
in the amount of $937,500. We accrued a liability for the full amount of this award in the
fourth quarter of fiscal 2004. On July 9, 2004, Daka filed a Notice of Appeal with the
Court of Appeals for the District of Columbia and this matter is now pending in that
court. In addition on June 23, 2004, plaintiffs counsel filed a motion for
additional attorneys fees in the amount of $375,000. Daka plans to vigorously oppose
this motion and in the event the trial court grants the motion for attorneys fees in
whole or in part, Daka plans to file a Notice of Appeal for the award of the legal fees.
We have not accrued for these additional attorneys fees. Depending on the timing and
nature of the ruling by the Court of Appeals, we also could incur substantial additional
legal expenses in pursuing Dakas appeal and the ultimate resolution of this matter.

18

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Revisions to our estimated loss of
$937,500 may be made in the future and will be reported in the period in which additional
information is known. Based upon our analysis, and the advice of outside legal counsel,
the Company believes that the ultimate outcome of this matter will not have any further
material adverse effect on the Companys consolidated financial position, results of
operations or cash flows.

In December 2001, the State of
Florida proposed to assess subsidiaries of DAKA $2.4 million in unpaid state sales taxes,
and an additional $2.9 million in penalties and interest through December 2001. We were
contractually obligated to indemnify DAKA for this matter. In February 2004, we entered
into a settlement agreement with the Florida Department of Revenue and paid $0.1 million
in full settlement of this matter.

We are engaged in various other
actions arising in the ordinary course of business. We believe based on managements
analyses and the advice of outside counsel that the ultimate collective outcome of these
other matters will not have a material adverse effect on our consolidated financial
condition, results of operations or cash flows.

As of June 27, 2004, we had an
aggregate of approximately $1.0 million reserved for liabilities associated with
predecessor companies, almost all of which related to the Daka associate judgment noted
above. These amounts have been reserved as a result of the trial court award of punitive
damages.

# Item 4.           Submission of
Matters to a Vote of Security Holders.

There
were no matters submitted by the Company to a vote of shareholders, through solicitation
or proxies or otherwise, during the fourth quarter of the fiscal year for which this
report is filed.

19

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# PART II

# Item 5.           Market for the
Registrants Common Stock and Related Stockholder Matters.

Our common stock is
listed on the NASDAQ National Market (Nasdaq) under the symbol
CMPP. The following table sets forth, for the periods indicated, the high and
low sales prices per share for the common stock as reported by Nasdaq.

|                      | High | Low
|--------------------- | ---- | ---
|Fiscal 2003           |      |    
|First Fiscal Quarter  |      |    
|Second Fiscal Quarter |      |    
|Third Fiscal Quarter  |      |    
|Fourth Fiscal Quarter |      |    
|Fiscal 2004           |      |    
|First Fiscal Quarter  |      |    
|Second Fiscal Quarter |      |    
|Third Fiscal Quarter  |      |    
|Fourth Fiscal Quarter |      |    

On August 31, 2004, there were
approximately 1,800 holders of record of the Companys common stock. On September 1,
2004, the closing price of the Companys common stock was $8.34 per share.

We have never declared or
paid dividends on our common stock. We currently intend to retain future
earnings for use in the operation and expansion of our business and therefore do not
anticipate paying cash dividends in the foreseeable future. Also, the Companys
credit arrangements restrict the amount of dividend payments or capital stock repurchases
to a maximum amount of $7.5 million over a three year period beginning March 2004.
Moreover, certain financial covenant ratios under the credit facilities require a minimum
amount of tangible net worth, as defined in the related agreements.

20

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# Item 6.           Selected
Financial Data.

# SELECTED FINANCIAL DATA

The following table presents selected
consolidated data from continuing operations and balance sheet data of the Company. The
balance sheet data as of June 27, 2004, June 29, 2003, June 30, 2002, July 1, 2001 and
July 2, 2000 and the statements of operations data for each of the five fiscal years in
the period ended June 27, 2004 presented below are derived from our audited
consolidated financial statements.

Certain amounts have been
reclassified for earlier periods to conform to the fiscal 2004 presentation. The
reclassifications have no impact on net income or income per share.

The selected consolidated financial
data should be read in conjunction with the consolidated financial statements and related
notes thereto of the Company and Managements Discussion and Analysis of
Results of Operations and Financial Condition included elsewhere in this Annual
Report on Form 10-K.

|                                                | As of and for the Fiscal Years Ended
|----------------------------------------------- | ------------------------------------
|
|
|Statements of Operations Data:                  |                                     
|Total revenue                                   |                                     
|Income from continuing operations               |                                     
|Net income (a)                                  |                                     
|Basic income per share from                     |                                     
|continuing  operations                          |                                     
|Diluted income per share from                   |                                     
|continuing operations                           |                                     
|Basic weighted average shares (in thousands):   |                                     
|Diluted weighted average shares (in thousands): |                                     
|Balance Sheet Data:                             |                                     
|Total assets                                    |                                     
|Long-term debt and capital lease obligations    |                                     
|including current portion                       |                                     
|Total equity                                    |                                     

(a) The fiscal years ending June 29, 2003 and July 1, 2001 had recorded income
tax benefits of $13,201 and $7,893, respectively,
     primarily related to reversals of valuation allowances previously recorded on deferred tax assets.

# Item 7.            Management's Discussion and Analysis
of Results of Operations and Financial Condition.

# Overview

We are a restaurant company competing in the upscale casual market. As of June 27, 2004, we
owned and operated 48, and franchised 12, upscale, full-service, casual dining restaurants
under one of the following names: Champps Americana, Champps Restaurant or Champps
Restaurant and Bar. We operate and franchise restaurants in 22 states with larger
concentrations of restaurants in the upper Midwest, mid-Atlantic and Texas. Champps
provides an extensive menu of approximately 90 items consisting of high quality
ingredients, freshly prepared and served with exceptional service in an exciting
environment through the use of videos, music, sports and promotions. Our restaurants
generally are open seven days a week from 11:00 a.m. to 1:00 a.m. We serve our guests in
the dining room and bar area during lunch, after work, during dinner and after dinner
during our late night period.

Since June 1999, we have positioned ourselves to increase profitability while
embarking on a strategic expansion in major metropolitan areas throughout the United
States. Prior to June 1999, we disposed of all non-Champps operating businesses and began
to concentrate solely on the Champps concept. At June 1999, we owned 18 restaurants. In
fiscal year 2000, we opened four restaurants and acquired two franchised restaurants. In
fiscal 2001, fiscal 2002 and fiscal 2003, we opened four, six and seven restaurants,
respectively. In fiscal 2004, we opened seven additional locations and had fully executed
contracts for three additional locations expected to open in fiscal 2005. We have
identified other potential sites and are negotiating contracts on additional sites for
restaurants to be opened in fiscal 2005. We expect to open a total of six new
company-operated restaurants in fiscal 2005.

21

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Our new restaurants typically range
in size from 7,500 square feet to 9,000 square feet. Historically since 2001, restaurants
with a ground lease have required, on average, a net cash investment of approximately
$1.8 million and average total invested capital of approximately $2.8 million per
restaurant. Restaurants constructed with build-to-suit financing have required, on
average, a net cash investment of $1.4 million and average total invested capital of
approximately $4.7 million which includes land acquisition cost. Pre-opening expenses are
expected to average approximately $360,000 per restaurant.

Historically, our primary sources of
liquidity for funding our operations and expansion have been net cash from operations, and
standard restaurant financing methods, such as build-to-suit transactions, sale-leaseback
transactions, mortgage facilities, notes payable, tenant improvement allowances and
equipment financing. We recently secured a three-year $25.0 million revolving bank credit
facility giving us greater financial flexibility and future interest expense
savings. In that regard, certain of our higher interest rate notes payable and capital
leases as well as certain operating leases were repaid in the third and fourth quarters of
2004 with excess cash and use of this bank facility, although we were subject to
prepayment penalties and a write-off of related debt issuance costs.

Because we continue to expand,
the timing of revenues and expenses associated with opening new restaurants is expected to
result in fluctuations in our quarterly and annual results. In addition, our results, and
the results of the restaurant industry as a whole, may be adversely affected by changes in
consumer tastes, discretionary spending priorities, national, regional and local economic
conditions, demographic trends, consumer confidence in the economy, traffic patterns,
weather conditions, employee availability, state and federal minimum wage requirements and
the type, number and location of competing restaurants. Changes in any of these factors
could adversely affect us and our financial results.

The success of our business and our
operating results are also dependent upon our ability to anticipate and react to changes
in food and liquor costs and the mix between food and liquor revenues. Various factors
beyond our control, such as adverse weather conditions, may affect food costs and
increases in federal, state and local taxes may affect liquor costs. While we have been
able to manage our exposure to the risk of increasing food and liquor costs in the past
through certain purchasing practices, menu changes and price adjustments, there can be no
assurance that we will be able to do so in the future or that changes in our sales mix or
our overall buying power will not adversely affect our results of operations.

Many food
product costs have increased substantially in this recent fiscal year. The most notable
products with higher costs that affected our operations included beef, dairy and chicken
wings. We responded to these higher costs by raising prices on select menu items and
adjusting recipes.

22

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An important indicator of sales
performance within the restaurant industry is comparable sales or same store sales. This
indicator compares the revenue performance of our restaurants open for more than sixty-six
weeks to the same restaurants in the prior year thereby eliminating the impact of new
openings in comparing the operations of existing stores. Small changes in comparable sales
can have a proportionally higher impact on operating margins because of the high degree of
fixed costs associated with operating restaurants.

Our comparable food sales have been
positive for nine consecutive quarters and for 17 out of the last 20 quarters. However, at
the same time, comparable alcohol sales have been negative for nine consecutive quarters.
The following table provides our comparable sales percentage change by quarter versus the
prior years comparable quarter for the last three fiscal years.

|            | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total
|----------- | --------- | --------- | --------- | --------- | -----
|Fiscal 2004 |           |           |           |           |      
|Food        |           |           |           | 0.9       | %    
|Alcohol     |           |           |           | -1.8      | %    
|            |           |           |           |           |      
|Total       |           |           |           | 0.2       | %    
|            |           |           |           |           |      
|Fiscal 2003 |           |          
|Food        |           |           |           | 0.7       | %    
|Alcohol     |           |           |           | -6.5      | %    
|            |           |           |           |           |      
|Total       |           |           |           | -1.6      | %    
|            |           |           |           |           |      
|Fiscal 2002 |           |          
|Food        |           |           |           | -2.9      | %    
|Alcohol     |           |           |           | -5.4      | %    
|            |           |           |           |           |      
|Total       |           |           |           | -3.7      | %    
|            |           |           |           |           |      

We believe that alcohol sales have
been impacted by our strategy to deemphasize our late night business beginning in the
fourth quarter of fiscal 2002, the sluggish economy, competition, fluctuating consumer confidence,
higher unemployment, decreases in discretionary income and a decline in overall on-premise
alcohol sales throughout our industry. In June 2004 after reviewing competitor prices, we
increased our alcohol prices.

Our average weekly sales per
restaurant has been decreasing over the last several years as our new stores have lower
average weekly sales than our existing stores due in part to their reduced size.

Food safety issues have received
increased media attention during this past year. Two prominent issues have been the
identification of green onions grown in farms in Mexico as the source of hepatitis and the
first reported case of mad cow disease in the United States. We know of no
known cases related to these food safety concerns affecting our restaurants. We have
received assurances from our produce provider of green onions that their sources are safe.
Also, we have reinforced to our restaurant operators procedures to follow for the safe
food handling of green onions. To date, the mad cow disease issue has not been
shown to influence the beef-eating habits of consumers per industry reports, although
future cases could certainly influence our customers eating habits. The USDA and the beef
industry have taken a number of actions to reduce the risk of mad cow diseased
beef from entering consumer markets.

As is fairly typical during most
election years, proposals to increase minimum wage levels have once again surfaced at the
federal level. In addition, certain states where we do business have legislative proposals
to increase their minimum wage levels. While most of our kitchen staff are paid in excess
of minimum wage levels and would not be affected by the proposals, our server and bar
staff are generally paid the tipped minimum wage.

23

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Recently, the popularity of the
Atkins diet has resulted in many restaurant chains incorporating and promoting
high-protein, low-carbohydrate items on their menus. We responded to this trend by
including certain menu items labeled carb conscious in our specials section of
the menu starting in the third quarter of fiscal 2004. We added a carb
conscious section to our menu in June 2004.

In the last fiscal year, two of our
restaurants operations were negatively impacted by local ordinances prohibiting
smoking in public places. These smoking bans are becoming more prevalent at both state and
local levels. State mandated smoking bans have not historically impacted our operations
while locality specific bans have negatively affected our operations due to the ability of
smoking patrons to choose smoking venues in other close localities that do not have a
smoking ban.

We have been liable for two
potentially significant loss contingencies related to a predecessor company (see Note 9 to
our audited consolidated financial statements). Significant developments have occurred
this last fiscal year in both items. In the McCrae vs. Daka matter, the Court of Appeals
issued its decision in December 2003. The Court affirmed the award of compensatory damages
in the amount of $187,500 and attorneys fees in the amount of $276,000. However, the
Court vacated the $4.8 million punitive damages award as constitutionally excessive and
remanded the case to the trial court for redetermination of punitive damages in accordance
with legal principles outlined in its opinion. In January 2004, we paid approximately $0.6
million for these items including interest. In May 2004, the trial court made its
redetermination and awarded $0.9 million in punitive damages to the plaintiff. We accrued
this amount as a predecessor cost in the fourth quarter of fiscal 2004 even though we have
appealed the punitive damage redetermination award. We have not accrued for $0.4 million
of additional attorneys fees sought by plaintiffs counsel as we do not believe
the liability is probable.

The State of Florida proposed sales
tax assessment including penalties and interest was settled in February 2004 for a payment
of $0.1 million. Previously, the State of Florida had proposed to assess $2.4 million in
unpaid state sales taxes, and an additional $2.9 million in penalties and interest as of
December 2001.

Our financial results for the year
ended June 27, 2004 included:

| |  | Growth
of consolidated revenues by 17.0% to $211.5 million.
|- |  | -----------------------------------------------------------

| |  | Growth
of income before income taxes by 59.8% to $6.2 million from $3.9 million.
|- |  | --------------------------------------------------------------------------------

| |  | A
decrease of net income of $12.1 million to $5.0 million. Fiscal 2003 net income was
higher in part because we recorded a $13.2 million income tax benefit related to a
decrease in the valuation allowance associated with deferred tax assets.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Critical accounting
policies

The preparation of our consolidated
financial statements requires us to make estimates and assumptions that affect the
reported amounts and disclosures in the consolidated financial statements. The estimates
and assumptions are evaluated on an on-going basis and are based on historical experience
and on various other factors that are believed by us to be reasonable under the
circumstances.

Items significantly impacted by
estimates and judgments include, but are not limited to, representations, warranties and
indemnities provided in connection with the spin-off of DAKA
International, Inc. in 1997 and the subsequent sale of the Fuddruckers business unit in
1998, self-insured risks relating to workers compensation and general liability
claims and legal liabilities, the useful lives and recoverability of our long-lived assets
such as property, equipment and intangibles, fair value attributed to assets and
liabilities of acquired businesses, valuation of deferred tax assets and the recording of
income tax expense.

24

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Loss contingencies and
self-insurance reserves

We maintain accrued liabilities and
reserves relating to the resolution of certain contingent obligations and reserves for
self-insurance. Significant contingencies include those related to litigation. We account
for contingent obligations in accordance with Statement of Financial Accounting Standards
(SFAS) No. 5, Accounting for Contingencies, as interpreted by FASB
Interpretation No. 14 which requires that we assess each contingency to determine
estimates of the degree of probability and range of possible settlement. Contingencies
which are deemed to be probable and where the amount of such settlement is reasonably
estimable are accrued in our financial statements. If only a range of loss can be
determined, we accrue to the best estimate within that range; if none of the estimates
within that range is better than another, we accrue to the low end of the range.

We are self-insured for a significant
portion of our employee health benefits, workers compensation and general liability
programs. However, we maintain stop-loss coverage with third party insurers to limit our
individual claim and total exposures under the programs. We estimate our accrued liability
for the ultimate costs to close known claims including claims incurred but not yet
reported to us as of the balance sheet date. Our recorded estimated liability for
self-insurance is based on the insurance companies incurred loss estimates and
managements judgment, including assumptions and factors related to the frequency and
severity of claims, our claims development history and our claims settlement practice.

The assessment of loss contingencies
and self-insurance reserves is a highly subjective process that requires judgments about
future events. Contingencies are reviewed at least quarterly to determine the adequacy of
the accruals and related financial statement disclosure. The ultimate settlement of loss
contingencies and self-insurance reserves may differ significantly from amounts we have
accrued in our financial statements.

Useful lives of property
and equipment

Land, buildings, leasehold
improvements and equipment are recorded at cost less accumulated depreciation. These
assets are depreciated using the straight-line method over the estimated useful lives of
the assets. These estimates may produce materially different amounts of reported
depreciation and amortization expense if different assumptions were used. As discussed
further below, these judgments may also impact our need to recognize an impairment charge
on the carrying amount of these assets.

Valuation of long-lived
assets

We evaluate the carrying value of
long-lived assets including property, equipment and related identifiable intangible assets
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Under SFAS No. 144, an assessment is made to
determine if the sum of the expected future undiscounted cash flows from the use of the
assets and eventual disposition is less than the carrying value.

If the sum of the
expected undiscounted cash flows is less than the carrying value, an impairment loss is
recognized based on fair value.

We separately evaluate each
individual restaurant for impairment. Generally, a restaurant is not evaluated for
impairment until it has been open a full six quarters as the initial two quarters of
operations are generally characterized by operating inefficiencies associated with
start-up operations. We consider four consecutive quarters of negative cash flow or losses
to indicate a potential for an individual restaurant to be impaired. We estimate the
future cash flows for such potentially impaired restaurants utilizing such factors as
restaurant sales trends, local economic conditions, demographics and competition,
management plans and initiatives and other factors deemed appropriate in the
circumstances.

As of June 27, 2004, we had two
restaurants open for at least six quarters which had negative cash flow in the last fiscal
year. We currently have a plan to simplify these restaurants operations and thereby
reduce costs which should significantly improve cash flow. These initiatives are to be
instituted in the first half of fiscal 2005. We believe it is premature to record an
impairment on the long-lived assets of these restaurants in light of our plans to improve
the financial performance of these two restaurants.

25

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Additionally, we had another two
restaurants open for at least six quarters which had positive cash flow over the last
fiscal year, but the level of such cash flows were not high enough to sufficiently cover
the restaurants long-term asset values if such cash flows continue for the remainder
of the restaurants lives. These two restaurants had negative local factors occurring
in the last year that impacted their operations. We believe that the local factors will
mitigate in the future and these restaurants cash flows will improve. Therefore, we
believe recording an impairment is not appropriate at this time.

Our forward-looking judgments and
estimates concerning the above mentioned restaurants may not materialize. If such cash
flows associated with any of these restaurants do not sufficiently improve, we would
record an impairment for all or a portion of the respective restaurants long-lived
assets depending on the fair value assigned to such assets. As of June 27, 2004, the
long-lived assets value on these four restaurants totaled $7.3 million.

We evaluate impairment of goodwill
and other unidentifiable intangible assets in accordance with SFAS No. 142 Goodwill
and Other Intangible Assets. Under the provisions of SFAS No. 142, we are required
to assess impairment at least annually by means of a fair value-based test. At June 27,
2004, we evaluated our goodwill and determined that the goodwill was not impaired. The
determination of fair value requires us to make certain assumptions and estimates related
to our business and is highly subjective, and accordingly, actual amounts realized may
differ significantly from our estimate.

Leases

We lease most of our properties
including our corporate office. We account for our leases under the provisions of SFAS No.
13 Accounting for Leases and subsequent amendments which require that leases
be evaluated and classified as operating leases or capital leases for financial reporting
purposes. In addition, we record the total rent payable during the lease term on a
straight-line basis over the term of the lease and record the difference between the rent
paid and the straight-line rent as a deferred rent liability. Lease incentive payments
(tenant improvement allowances) received from landlords are recorded as
deferred rent liabilities and are amortized on a straight-line basis over the lease term
as a reduction in rent. Future authoritative changes to the methods of accounting for
leases could have a material impact on the Companys reported results of operations
and financial position.

Valuation of deferred tax
assets

We recognize deferred tax assets and
liabilities for the future tax consequences attributable to temporary differences between
the carrying value for financial reporting purposes and the tax basis of assets and
liabilities in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recorded using the enacted tax rates expected to
apply to taxable income in the years in which such differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities, resulting from a
change in tax rates, is recognized as a component of income tax expense (benefit) in the
period that such change occurs. Net operating loss and other credit carryforwards,
including FICA tip tax credits, are recorded as deferred tax assets. A valuation allowance
is recorded for the tax benefit of the deferred tax assets not expected to be utilized
based on projected future taxable income and the reversal of temporary differences. As of
June 27, 2004, we had net deferred tax assets of $23.9 million. As a result of our
improved profitability in recent years and our estimates of projected future taxable
income, we believe that it is more likely than not that we will be able to realize these
net deferred tax assets. As of June 27, 2004, we had federal net operating loss and FICA
tip credit carryforwards of approximately $56.5 million, expiring at various dates through
2024.

26

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Income tax provision

Certain components of our provision
for income taxes are estimated. These estimates include, among other items, effective
rates for local and state taxes, allowable tax credits for items such as FICA taxes paid
on reported tip income, estimates related to depreciation and amortization allowable for
tax purposes, and the tax deductibility of certain other items.

Our estimates are based on the best
available information at the time that we prepare the provision. We generally file our
annual income tax returns many months after our fiscal year-end. Income tax returns are
subject to audit by federal, state and local governments, generally years after the
returns are filed. These returns could be subject to material adjustments or differing
interpretations of the tax laws.

Our accounting policies are more
fully described in Note 1 to our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K and incorporated herein by reference.

# Financial definitions

Revenue  Our revenue is
comprised of restaurant sales and net franchise royalties and fees. Restaurant sales are
comprised almost entirely of food and beverage sales with less than 0.2% of the restaurant
sales represented by sales of Champps merchandise and other revenue. In calculating
our company-owned comparable restaurant sales, we include restaurants open at least 66
weeks. As of the end of fiscal 2004, 39 restaurants of our total 48 restaurants in
operation were included in our comparable sales calculation.

Restaurant Operating Costs
 Product costs are composed primarily of food and beverage expenses. Labor costs
include direct hourly and management wages, our restaurant associates wages during
training, bonuses, workers compensation and payroll taxes and benefits for
restaurant employees. Other operating expense includes restaurant supplies, marketing
costs specifically related to the restaurants activities, utilities, repairs and
maintenance, banking and credit card fees and other directly related restaurant costs.
Occupancy costs include equipment operating leases, fixed rent, percentage rent, common
area maintenance charges, general liability and property insurance and real estate and
personal property taxes. Depreciation and amortization principally includes depreciation
on capital expenditures for restaurants. Depreciation and amortization excludes corporate
level depreciation and amortization which are included in general and administrative
expense. Restaurant level operating profit is composed of restaurant sales less restaurant
operating costs, which includes product costs, labor costs, other operating expense,
occupancy and depreciation and amortization.

General and Administrative
Expenses General and administrative expenses include all corporate and
administrative functions that support existing operations and provide infrastructure to
facilitate our future growth. Components include executive and management salaries,
regional supervisory and staff salaries, bonuses and related associate payroll taxes and
benefits, travel, information systems, communication expenses, corporate rent and related
occupancy and operating costs, corporate depreciation and amortization and professional
and consulting fees.

Preopening and Other Items
 Pre-opening expenses, which are expensed as incurred, consist of direct costs
related to hiring and training the initial restaurant workforce and other expenses
incurred prior to the opening of a new restaurant that are directly associated with
opening the new restaurants. Other (income) expense, net generally consists of gains or
losses on asset disposals primarily from asset replacements. Interest expense and income,
net consists of interest expense on notes payable and capitalized lease obligations and
amortization of loan fee costs partially offset by interest income earned on excess cash
balances and interest capitalized as part of the construction process. Expenses related to
predecessor companies consist of expenses for indemnity obligations related to the
spin-off of DAKA International in 1997. Debt extinguishment costs consist of prepayment penalties
and write-off of unamortized debt issuance costs associated with repayment of debt before
scheduled maturity. Loss from discontinued operations consists of expenses for obligations
of indemnity related to the Companys sale of Fuddruckers in 1998.

27

---

Fiscal Calendar We
utilize a 52/53 week fiscal year ending on the Sunday closest to June 30 for financial
reporting purposes. Fiscal years 2004, 2003 and 2002 each consisted of 52 weeks. Each
quarter within those years consisted of 13 weeks. Our upcoming fiscal 2005 will consist of
53 weeks. The first quarter of fiscal 2005 will contain 14 weeks while the remaining
quarters in the fiscal year will contain 13 weeks each.

# Results of operations

The following table sets forth
certain financial information for the Company (dollars in 000s).

|                                                    | Fiscal Year Ended
|--------------------------------------------------- | -----------------
|
|Revenue:                                            |                  
|Sales                                               |                  
|Franchising and royalty, net                        |                  
|                                                    |                  
|Total revenue                                       |                  
|                                                    |                  
|Restaurant operating expenses (as a                 |                  
|percentage of restaurant sales)                     |                  
|Product costs                                       |                  
|Labor costs                                         |                  
|Other operating expenses                            |                  
|Occupancy                                           |                  
|Depreciation and amortization                       |                  
|                                                    |                  
|Restaurant operating expenses                       |                  
|                                                    |                  
|Restaurant level operating profit (1)               |                  
|                                                    |                  
|Restaurant operating and franchise contribution (1) |                  
|General and administrative expenses                 |                  
|Pre-opening expenses                                |                  
|Other (income) expense, net                         |                  
|                                                    |                  
|Income from operations                              |                  
|                                                    |                  
|Other (income) expense:                             |                  
|Interest expense and income, net                    |                  
|Expenses related to predecessor                     |                  
|Debt extinguishment costs                           |                  
|                                                    |                  
|Total costs and expenses                            |                  
|                                                    |                  
|Income from continuing operations                   |                  
|Loss from discontinued operations                   |                  
|                                                    |                  
|Income before income taxes                          |                  
|Income tax expense (benefit)                        |                  
|                                                    |                  
|Net income                                          |                  
|                                                    |                  
|Restaurant operating weeks                          |                  
|Restaurant sales per operating week                 |                  
|Number of restaurants (end of period)               |                  
|Company-owned                                       |                  
|Franchised                                          |                  
|                                                    |                  
|Total restaurants                                   |                  
|                                                    |                  

|(1) |  | Restaurant
level operating profit and restaurant operating and franchise contribution are non-GAAP
measures that we believe are useful in understanding our business because these measures
most directly relate to the operations of our restaurants. Such measures should not be
considered in isolation or construed as a substitute for net income or other operations
data or cash flow data prepared in accordance with GAAP for purposes off analyzing our
profitability or liquidity.  Restaurant level operating profit and restaurant operating
and franchise contribution, as calculated, may not be comparable to similarly titled
measures reported by other companies.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(Continued)

28

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The following table reconciles these measures to the
closest GAAP measure, income from operations (in 000s).

|                                                | Fiscal Year Ended
|----------------------------------------------- | -----------------
|
|Income from operations                          |                  
|plus general and administrative expenses        |                  
|plus other (income) expense, net                |                  
|plus pre-opening expenses                       |                  
|                                                |                  
|Restaurant operating and franchise contribution |                  
|less franchising and royalty, net               |                  
|                                                |                  
|Restaurant level operating profit               |                  
|                                                |                  

Fiscal 2004 compared to fiscal 2003

Total revenue. Total revenue
increased approximately $30.8 million, or 17.0%, to $211.5 million in fiscal 2004 from
$180.7 million for the comparable prior year period primarily due to the opening of seven
additional restaurants throughout fiscal 2004 and full year inclusion of the seven
restaurants opened in fiscal 2003. Comparable restaurant sales increased 0.2% between
years. In fiscal 2004, comparable food sales increased 1.2% while comparable alcohol sales
decreased 2.3%. The average guest check in our dining room, excluding alcoholic beverages,
was approximately $13.27 for fiscal 2004 versus $13.03 for fiscal 2003. During fiscal
2004, food sales and alcoholic beverage sales represented 71.8% and 28.2% of our total
food and beverage sales, respectively. During fiscal 2003, food and alcoholic beverage
sales represented 70.5% and 29.5% of our total food and beverage sales, respectively.

Restaurant operating
expenses.

| | Product
costs. Product costs increased by $8.3 million, or 16.4%, to $58.9 million in fiscal
2004 from $50.6 million in the prior year. Product costs as a percentage of restaurant
sales decreased to 27.9% for fiscal 2004 compared to 28.1% for fiscal 2003 due largely to
recipe modifications and increased vendor rebates partially offset by rising costs for
several commodities, particularly proteins, dairy and higher beer and alcohol costs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Labor
costs. Labor costs increased by $9.9 million, or 17.0%, to $68.1 million in fiscal
2004 from $58.2 million in the prior year. Labor costs as a percentage of restaurant sales
were 32.3% in both fiscal 2004 and fiscal 2003. Lower staff and management costs from cost
cutting initiatives were offset by insurance costs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
operating expense. Other operating expense increased $4.5 million, or 15.7%, to $33.1
million in fiscal 2004 from $28.6 million in the prior year. Operating expense as a
percentage of restaurant sales decreased to 15.7% in fiscal 2004 from 15.9% in fiscal
2003. The decrease was due to lower janitorial costs and credit card fees partially offset
by higher utility costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Occupancy.
Occupancy expense increased $2.8 million, or 17.4%, to $18.9 million in
fiscal 2004 from $16.1 million in the prior year primarily due to the opening of new restaurants.
Occupancy expense as a percentage of restaurant sales was 8.9% in both fiscal 2004 and fiscal 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
and amortization.Depreciation and amortization expense increased $2.1 million,
or 27.6%, to $9.7 million for fiscal 2004 from $7.6 million in the prior year primarily
due to an increase in assets associated with the opening of new restaurants. Depreciation
and amortization expense as a percentage of restaurant sales increased to 4.6% in fiscal
2004 from 4.3% in fiscal 2003 due to lower average restaurant revenues associated with new
restaurants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

Restaurant level operating
profit (Non-GAAP Measure.)Restaurant level operating profit increased approximately $3.3 million,
or 17.4%, to $22.3 million in fiscal 2004 from $19.0 million in the prior year. Restaurant
level operating profit as a percentage of restaurant sales increased modestly to 10.6% in
fiscal 2004 from 10.5% in fiscal 2003.  Reconciliation  of restaurant  level operating  profit to the most
comparable GAAP measure,  income from
operations,  is contained in footnote 1 to the table under "Managements  Discussion and Analysis"  Results of
Operations on page 28 and 29.

General and administrative
expenses.General and administrative expenses increased $0.9 million, or 9.1%,
to $10.8 million in fiscal 2004 from $9.9 million in the comparable prior year period. The
increase was the result of higher personnel costs to support growth, bonus expense and
computer related costs. The increase was partially offset by lower hiring and recruiting
expenses as well as $160,000 of expenses related to terminated projects and litigation
settlement costs of $441,000 incurred in the prior year. General and administrative
expenses as a percentage of total revenue decreased to 5.1% for fiscal 2004 from 5.5% in
fiscal 2003 as a result of economies of scale associated with higher revenues.

Pre-opening expenses.Pre-opening expenses were $1.9 million for fiscal 2004 and $3.1 million for the
comparable prior year period. Pre-opening expenses as a percentage of revenue were 0.9%
for fiscal 2004 and 1.7% for fiscal 2003. Pre-opening expenses have historically been
approximately $0.4 million per location. We opened seven restaurants in both fiscal 2004
and fiscal 2003. The average restaurant pre-opening cost was significantly lower in 2004
versus 2003 because of the timing of openings, openings occurring in existing markets, and
improved management of the expenses.

Other (income) expense, net.
Other expense of $0.1 million was recorded in fiscal 2004 compared to other expense of
$0.3 million in fiscal 2003. The decrease in expense in 2004 was due to fewer losses on
asset replacements and $0.1 of income recorded in fiscal 2004 related to certain warrant
investments.

Interest expense and income, net.Interest expense and income, net was approximately $2.1 million fiscal 2004 and $1.8
million in fiscal 2003. The increase resulted primarily from lower capitalized interest
associated with lower levels of capital expenditures and higher interest expense
associated with the issuance of $15.0 million of 5.5% convertible notes in December 2002
and $4.5 million of new borrowings in the first quarter of fiscal 2004. Partially
offsetting the above was the prepayment of approximately $15.2 million and $5.2 million of
debt and capital leases in fiscal 2004 and fiscal 2003, respectively, before scheduled
maturity.

Expenses related to predecessor
companies.Expenses related to predecessor companies totaled $1.2 million for fiscal
2004 and $0.3 million for the prior year. The fiscal 2004 expenses relate to adjustments
to the liabilities for the McCrae vs. Daka litigation as a result of the appellate
decision and trial court redetermination (see Note 9 to the consolidated financial
statements) and on-going litigation costs partially offset by a reduction in the liability
for the State of Florida proposed tax assessment due to the favorable settlement of the
proposed assessment.

Debt extinguishment costs.
Debt extinguishment costs of $0.6 million were incurred for fiscal 2004 as a result of the
repayment of $15.2 million of debt and capital lease obligations before scheduled
maturity. Debt extinguishment costs of $0.3 million were incurred in fiscal 2003 as a
result of the prepayment of $5.2 million of debt before scheduled maturity.

Income before income taxes.
Income before income taxes increased $2.3 million, or 59.0%, to $6.2 million for fiscal
2004 from $3.9 million in the comparable prior year period for the reasons described
herein.

Income tax expense. For fiscal
2004, we recorded an income tax expense of $1.2 million, or an effective income tax rate
of 19.7%. Although we recognized an income tax expense of 19.7%, we anticipate paying
income taxes at an effective rate of only 6% because of our ability to utilize net operating loss carryforwards
to offset taxable federal income. In fiscal 2003, we recorded an income tax benefit of
$13.2 million reflecting the $15.2 million decrease in deferred tax asset valuation
allowance.

30

---

# Fiscal 2003 compared to
fiscal 2002

Total revenue. Total revenue
increased approximately $22.2 million, or 14.0%, to $180.7 million for fiscal 2003 from
$158.5 million for the comparable prior period. The increase was primarily due to the
full-year operation of six additional restaurants opened in fiscal 2002, seven additional
restaurants opened in fiscal 2003 and menu price increases having an impact on sales of
approximately 1%. This increase was partially offset by a decrease in comparable
restaurant sales of 1.6%. Comparable food sales increased 1.0% due largely to increases in
customer traffic partially offset by a lower guest check average; however, comparable
alcohol sales decreased 6.8%. The comparable alcohol sales decrease was due, in part, to a
strategic de-emphasis of the Companys late night promotions as the promotions are
costly and can alienate dinner guests. Sales in the January through March 2003 period were
also negatively affected by severe weather primarily in Ohio, Indiana, the mid-Atlantic
and Colorado markets. Furthermore, sales were negatively affected by weakening consumer
confidence and the impact of the war in Iraq. During fiscal 2003, food sales and alcoholic
beverage sales represented 70.5% and 29.5% of our total food and beverage sales,
respectively. During fiscal 2002, food sales and alcoholic beverage sales represented
67.8% and 32.2% of our total food and beverage sales, respectively.

Restaurant operating
expenses.

| | Product
costs. Product costs increased by $6.0 million, or 13.5%, to $50.6 million in fiscal
2003 from $44.6 million for the comparable prior period primarily as a result of our
increased restaurant base. Product costs as a percentage of restaurant sales in fiscal
2003 decreased to 28.1% from 28.2% for the comparable prior period. This improvement was
primarily the result of decreased commodity costs and stable produce prices in the first
half of fiscal 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Labor
costs. Labor costs increased by $7.1 million, or 13.9%, to $58.2 million in fiscal
2003 from $51.1 million for the comparable prior period primarily as a result of our
increased restaurant base. Labor costs as a percentage of restaurant sales decreased to
32.3% in fiscal 2003 from 32.4% for the comparable prior period primarily due to lower
staff costs due to efficiency improvements partially offset by higher health benefit and
payroll tax costs and the impact of lower average sales relative to fixed management
costs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
operating expense. Other operating expense increased $4.4 million, or 18.2%, to $28.6
million for fiscal 2003 from $24.2 million for the comparable prior period. Other
operating expense as a percentage of restaurant sales increased to 15.9% in fiscal 2003
from 15.3% for the comparable prior period primarily due to lower comparable restaurant
sales coupled with higher expenses for utilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Occupancy.  Occupancy expense increased $2.5 million,
or 18.4%, to $16.1 million for fiscal 2003 from $13.6 million for the comparable prior period.
Occupancy expense as a percentage of restaurant sales increased to 8.9% for fiscal 2003 from 8.6% for
the comparable prior period primarily due to an increase in real estate taxes
coupled with lower comparable restaurant sales.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
and Amortization. Depreciation and amortization expense increased $1.2 million, or
18.8%, to $7.6 million for fiscal 2003 from $6.4 million for the comparable prior period.
Depreciation and amortization expense as a percentage of restaurant sales increased to
4.3% for fiscal 2003 from 4.1% for the comparable prior period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Restaurant level operating
profit (Non-GAAP Measure.) Restaurant level operating profit increased approximately $1.0 million, or
5.6%, to $19.0 million for fiscal 2003 compared with $18.0 million forthecomparable prior period. Restaurant level operating profit as a percentage of
restaurant sales decreased to 10.5% for fiscal 2003 from 11.4% for the comparable prior
period. The decrease was due to higher restaurant expenses as a percent of sales
associated with the opening of seven new restaurants in fiscal 2003. The income generated
from new restaurants is typically lower during the first four months of operation compared
to an existing restaurant. In addition, lower average restaurant sales resulted in fixed
expenses being a higher percentage of revenues during fiscal 2003. Reconciliation  of restaurant  level operating  profit to the most  comparable GAAP measure,  income from
operations,  is contained in footnote 1 to the table under "Managements  Discussion and Analysis"  Results of
Operations on page 28 and 29.

31

---

General and administrative
expense. General and administrative expense increased $1.3 million, or 15.1%, to $9.9
million for fiscal 2003 from $8.6 million for the comparable prior period. The increase
was largely due to a $180,000 reversal of bad debt from a franchisee in fiscal 2002,
approximately $441,000 of litigation settlement costs, $160,000 of expenses related to
terminated projects and higher computer expense due to the new restaurants and increased
professional fees in fiscal 2003. General and administrative expense as a percentage of
total revenue increased to 5.5% for fiscal 2003 from 5.4% for the comparable prior period.

Pre-opening expense.
Pre-opening expense increased $0.5 million to $3.1 million during fiscal 2003 from $2.6
million during the comparable prior period. We opened seven new restaurants in fiscal 2003
and opened six new restaurants for the comparable prior period. Although pre-opening
expense is incurred prior to the opening of a new restaurant, we continue to incur
pre-opening expense for trainers up to two weeks after a new restaurant opens. Pre-opening
expense has historically been approximately $0.4 million per location.

Expenses related to predecessor
companies and loss from discontinued operations. Expenses related to the Daka spin-off
and Fuddruckers sale decreased $0.2 million to $0.3 million from $0.5 million. The
decrease is primarily the result of the length of time since these transactions were
completed in 1997 and 1998.

Interest expense and income, net.Interest expense and income, net increased $0.2 million to $1.8 million from $1.6
million in the prior period primarily due to interest expense on additional debt. As of
June 29, 2003, we had a total of $28.6 million in notes payable and capitalized leases
versus $21.8 million as of June 30, 2002.

Debt extinguishment costs.Debt extinguishment costs of $0.3 million were incurred in fiscal 2003 as a result of
the repayment of $5.2 million of notes payable before their scheduled maturity. No debt
extinguishment costs were incurred in the prior fiscal year.

Other (income) expense.The
Company recorded other expense of $0.3 million in fiscal 2003 compared to a nominal amount
in the prior fiscal year. The increase in expense resulted from losses on asset disposals
from asset retirements.

Income before provision for income
taxes. Income before provision for income taxes decreased $1.4 million, or 26.4%, to
$3.9 million from $5.3 million for the comparable prior period.

Provision for income tax
benefit/expense. For fiscal 2003, we recognized an income tax benefit of $13.2 million
compared to income tax expense of $0.2 million in fiscal 2002. The income tax benefit in
fiscal 2003 was primarily the result of a reversal of the remaining valuation allowance on
the Companys deferred tax assets associated with net operating loss carryforwards.
The reversal of the valuation allowance resulted from a determination by management that
the net operating loss carryforwards are not limited under tax law and the Companys
future taxable income will, more likely than not, be sufficient to realize the
carryforwards before expiration.

# Liquidity and capital resources

As of June 27, 2004, our unrestricted
cash balance was $1.4 million and our restricted cash balance was $0.1 million. The
restricted cash balance primarily serves as collateral for performance obligations. Our
cash balance and working capital needs are generally low, as sales are made for cash or
through credit cards that are quickly converted to cash, purchases of food and supplies
and other operating expenses are generally paid within 30 to 60 days after receipt of
invoices and labor costs are paid bi-weekly. The timing of our sales collections and
vendor and labor payments are consistent with other companies engaged in the restaurant
industry. Our net working capital decreased by $4.0 million in fiscal 2004 primarily as a
result of using excess cash to reduce debt balances.

32

---

For fiscal years 2004, 2003 and 2002,
we generated cash flow from operating activities of $17.1 million, $10.1 million and $8.9
million, respectively. The increased cash flow from operating activities was due largely
to our improved profitability and, to a smaller extent, due to increased cash from working
capital changes. Our operating cash flow is enhanced by our ability to utilize net
operating loss carryforwards and other tax credits to offset our federal income tax
liability. At June 27, 2004, we had $56.5 million of such carryforwards and credits
available through 2024 to offset federal taxes. We expect to fully utilize these
carryforwards and credits in the next seven to ten years.

A significant portion, if not all, of
our cash flow generated from operating activities in each of the last three fiscal years
has been invested in capital expenditures, the majority of which was for the construction
of new stores. We opened seven new restaurants in both fiscal 2004 and fiscal 2003 and six
new restaurants in fiscal 2002. The following table, in thousands, details our capital
expenditures for the last three fiscal years along with funding provided from tenant
improvement allowances. Tenant improvement allowances are reimbursements received from
certain of our landlords for a portion of initial construction expenditures.

|                                            | Fiscal Year Ended
|------------------------------------------- | -----------------
|
|New store construction                      |                  
|Existing store remodel and refurbishment    |                  
|Corporate related capital expenditures      |                  
|Purchase of equipment previously under      |                  
|operating lease                             |                  
|                                            |                  
|Purchase of property and equipment          |                  
|                                            |                  
|Proceeds from tenant improvement allowances |                  
|                                            |                  

Total capital expenditures for fiscal year
2005 are anticipated to be approximately $20.0 million, before tenant improvement
allowances. These expenditures will primarily be for the construction of six new
restaurants expected to open in fiscal 2005, construction for certain restaurants expected
to open in early fiscal 2006 and for upgrades to existing restaurants. We review our
capital expenditures budget on a monthly basis and amounts are subject to change. We are
anticipating receiving cash for tenant improvement allowances of approximately $4.8
million for fiscal 2005.

In January, 2003, we entered into an agreement with AEI Fund Management, Inc. ("AEI") for
the development and sale/leaseback of up to seven
new restaurants with an additional funding commitment of $24.5 million. At June 27, 2004,
we had completed the construction of three restaurants under this commitment located in
Houston, Texas, Cincinnati, Ohio and Orland Park, Illinois. The agreement expires the
earlier of November 30, 2005 or upon AEIs acceptance or rejection of seven total
restaurant sites. The funding of this build-to-suit facility is subject to various
pre-closing conditions.  For additional information on our agreement with AEI, please
refer to the information provided under Note 6 to the accompanying consolidated
financial statements, which information is incorporated by reference herein.

We supplemented our operating cash
flows over the last three years through various financing arrangements. In September 2002,
we entered into a $5.0 million five-year term loan facility with General Electric Capital.
This facility was collateralized by equipment. We borrowed $0.5 million of the funds in fiscal
2003 and the $4.5 million balance during the first quarter of fiscal 2004. These loans were
repaid in fiscal 2004.

33

---

In
fiscal 2003, we received $15.0 million of gross proceeds from the issuance of 5.5%
convertible subordinated notes (notes) and warrants. Approximately $1.4
million of issuance costs were incurred relative to the notes. The notes are due December
2007 and require interest only payments semi-annually.

Also in fiscal 2003, we received
approximately $5.0 million from the exercise of stock options. Most of the stock option
exercises occurred as a result of a 10b5-1 stock trading plan under which our
chief executive officer exercised 1.0 million stock options
before the options expired at the end of fiscal 2003. The
exercise price of the options and certain tax withholding liabilities were paid through
tendering almost half of the exercised shares with a fair value of $3.6 million.

In fiscal 2002, we entered into two
term loans totaling $5.0 million with General Electric
Capital collateralized by equipment. As of June 27, 2004, we had approximately $1.8 million outstanding under these
term loans. These loans bear interest at the 30-day commercial paper rate, plus 3.75% and
mature between December 2006 and February 2007. Also in fiscal 2002, we received $1.8
million of proceeds from equipment capital lease transactions.

In fiscal 2004 and fiscal 2003, we
elected to prepay $15.2 million and $5.2 million, respectively, of our existing debt to
reduce our annual interest costs. The funds to prepay the debt came from excess cash, the
$15.0 million issuance of convertible notes in fiscal 2003 and borrowings under the new
$25.0 million senior secured bank credit facility obtained in fiscal 2004. Prepayment
penalties and a write-off of unamortized deferred financing fees totaling $587,000 and
$290,000 were recorded in fiscal 2004 and fiscal 2003, respectively, as a result of
prepaying the debt before its scheduled maturity.

In March 2004, we obtained a
three-year $25.0 million senior secured credit facility with a new lender, LaSalle Bank. We
used a portion of the facility to refinance certain of our existing debt and the facility
may also be used to support growth and general working capital needs and provide up to
$5.0 million for the issuance of letters of credit. The facility is secured by a blanket
lien on all personal assets and real property of the Company. Borrowings under the
facility will bear interest depending on a total funded debt to EBITDA ratio and will
range from prime to prime plus 50 basis points or, if elected, LIBOR plus 200 to 300 basis
points. We paid an up-front fee of $188,000 and are required to pay an annual unused
commitment fee of 37.5 basis points to 50 basis points. Outstanding borrowings under the
facility may be converted to a five-year term loan if the ratio of senior debt to EBITDA
exceeds specified levels. The facility requires the Company to maintain a minimum fixed
charge coverage ratio and tangible net worth level and not exceed thresholds for total
funded debt to EBITDA and total senior debt to EBITDA ratios. Capitalized terms refer to
defined terms in the senior secured credit facility.  The facility limits the
opening of new restaurants to a maximum of twenty-four over a three year period and also
limits the amount of dividends and/or stock repurchases. As of June 27, 2004, the Company
had $2.5 million of outstanding borrowings under this facility and had placed letters of
credit of $1.3 million under the facility with $19.4 million available for additional
borrowing. As of June 27, 2004, we were in compliance with all debt covenants and
financial ratios.

At June 27, 2004, we had a bank
credit facility with First National Bank of Colorado under which we could borrow up to
$2.0 million to provide short-term working capital and to support the issuance of letters of
credit. As of June 27, 2004, we had no outstanding borrowings but had placed letters of
credit of $1.8 million under this working capital facility. The Company has no intent to
extend this facility past its January 2005 expiration in light of its new $25.0 million
credit facility.

For  additional  information  regarding  our material  debt  instruments,  including our $15.0 million
convertible  subordinated  notes and related  warrants,  $25.0  million  senior  secured  credit  facility with
LaSalle Bank, and our $2.0 million bank credit  facility with First National Bank of Colorado,  please refer to
the  information  provided  under  Note  7  "Long-term  Debt",  to  the  accompanying  consolidated  financial
statements, which information is incorporated by reference herein.

34

---

There will be cash payments during
the next twelve months associated with predecessor company activities. Such cash payments
will include settlements and on-going legal costs. We expect the total cash payments
for these liabilities to be approximately $1.0 million, but the amounts could be higher
depending on the final outcome of litigation.  . For additional information regarding our commitments and contingencies, including our payments associated
with our predecessor company activities, please refer to the information provided under Note 9  "Commitments
and Contingencies," to the accompanying consolidated financial statements, which information is incorporated
by reference herein.During fiscal 2004, 2003 and 2002, we expended
approximately $0.8 million, $1.0 million and $1.4 million related to the predecessor
company matters.

We believe our cash flow from
operations, together with anticipated tenant improvement allowances of approximately $4.8
million and funds available under our $25.0 million credit facility ($19.4 million available
at June 27, 2004) will be sufficient to fund our operations, debt repayment and expansion
at least through the end of fiscal 2005. However, changes in our operating plans,
acceleration of our expansion plans, lower than anticipated sales, increased expenses or
other events, including those described in Item 1 Business-Risk Factors, may
cause us to seek additional debt or equity financing on an accelerated basis.
Additional financing
may not be available on acceptable terms, or at all, and our failure to raise capital when
needed could negatively impact our growth plans and our financial condition and results of
operations. Any 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 and/or financial ratios that restrict our ability to operate and grow our business.

# Contractual obligations and commitments

Payments, including interest, due by period as of June 27, 2004 (in 000's)

|Contractual Obligations                | Total | One year
and less | Two to
three years | Four to
five years | After five
years
|-------------------------------------- | ----- | ----------------- | ------------------ | ------------------ | ----------------
|Operating leases                       |       |                   | $                  | 217,475            |                 
|Long-term debt                         |       |                   |                    | 22,514             |                 
|Letters of credit                      |       |                   |                    | 2,092              |                 
|Construction commitments               |       |                   |                    | 7,618              |                 
|Build-to-suit construction commitments |       |                   |                    | 192                |                 
|                                       |       |                   |                    |                    |                 
|                                       |       |                   | $                  | 249,891            |                 
|                                       |       |                   |                    |                    |                 

We are obligated under non-cancelable
operating leases for our headquarters and all but one of our restaurants. The fixed terms
of the restaurant leases range up to 20 years and generally contain multiple renewal
options for various periods ranging from five to 20 years. Our restaurant leases also
contain provisions that require additional rent payments based on sales performance and
the payment of common area maintenance charges and real estate taxes. Amounts in this
table do not reflect any of these additional amounts.

Our long-term debt is principally
comprised of a $15.0 million issuance of 5.5% convertible notes due December 2007, unless
otherwise earlier converted into our common stock. Additionally, at June 27, 2004, we had
term debt balances of $1.8 million and $2.5 million of loans outstanding under our
revolving credit facility. The credit facility borrowings mature in March 2007.

We have letters of credit outstanding
to guarantee performance under insurance contracts and to secure other arrangements. The
letters of credit are irrevocable and have one-year renewable terms.

We have commitments under contracts
for the purchase of property and equipment and for the construction of buildings under
build-to-suit arrangements or otherwise. Portions of such contracts not completed at June
27, 2004 as stated above were not reflected as assets or liabilities in our consolidated
financial statements.

35

---

# Impact of inflation

The primary inflationary factors
affecting our operations are food, alcoholic beverages and labor costs. A large number of
our restaurant associates are paid at rates based on the applicable minimum wage, and
increases in the minimum wage directly affect our labor costs. Many of our leases require
us to pay property taxes, maintenance, repairs, insurance and utilities, all of which are
generally subject to inflationary increases. We believe inflation has not had a material
impact on our results of operations in recent years. We cannot predict whether inflation
will have an impact on our results of operations in the future.

# Seansonality

Our sales fluctuate seasonally and
therefore our quarterly results are not necessarily indicative of results that may be
achieved for the full fiscal year. For fiscal years 2004 and 2003, our relative sales were
highest in our second quarter (October through December), followed by our third quarter
(January through March), then by our fourth quarter (April through June). Our first
quarter (July through September) recorded the lowest relative sales for those years.
Factors influencing sales variability in addition to those noted above include the
frequency and popularity of sporting events, holidays (including which day of the week the
holiday occurs) and weather.

# Item 7A.           Quantitative
and Qualitative Market Risk Disclosures

We are exposed to market risk
primarily from changes in interest rates and changes in commodity prices.

At June 27, 2004, we were exposed to
interest rate fluctuations on approximately $4.3 million of notes payable and bank credit
facility borrowings carrying variable interest rates. A hypothetical one hundred basis
point increase in interest rates for these notes payable would increase our annual
interest expense by approximately $43,000.

We have also been subject to interest
rate market risk for short-term invested cash and cash equivalents. The principal of such
invested funds would not be subject to fluctuating value because of their highly liquid
short-term nature. As of June 27, 2004, we had no such funds invested in short-term
maturing investments.

Many of the ingredients purchased for
use in the products sold to our guests are subject to unpredictable price volatility
outside of our control. We try to manage this risk by entering into selective short-term
agreements for the products we use most extensively. Also, we believe that our commodity
cost risk is diversified as many of our food products are available from several sources
and we have the ability to modify product recipes or vary our menu items offered.
Historically, we have also been able to increase certain menu prices in response to food
commodity price increases and believe the opportunity may exist in the future. To
compensate for a hypothetical price increase of 10% for food and beverages, we would need
to increase prices charged to our guests by an average of approximately 2.8%. We have not
used financial instruments to hedge our commodity product prices.

# Item 8.           Financial
Statements and Supplementary Data.

The information required under this
Item 8 is set forth on pages F-1 through F-27 of this Report.

# Item 9.           Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.

None.

36

---

# Item 9A.           Controls and
Procedures.

We maintain disclosure  controls and procedures that are designed to ensure that information  required
to be disclosed by us in the reports that we file or submit to the  Securities  and Exchange  Commission  under
the Securities  Exchange Act of 1934, as amended,  is recorded,  processed,  summarized and reported within the
time  periods  specified  by the  Commissions  rules  and  forms,  and that  information  is  accumulated  and
communicated to our  management,  including our chief executive  officer and our chief  financial  officer,  as
appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the
participation of our management, including our chief executive officer and our chief
financial officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of June 27, 2004, the end of the
period covered by this report. Based on that evaluation, the chief executive officer and
chief financial officer concluded that our disclosure controls and procedures were
effective as of June 27, 2004.

During the quarter ended June 27,
2004, there was no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

# PART III

# Item 10.           Directors and
Executive Officers of the Registrant.

Part of the information required by this Item
is incorporated herein by reference to the information from the
section captioned Election of Directors contained in the Proxy Statement
for the Company's Annual Shareholder's Meeting to be held on or about December 1, 2004
and to be filed with the Securities and Exchange Commission within 120 days of June 27, 2004.

Our executive officers include the
following persons:

|Name                                                                                                                           | Age                                             | Positions                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|William H. Baumhauer 
Donnie N. Lamb       
Frederick J. Dreibholz
                     
Donna L. Depoian     
David J. Miller | 56  
    51  
    49  
        
    44  
    53 | Chairman, President and Chief Executive Officer
    Senior Vice President, Chief Operating Officer
    Vice  President,  Treasurer  and  Chief  Financial
    Officer
    Vice President, Secretary and General Counsel
    Vice President of Construction and Design

All executive officers hold office at
the discretion of the board of directors.

William H. Baumhauer. Mr.
Baumhauer is our chairman of the board and has been an officer of Champps since June 1999
and a director since August 1999. Mr. Baumhauer also held these positions with our
predecessors or us from September 1988 until July 24, 1998, when he left the Company to
serve as president and chief operating officer of Planet Hollywood International, Inc., a
position he held until his return to Champps in June 1999.

Donnie N. Lamb. Mr. Lamb has served as
our senior vice president and chief operating officer since August 2002. Mr. Lamb
started his employment with the Company in August 1996. He served as a director of
operations from August 1996 through August 1999 when he was promoted to vice president
 operations. Prior to August 1996, Mr. Lamb held multi-unit management positions
with Houlihans and Ruby Tuesday, Inc.

37

---

Frederick J. Dreibholz. Mr.
Dreibholz has served as our vice president, chief financial officer and treasurer since
October 1999. From November 1998 to October 1999, Mr. Dreibholz acted as a consultant to
numerous restaurant and food service clients in South Florida and New York City. From
April 1998 to November 1998, he served as chief financial officer of Unique Restaurant
Concepts, Inc. and Sforza Enterprises, Inc. From November 1987 to April 1998, he served as
chief financial officer of Flik International Corp.

Donna L. Depoian. Ms. Depoian
has served as our vice president, general counsel and secretary since May 1998. From
February 1998 to May 1998, Ms. Depoian served as our acting general counsel and assistant
secretary and from July 1997 to February 1998, as our corporate counsel and assistant
secretary. From April 1994 to July 1997, Ms. Depoian served as corporate counsel and
assistant secretary for DAKA International, Inc.

David J. Miller.Mr. Miller
has served as our vice president of construction and design since October 1999. He started
with the Company in May 1996 and served in the capacities of construction manager until
October 1997 when he was promoted to corporate director of construction.

# Item 11.           Executive
Compensation.

The information required by this Item
is incorporated by reference to the section captioned Executive Compensation
contained in the Proxy Statement for the Company's Annual Shareholder's Meeting to be held on or about
December 1, 2004 and to be filed with the Securities and Exchange Commission within 120 days of June 27, 2004.

# Item 12.           Security
Ownership of Certain Beneficial Owners and Management.

The information required by this Item
is incorporated by reference to the section captioned Principal and Management
Shareholders contained in the Proxy Statement for the Company's Annual Shareholder's Meeting to be held on or about
December 1, 2004 and to be filed with the Securities and Exchange Commission within 120 days of June 27, 2004.

# Item 13.           Certain
Relationships And Related Transactions.

The information required by this Item
is incorporated by reference from the sections captioned Certain Relationships and
Related Transactions contained in the Proxy Statement for the Company's Annual Shareholder's Meeting to be held on or about
December 1, 2004 and to be filed with the Securities and Exchange Commission within 120 days of June 27, 2004.

# Item 14.           Independent
Registered Public Accountant and Fees.

The information required by this Item
is incorporated by reference from the section captioned Audit and Other Fees
contained in the Proxy Statement for the Company's Annual Shareholder's Meeting to be held on or about
December 1, 2004 and to be filed with the Securities and Exchange Commission within 120 days of June 27, 2004.

38

---

# PART IV

# Item 15.           Exhibits,
Financial Statement Schedules and Reports on Form 8-K.

(a)     The following are being filed as part
of this Annual Report on Form 10-K.

# 1. Financial Statements:

| | Report of Independent Registered Public Accounting Firm
| | -------------------------------------------------------

| | Consolidated Balance Sheets - As of June 27, 2004 and June 29, 2003
| | -------------------------------------------------------------------

| | Consolidated
Statements of Operations  Fiscal years ended June 27, 2004, June 29, 2003 and June
30, 2002
| | ---------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Changes in Stockholders Equity and Comprehensive Income  Fiscal
years ended June 27, 2004, June 29, 2003 and June 30, 2002
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidated
Statements of Cash Flows  Fiscal years ended June 27, 2004, June 29, 2003 and June
30, 2002
| | ---------------------------------------------------------------------------------------------------------

| | Notes
to Consolidated Financial Statements for the fiscal years ended June 27, 2004, June 29,
2003 and June 30, 2002.
| | ---------------------------------------------------------------------------------------------------------------------

# 2. Financial Statement
Schedules:

| | There
are no Financial Statement Schedules required to be filed. Information required by Article
12 of Regulation S-X with respect to Valuation and Qualifying Accounts has been included
in the Notes to the Consolidated Financial Statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 3. Exhibits:

|2.1 |  | Agreement and Plan of Merger, dated as of May 27, 1997, by and among Compass Interim, Inc.
(Compass Interim), Compass Holdings, Inc. (Purchaser), Compass
Group PLC (Parent) and DAKA International, Inc. (DAKA
International), incorporated herein by reference to the Companys Registration
Statement on Form 10 filed June 3, 1997, as amended.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.2 |  | Reorganization Agreement dated as of May 27, 1997, by and among DAKA International, Daka,
Inc. (Daka), the Company, Parent and Compass Holdings, together with certain
exhibits thereto, incorporated herein by reference to the Companys
Registration Statement on Form 10 filed June 3, 1997, as amended.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.3 |  | Agreement and Plan of Merger among Champps Entertainment, Inc. (Champps), DAKA
and CEI Acquisition Corp., dated as of October 10, 1995, incorporated herein by reference
to DAKAs Registration Statement on Form S-4 (File No. 33-65425) (1996 DAKA
Form S-4).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.4 |  | Series D Convertible Preferred Stock and Warrant Purchase Agreement, dated as of January
12, 1996, by and among La Salsa Holding Co. and Casual Dining Ventures, Inc. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules to the Series D Convertible Preferred
Stock and Warrant Purchase Agreement are omitted. The Company hereby undertakes to furnish
supplementally a copy of any omitted Schedule to the Commission upon request. Incorporated
herein by reference to the Annual Report on Form 10-K of DAKA International for the year
ended June 29, 1996.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

---

|2.5 |  | Certificate  of  Ownership  and  Merger  between  Champps   Entertainment,   Inc.  and  Unique  Casual
         Restaurants, Inc., dated July 26, 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Amended and Restated Certificate of Incorporation of the Company, incorporated herein by
reference to the Companys Registration Statement on Form 10 filed June 3, 1997, as
amended.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Amended and Restated By-laws of the Company incorporated herein by reference to the
Companys Registration Statement on Form 10 filed June 3, 1997, as amended.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3 |  | Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of the
Company, dated January 30, 1998, incorporated herein by reference to the Companys
Current Report on Form 8-K filed February 2, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Specimen Stock Certificate for shares of the UCRI Common Stock, incorporated herein by
reference to the Companys Registration Statement on Form 10 filed June 3, 1997, as
amended.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Form of 5.5% Convertible Subordinated Note Due 2007, incorporated herein by reference to
the Companys Current Report on Form 8-K filed December 16, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Form of Warrant to Purchase Common Stock, incorporated herein by reference to the
Companys Current Report on Form 8-K filed December 16, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Registration  Rights  Agreement  dated as of December 12, 2002 by and between  Champps  Entertainment,
         Inc.,  U.S.  Bancorp Piper Jaffray,  Inc. and the Buyers as defined  therein,  incorporated  herein by
         reference to the Company's Current Report on Form 8-K filed December 16, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Tax Allocation Agreement dated as of May 27, 1997, by and among DAKA, the Company, and
Parent, incorporated herein by reference to the Companys Registration Statement on
Form 10 filed June 3, 1997, as amended.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Post-Closing Covenants Agreement, dated as of May 27, 1997, by and among DAKA, Daka, Inc.,
the Company, Champps, Fuddruckers, Inc., Purchaser and Parent, incorporated herein by
reference to the Companys Registration Statement on Form 10 filed June 3, 1997, as
amended.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Stock Purchase Agreement, dated as of May 26, 1997, between DAKA, Parent, Purchaser, First
Chicago Equity Corporation, Cross Creek Partners I and the other holders of Series A
Preferred Stock of DAKA, incorporated herein by reference to the Companys
Registration Statement on Form 10 filed June 3, 1997, as amended.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4* |  | 1997 Stock Option and Incentive Plan, incorporated herein by reference to the
Companys Registration Statement on Form 10 filed June 3, 1997, as amended.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5* |  | 1997 Stock Purchase Plan, incorporated herein by reference to the Companys
Registration Statement on Form 10 filed June 3, 1997, as amended.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.6* |  | Indemnification Agreement, by and between the Company and directors and officers of DAKA,
incorporated herein by reference to the Companys Registration Statement on Form 10
filed June 3, 1997, as amended.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | La Salsa Holding Co. Warrant to Purchase Shares of Series D Convertible Preferred Stock,
dated as of January 12, 1996, issued to Casual Dining Ventures, Inc. by La Salsa Holding
Co. Incorporated herein by reference to the Annual Report on Form 10-K of DAKA
International for the year ended June 29, 1996.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

---

|10.8 |  | Stock Purchase Agreement, dated as of July 31, 1998, by and between King Cannon, Inc. and
Unique Casual Restaurants, Inc., incorporated herein by reference to the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the year ended June 27, 1999.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Loan Agreement, dated April 21, 2000, by and between Champps Operating Corporation and
Finova Capital Corporation, incorporated herein by reference to the Annual Report on Form
10-K of Champps Entertainment, Inc. for the year ended June 30, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Securities Purchase Agreement dated as of December 12, 2002 by and between Champps
Entertainment, Inc. and the Buyers as defined therein, incorporated herein by reference to
the Companys Current Report on Form 8-K filed December 16, 2002.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | First Amendment to Multi-Site Agreement, dated January 8, 2003, by and between Champps
Entertainment Inc. and AEI Fund Management, Inc., incorporated herein by reference to the
Quarterly Report on Form 10-Q of Champps Entertainment, Inc. for the quarter ended
December 29, 2002.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Master Credit Facility Agreement, dated as of February 14, 2003, by and between Champps
Entertainment, Inc. and First National Bank of Colorado, incorporated herein by reference
to the Quarterly Report on Form 10-Q of Champps Entertainment, Inc. for the quarter ended
March 30, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13* |  | Amended and Restated Employment Contract, dated as of May 22, 2003, by and between Champps
Entertainment, Inc. and William H. Baumhauer, incorporated herein by reference to the
Companys Current Report on Form 8-K dated May 28, 2003.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14* |  | 2003 Stock Option and Incentive Plan, incorporated herein by reference to the
Companys definitive proxy statement filed April 29, 2003.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Amended and Restated Agreement, dated as of May 22, 2003, by and between Champps
Entertainment, Inc. and Sysco incorporated herein by reference to the Annual Report on
Form 10-K of Champps Entertainment, Inc. for the year ended June 29, 2003.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Credit Agreement (Revolving Loan), by and between LaSalle Bank National Association as
Administrative Agent and as a Syndication Party and Champps Operating Corporation as
Borrower dated as of March 16, 2004 incorporated herein by reference to the Quarterly
Report on Form 10-Q of Champps Entertainment, Inc. for the quarter ended March 28, 2004.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21.1** |  | Subsidiaries of the Company.
|------ |  | ----------------------------

|23.1** |  | Consent of KPMG LLP.
|------ |  | --------------------

|31.1** |  | Certification by William H. Baumhauer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|------ |  | ------------------------------------------------------------------------------------------------

|31.2** |  | Certification by Frederick J. Dreibholz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|------ |  | --------------------------------------------------------------------------------------------------

|32.1** |  | Certification by William H. Baumhauer pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2** |  | Certification by Frederick J. Dreibholz pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

---

|99.1** |  | Champps  Entertainment,  Inc. Policy  Statements:  Code of Conduct and Ethics  incorporated  herein by
         reference to the Quarterly  Report on Form 10-Q of Champps  Entertainment,  Inc. for the quarter ended
         December 28, 2003.
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

*  Identifies each management contract or compensatory plan
or arrangement.** Filed herewith.

(b)      Reports on Form 8-K



Current reports on Form 8-K filed during the fourth quarter ended June
27, 2004:

| | Current report
on Form 8-K furnished pursuant to Item 12 (Results of Operations and Financial Condition)
on April 29, 2004 announcing results for its third quarter of fiscal 2004 ended March 28,
2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(c)     
Financial Statement Schedules:

There are no Financial Statement Schedules required to be filed.  Information required by Article 12 of
Regulation S-X with respect to Valuation and Qualifying Accounts has been included in the Notes to the
Consolidated Financial Statements.

Exhibit Index:

|2.1 |  | Agreement and Plan of Merger, dated as of May 27, 1997, by and among Compass Interim, Inc.
(Compass Interim), Compass Holdings, Inc. (Purchaser), Compass
Group PLC (Parent) and DAKA International, Inc. (DAKA
International), incorporated herein by reference to the Companys Registration
Statement on Form 10 filed June 3, 1997, as amended.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.2 |  | Reorganization Agreement dated as of May 27, 1997, by and among DAKA International, Daka,
Inc. (Daka), the Company, Parent and Compass Holdings, together with certain
exhibits thereto), incorporated herein by reference to the Companys
Registration Statement on Form 10 filed June 3, 1997, as amended.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.3 |  | Agreement and Plan of Merger among Champps Entertainment, Inc. (Champps), DAKA
and CEI Acquisition Corp., dated as of October 10, 1995, incorporated herein by reference
to DAKAs Registration Statement on Form S-4 (File No. 33-65425) (1996 DAKA
Form S-4).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.4 |  | Series D Convertible Preferred Stock and Warrant Purchase Agreement, dated as of January
12, 1996, by and among La Salsa Holding Co. and Casual Dining Ventures, Inc. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules to the Series D Convertible Preferred
Stock and Warrant Purchase Agreement are omitted. The Company hereby undertakes to furnish
supplementally a copy of any omitted Schedule to the Commission upon request. Incorporated
herein by reference to the Annual Report on Form 10-K of DAKA International for the year
ended June 29, 1996.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2.5 |  | Certificate  of  Ownership  and  Merger  between  Champps   Entertainment,   Inc.  and  Unique  Casual
         Restaurants, Inc., dated July 26, 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Amended and Restated Certificate of Incorporation of the Company, incorporated herein by
reference to the Companys Registration Statement on Form 10 filed June 3, 1997, as
amended.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Amended and Restated By-laws of the Company incorporated herein by reference to the
Companys Registration Statement on Form 10 filed June 3, 1997, as amended.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

42

---

|3.3 |  | Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of the
Company, dated January 30, 1998, incorporated herein by reference to the Companys
Current Report on Form 8-K filed February 2, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Specimen Stock Certificate for shares of the UCRI Common Stock, incorporated herein by
reference to the Companys Registration Statement on Form 10 filed June 3, 1997, as
amended.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Form of 5.5% Convertible Subordinated Note Due 2007, incorporated herein by reference to
the Companys Current Report on Form 8-K filed December 16, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Form of Warrant to Purchase Common Stock, incorporated herein by reference to the
Companys Current Report on Form 8-K filed December 16, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Registration  Rights  Agreement  dated as of December 12, 2002 by and between  Champps  Entertainment,
         Inc.,  U.S.  Bancorp Piper Jaffray,  Inc. and the Buyers as defined  therein,  incorporated  herein by
         reference to the Company's Current Report on Form 8-K filed December 16, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Tax Allocation Agreement dated as of May 27, 1997, by and among DAKA, the Company, and
Parent, incorporated herein by reference to the Companys Registration Statement on
Form 10 filed June 3, 1997, as amended.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Post-Closing Covenants Agreement, dated as of May 27, 1997, by and among DAKA, Daka, Inc.,
the Company, Champps, Fuddruckers, Inc., Purchaser and Parent, incorporated herein by
reference to the Companys Registration Statement on Form 10 filed June 3, 1997, as
amended.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Stock Purchase Agreement, dated as of May 26, 1997, between DAKA, Parent, Purchaser, First
Chicago Equity Corporation, Cross Creek Partners I and the other holders of Series A
Preferred Stock of DAKA, incorporated herein by reference to the Companys
Registration Statement on Form 10 filed June 3, 1997, as amended.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | 1997 Stock Option and Incentive Plan, incorporated herein by reference to the
Companys Registration Statement on Form 10 filed June 3, 1997, as amended.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | 1997 Stock Purchase Plan, incorporated herein by reference to the Companys
Registration Statement on Form 10 filed June 3, 1997, as amended.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Indemnification Agreement, by and between the Company and directors and officers of DAKA,
incorporated herein by reference to the Companys Registration Statement on Form 10
filed June 3, 1997, as amended.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | La Salsa Holding Co. Warrant to Purchase Shares of Series D Convertible Preferred Stock,
dated as of January 12, 1996, issued to Casual Dining Ventures, Inc. by La Salsa Holding
Co. Incorporated herein by reference to the Annual Report on Form 10-K of DAKA
International for the year ended June 29, 1996.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Stock Purchase Agreement, dated as of July 31, 1998, by and between King Cannon, Inc. and
Unique Casual Restaurants, Inc., incorporated herein by reference to the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the year ended June 27, 1999.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Loan Agreement, dated April 21, 2000, by and between Champps Operating Corporation and
Finova Capital Corporation, incorporated herein by reference to the Annual Report on Form
10-K of Champps Entertainment, Inc. for the year ended June 30, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

---

|10.10 |  | Securities Purchase Agreement dated as of December 12, 2002 by and between Champps
Entertainment, Inc. and the Buyers as defined therein, incorporated herein by reference to
the Companys Current Report on Form 8-K filed December 16, 2002.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | First Amendment to Multi-Site Agreement, dated January 8, 2003, by and between Champps
Entertainment Inc. and AEI Fund Management, Inc., incorporated herein by reference to the
Quarterly Report on Form 10-Q of Champps Entertainment, Inc. for the quarter ended
December 29, 2002.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Master Credit Facility Agreement, dated as of February 14, 2003, by and between Champps
Entertainment, Inc. and First National Bank of Colorado, incorporated herein by reference
to the Quarterly Report on Form 10-Q of Champps Entertainment, Inc. for the quarter ended
March 30, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Amended and Restated Employment Contract, dated as of May 22, 2003, by and between Champps
Entertainment, Inc. and William H. Baumhauer, incorporated herein by reference to the
Companys Current Report on Form 8-K dated May 28, 2003.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | 2003 Stock Option and Incentive Plan, incorporated herein by reference to the
Companys definitive proxy statement filed April 29, 2003.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Amended and Restated Agreement, dated as of May 22, 2003, by and between Champps
Entertainment, Inc. and Sysco incorporated herein by reference to the Annual Report on
Form 10-K of Champps Entertainment, Inc. for the year ended June 29, 2003.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Credit Agreement (Revolving Loan), by and between LaSalle Bank National Association as
Administrative Agent and as a Syndication Party and Champps Operating Corporation as
Borrower dated as of March 16, 2004 incorporated herein by reference to the Quarterly
Report on Form 10-Q of Champps Entertainment, Inc. for the quarter ended March 28, 2004.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21.1 |  | Subsidiaries of the Company.
|---- |  | ----------------------------

|23.1 |  | Consent of KPMG LLP.
|---- |  | --------------------

|31.1 |  | Certification by William H. Baumhauer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------

|31.2 |  | Certification by Frederick J. Dreibholz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------

|32.1 |  | Certification by William H. Baumhauer pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification by Frederick J. Dreibholz pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.1 |  | Champps  Entertainment,  Inc. Policy  Statements:  Code of Conduct and Ethics  incorporated  herein by
         reference to the Quarterly  Report on Form 10-Q of Champps  Entertainment,  Inc. for the quarter ended
         December 28, 2003.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44

---

# 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.

CHAMPPS ENTERTAINMENT,
INC.

(Registrant)

By: /s/ William H.
Baumhauer
William H. Baumhauer
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)

Date: September 3, 2004

By: /s/ Frederick J.
Dreibholz 
Frederick J. Dreibholz
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)

Date: September 3, 2004

Pursuant to the requirement 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 date indicated.

|Signature                                                                                                                                                                                                                                                                                                             | Title                                                                                         | Date                                                                                                                                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------
|/s/ William H. Baumhauer      
      /s/ Timothy Barakett         
      /s/ Stephen F. Edwards       
      /s/ James Goodwin            
      /s/ Ian Hamilton             
      /s/ Michael O'Donnell        
      /s/ Charles G. Phillips      
      /s/ Nathaniel Rothschild     
      /s/ Alan D. Schwartz | Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
Director | September 3, 2004
August 26, 2004
August 25, 2004
August 26, 2004
August 24, 2004
August 25, 2004
August 25, 2004
August 26, 2004
August 25, 2004

45

---

# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and ShareholdersChampps Entertainment, Inc.:

We have audited the accompanying
consolidated balance sheets of Champps Entertainment, Inc. (the Company) and
subsidiaries as of June 27, 2004 and June 29, 2003, and the related consolidated
statements of operations, changes in shareholders equity and comprehensive income,
and cash flows for each of the years in the three-year period ended June 27, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Champps Entertainment, Inc. and subsidiaries as of June 27, 2004 and
June 29, 2003, and the results of their operations and their cash flows for each of the
years in the three-year period ended June 27, 2004, in conformity with U.S. generally
accepted accounting principles.

# /s/ KPMG LLP

Denver, ColoradoAugust 18, 2004

F-1

---

CHAMPPS ENTERTAINMENT,
INC.CONSOLIDATED BALANCE SHEETSAs of June 27, 2004 and June 29, 2003 (In thousands, except
share data)

|                                                                        | June 27,2004 | June 29,2003
|----------------------------------------------------------------------- | ------------ | ------------
|ASSETS                                                                  |              |             
|Current assets:                                                         |              |             
|Cash and cash equivalents (Note 1)                                      |              |             
|Restricted cash (Note 1)                                                |              |             
|Accounts receivable (Note 1)                                            |              |             
|Inventories (Note 1)                                                    |              |             
|Prepaid expenses and other current assets (Notes 1 and 2)               |              |             
|Deferred tax assets (Notes 1 and 8)                                     |              |             
|                                                                        |              |             
|Total current assets                                                    |              |             
|Property and equipment, net (Notes 1 and 3)                             |              |             
|Goodwill (Note 1)                                                       |              |             
|Deferred tax assets (Notes 1 and 8)                                     |              |             
|Other assets, net (Notes 1 and 4)                                       |              |             
|                                                                        |              |             
|Total assets                                                            |              |             
|                                                                        |              |             
|LIABILITIES AND SHAREHOLDERS' EQUITY                                    |              |             
|Current liabilities:                                                    |              |             
|Accounts payable                                                        |              |             
|Accrued expenses (Notes 5 and 9)                                        |              |             
|Current portion of capital lease obligations                            |              |             
|Current portion of long-term debt (Note 7)                              |              |             
|                                                                        |              |             
|Total current liabilities                                               |              |             
|Capital lease obligations, net of current portion                       |              |             
|Long-term debt, net of current portion (Note 7)                         |              |             
|Other long-term liabilities (Notes 5 and 9)                             |              |             
|                                                                        |              |             
|Total liabilities                                                       |              |             
|                                                                        |              |             
|Commitments and contingencies (Note 9)                                  |              |             
|Shareholders' equity (Notes 1, 10 and 11):                              |              |             
|Preferred stock ($.01 par value per share; authorized 5,000,000 shares; |              |             
|none issued)                                                            |              |             
|Common stock ($.01 par value per share; authorized 30,000,000           |              |             
|shares; 13,285,253 and 13,235,638 shares issued at June 27, 2004        |              |             
|and June 29, 2003, respectively)                                        |              |             
|Additional paid-in capital                                              |              |             
|Accumulated deficit                                                     |              |             
|Accumulated other comprehensive income                                  |              |             
|Treasury stock, at cost (471,588 shares)                                |              |             
|                                                                        |              |             
|Total shareholders' equity                                              |              |             
|                                                                        |              |             
|Total liabilities and shareholders' equity                              |              |             
|                                                                        |              |             

See accompanying notes to
consolidated financial statements.

F-2

---

CHAMPPS ENTERTAINMENT,
INC. CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended June 27, 2004, June 29, 2003 and June 30,
2002(In thousands, except per share data)

|                                                   | Fiscal Year Ended
|-------------------------------------------------- | -----------------
|
|Revenue:                                           |                  
|Sales (Note 1)                                     |                  
|Franchising and royalty, net (Note 1)              |                  
|                                                   |                  
|Total revenue                                      |                  
|                                                   |                  
|Costs and expenses:                                |                  
|Cost of sales and operating expenses               |                  
|General and administrative expenses                |                  
|Depreciation and amortization                      |                  
|Other (income) expense, net                        |                  
|                                                   |                  
|Income from operations                             |                  
|Other (income) expense:                            |                  
|Interest expense and income, net                   |                  
|Expenses related to predecessor companies (Note 9) |                  
|Debt extinguishment costs (Note 7)                 |                  
|                                                   |                  
|Income from continuing operations                  |                  
|Loss from discontinued operations,                 |                  
|net of tax of $83 (Note 9)                         |                  
|                                                   |                  
|Income before income taxes                         |                  
|Income tax expense (benefit) (Note 8)              |                  
|                                                   |                  
|Net income                                         |                  
|                                                   |                  
|Basic income (loss) per share (Note 10):           |                  
|Income before discontinued operations              |                  
|Loss from discontinued operations                  |                  
|                                                   |                  
|Net income                                         |                  
|                                                   |                  
|Diluted income (loss) per share (Note 10):         |                  
|Income before discontinued operations              |                  
|Loss from discontinued operations                  |                  
|                                                   |                  
|Net income                                         |                  
|                                                   |                  
|Basic weighted average shares outstanding          |                  
|                                                   |                  
|Diluted weighted average shares outstanding        |                  
|                                                   |                  

See accompanying notes to
consolidated financial statements.

F-3

---

CHAMPPS ENTERTAINMENT,
INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY ANDCOMPREHENSIVE INCOMEFiscal
Years Ended June 27, 2004, June 29, 2003 and June 30, 2002(In thousands, except
share data)

|                               |  |  |  |            |  |   |     | 
|------------------------------ |  |  |  | ---------- |  | - | --- | 
|
|
|Balance as of July 1, 2004     |  |  |  | 12,017,647 |  | $ | 120 | 
|Net income                     |  |  |  | -          |  |   | -   | 
|Common shares issued           |  | 
|(Note 11)                      |  |  |  | 156,877    |  |   | 2   | 
|Income tax benefit of          |  | 
|stock options exercised        |  |  |  | -          |  |   | -   | 
|Non-cash stock                 |  | 
|compensation                   |  |  |  | -          |  |   | -   | 
|Interest on loan for exercise  |  | 
|of stock options (Note 13)     |  |  |  | -          |  |   | -   | 
|                               |  |  |  |            |  |   |     | 
|Balance as of  June 30, 2002   |  |  |  | 12,174,524 |  |   | 122 | 
|Net income                     |  |  |  | -          |  |   | -   | 
|Common shares issued           |  | 
|(Note 11)                      |  |  |  | 1,061,114  |  |   | 10  | 
|Income tax benefit of          |  | 
|stock options exercised        |  |  |  | -          |  |   | -   | 
|Fair value of common stock     |  | 
|warrants issued (Note 10       |  |  |  | -          |  |   | -   | 
|Repurchase of common shares    |  | 
|(Note 11)                      |  |  |  | -          |  |   | -   | 
|Interest on loan for exercise  |  | 
|of stock options (Note 13)     |  |  |  | -          |  |   | -   | 
|Repayment of loan for          |  | 
|exercise of stock options      |  | 
|(Note 13)                      |  |  |  | -          |  |   | -   | 
|                               |  |  |  |            |  |   |     | 
|Balance as of June 29, 2003    |  |  |  | 13,235,638 |  |   | 132 | 
|Net income                     |  |  |  | -          |  |   | -   | 
|Unrealized gains on equity     |  | 
|securities, net of tax         |  | 
|of $55                         |  |  |  | -          |  |   | -   | 
|                               |  |  |  |            |  |   |     | 
|Total comprehensive            |  | 
|income                         |  |  |  |            |  |   |     | 
|Common shares issued           |  |  |  | 49,615     |  |   | 1   | 
|Income tax benefit of          |  | 
|stock options exercised        |  |  |  | -          |  |   | -   | 
|Interest on loan for exercise  |  | 
|of stock options (Note 13)     |  |  |  | -          |  |   | -   | 
|Repayment of loan for exercise |  | 
|exercise of stock options      |  | 
|(Note 13)                      |  |  |  | -          |  |   | -   | 
|                               |  |  |  |            |  |   |     | 
|Balance as of June 27          |  |  |  | 13,285,253 |  | $ | 133 | 
|                               |  |  |  |            |  |   |     | 



See accompanying notes to
consolidated financial statements.

F-4

---

CHAMPPS ENTERTAINMENT,
INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended June 27, 2004, June 29, 2003 and June 30,
2002(In thousands)

|                                                              | June 27,
2004 | June 29,
2003 | June 30,
2002
|------------------------------------------------------------- | ------------- | ------------- | -------------
|Cash flows from operating activities:                         |               |               |              
|Net income                                                    |               |               | $            
|Adjustments to reconcile net income to net cash provided by   |               |              
|operating activities:                                         |               |              
|Depreciation and amortization Notes 1,3 and 4)                |               |               |              
|Amortization of notes payable discount                        |               |               |              
|Loss on disposal of assets                                    |               |               |              
|Non-cash compensation (Note 11)                               |               |               |              
|Income tax benefit of stock options exercised                 |               |               |              
|Interest on loan for exercise of stock options (Note 13)      |               |               |              
|Deferred income taxes (Note 8)                                |               |               |              
|Changes in assets and liabilities:                            |               |              
|Accounts receivable (Note 1)                                  |               |               |              
|Inventories (Note 1)                                          |               |               |              
|Prepaid expenses and other current assets (Notes 1 and 2)     |               |               |              
|Accounts payable                                              |               |               |              
|Accrued expenses (Note 5)                                     |               |               |              
|Other assets (Notes 1 and 4)                                  |               |               |              
|Other long-term liabilities (Note 5)                          |               |               |              
|                                                              |               |               |              
|Net cash provided by operating activities                     |               |               |              
|                                                              |               |               |              
|Cash flows from investing activities:                         |               |              
|Purchase of property and equipment                            |               |               |              
|Proceeds from disposal of assets                              |               |               |              
|Change in restricted cash                                     |               |               |              
|Repayment of loan for exercise of stock options               |               |               |              
|                                                              |               |               |              
|Net cash used in investing activities                         |               |               |              
|                                                              |               |               |              
|Cash flows from financing activities:                         |               |              
|Proceeds from issuance of common stock (Note 11)              |               |               |              
|Proceeds from issuance of convertible subordinated notes      |               |              
|and common stock warrants (Notes 7 and 10)                    |               |               |              
|Issuance costs for subordinated convertible notes and common  |               |              
|stock warrants (Notes 7 and 10)                               |               |               |              
|Repurchase of common stock (Note 11)                          |               |               |              
|Repayment of long-term debt and capitalized lease obligations |               |               |              
|Proceeds from long-term debt (Note 7)                         |               |               |              
|Proceeds from capital lease transactions                      |               |               |              
|Proceeds from tenant improvement allowances                   |               |               |              
|                                                              |               |               |              
|Net cash provided by (used in) financing activities           |               |               |              
|                                                              |               |               |              
|Net change in cash and cash equivalents                       |               |               |              
|Cash and cash equivalents, beginning of period                |               |               |              
|                                                              |               |               |              
|Cash and cash equivalents, end of period (Note 1)             |               |               | $            
|                                                              |               |               |              

CONTINUED

F-5

---

CHAMPPS ENTERTAINMENT,
INC. CONSOLIDATED STATEMENTS OF CASH FLOWS  CONTINUED Fiscal Years Ended June 27, 2004, June 29,
2003 and June 30, 2002(In thousands)

|                                                   | June 27,2004 | June 29,2003 | June 30,2002
|-------------------------------------------------- | ------------ | ------------ | ------------
|Supplemental disclosures of cash flow information: |              |              |             
|Cash paid during the period for:                   |              |             
|Interest, net of amount capitalized                |              |              | $           
|Income taxes, net of refunds                       |              |              |             
|Supplemental disclosures of non-cash               |              |             
|investing and financing activities:                |              |             
|Tenant improvement allowances not yet received     |              |              |             

See accompanying notes to
consolidated financial statements.

F-6

---

CHAMPPS ENTERTAINMENT,
INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFiscal Years Ended
June 27, 2004, June 29, 2003 and June 30, 2002

# 1. Summary of
Significant Accounting Policies

Background

Champps Entertainment, Inc. (the
Company), is a Delaware corporation formed on May 27, 1997 in connection with
the spin-off of DAKA International, Inc. ("DAKA
International"). At June 27, 2004, the Company operated one business segment. The
Companys principal business activity is to own, operate and franchise Champps casual
dining restaurants that serve customers in upscale restaurant settings in 22 states
throughout the United States with larger concentrations of restaurants in the upper
Midwest, mid-Atlantic and Texas.

Basis of Presentation

The accompanying consolidated
financial statements include the accounts of the Champps Entertainment, Inc. and its
consolidated subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation. Certain accounts have been reclassified in prior years
consolidated financial statements to be consistent with the June 27, 2004 presentation.

Fiscal Year

The Companys fiscal year ends
on the Sunday closest to June 30th. For purposes of these consolidated financial
statements, the fiscal years ended June 27, 2004, June 29, 2003 and June 30, 2002, are
referred to as fiscal 2004, 2003, and 2002, respectively. Fiscal 2004, 2003 and 2002 each
consisted of 52 weeks. The Companys upcoming fiscal 2005 will consist of 53 weeks.

Significant Estimates

In the process of preparing its
consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America, the Company estimates the carrying value of
certain assets and liabilities that are subjective in nature. The primary estimates
included in the Companys consolidated financial statements include the useful lives
and recoverability of property and equipment, the recoverability of goodwill, the
valuation allowance for deferred tax assets, accruals for the self insured risk relating
to workers compensation and general liability, accruals for loss contingencies and
accruals relating to representations and warranties provided in connection with the spin-off
of DAKA International, Inc. in 1997 and the Fuddruckers sale in 1998. Actual results could differ from
those estimates.

Cash and Cash Equivalents
and Restricted Cash

Cash and cash equivalents consist of
cash and highly liquid investments with maturities of three months or less at the date of
purchase. Cash and cash equivalents are carried at cost, which approximates fair value due
to their short-term maturities. The Company placed certificates of deposit to serve as
cash collateral for stand-by letters of credit in the amount of $101,000 and $741,000 at
June 27, 2004 and June 29, 2003, respectively. Such collateral commitments expire within
the twelve-month period after the balance sheet dates presented and accordingly, have been
classified as current assets in the accompanying consolidated balance sheets.

F-7

---

Accounts Receivable

Accounts receivable
consist largely
of credit card receivables representing three to four days credit card sales that
have not, at the balance sheet date, been processed by the credit card processor and
remitted to the Company. Accounts receivable also includes amounts due from the
Companys franchisees for the payment of franchise royalty fees that are paid monthly
in arrears and other receivables that may arise in the ordinary course of business. The
Companys allowance for uncollectible accounts receivable and related bad debt
expense are not significant.

Concentration of Credit
Risk

Financial instruments that
potentially subject the Company to a concentration of credit risk are cash and cash
equivalents, restricted cash and accounts receivable. The Company maintains its day-to-day
operating cash, temporary excess cash and restricted cash balances with two major
financial institutions that, in turn, invest in investment-grade commercial paper and
other corporate obligations, certificates of deposit, government obligations and other
investments and marketable securities. At most times, cash balances are in excess of
Federal Deposit Insurance Corporation (FDIC) insurance limits. The Company considers the
concentration of credit risk for accounts receivable to be minimal as a result of the
short-term nature of credit card receivables, the credit worthiness of the credit card
processor and payment histories of the Companys franchisees.

Inventories

Inventories are stated at the lower
of cost, principally determined using the first-in, first-out method, or market value.
Inventories include the initial cost of smallwares. Subsequent purchases of smallwares are
charged to expense when purchased. Approximately 80% of the Companys food products
and supplies are purchased under a distribution contract with Sysco Corporation.
Management believes that it could obtain its food products and supplies from alternative
sources under terms that are similar to those received currently.

The components of inventories were as
follows (in 000s):

|                         | June 27,
2004 | June 29,
2003
|------------------------ | ------------- | -------------
|Food and liquor products |               |              
|Smallwares               |               |              
|Supplies                 |               |              
|                         |               |              
|Total inventory          |               |              
|                         |               |              

Prepaid Expenses and
Other Current Assets

The Company has cash outlays in
advance of expense recognition for items such as rent, insurance, interest, financing
fees, income taxes and service contracts. All amounts identified as prepaid expenses and
other current assets will be utilized during the twelve-month period after the balance
sheet dates presented and accordingly, have been classified as current assets in the
accompanying consolidated balance sheets.

Capitalized Construction
Costs

The Company capitalizes as part of
its new restaurant construction certain directly related pre-construction development and
site acquisition costs primarily consisting of broker and site investigation costs.
Additionally, direct external construction management oversight and insurance builders
risk costs are capitalized as part of the projects.

F-8

---

The Company also capitalizes interest
as part of its new restaurant construction. Interest capitalized is based upon the
weighted-average of accumulated expenditures. The interest capitalization period commences
when expenditures are made to prepare an asset for its intended use and interest costs are
incurred. The interest capitalization period ends when the restaurant opens or when the
asset is substantially complete and ready for service. The Company utilizes an interest
rate based upon the weighted average of the rates applicable to other borrowings of the
enterprise during the assets construction period, unless the interest expense is
directly related to the construction project. If interest expenses are not incurred during
the construction periods, no interest capitalization is recorded.

The Company accumulates its costs in
its construction-in-progress account until the restaurant opens. At that time, the costs
accumulated to date are reclassified to property, plant and equipment and are depreciated
over their useful lives.

Renovations, Improvements
and Repairs and Maintenance

As is typical in the restaurant
industry, the Company renovates, remodels or improves its restaurants (all or a portion
depending on need), replaces aged equipment and periodically upgrades equipment to more
current technology. Each of these expenditures provides a future economic benefit and is
capitalized accordingly. While the Company believes its useful lives used for depreciation
purposes are representative of the assets actual useful lives, the Company has an
asset retirement policy and any assets that are replaced are retired. In fiscal years
2004, 2003 and 2002, the Company capitalized $2.2 million, $2.4 million and $2.8 million,
respectively, related to renovations, remodels and improvements to existing restaurants.
The Company currently has a capitalization threshold of $1,500 and any costs for singular
items below this threshold are expensed.

The Company routinely has repairs and
maintenance to its facilities and equipment. In fiscal years 2004, 2003 and 2002, the
Company recorded repair and maintenance expense of $3.7 million, $3.4 million and $2.8
million, respectively. These repairs and maintenance costs generally relate to repairs to
existing equipment, fixtures or facilities (e.g. electrical, plumbing, refrigeration, air
conditioning, heating, painting, tile work, roof repairs and wood repairs).

Property and Equipment

Property and equipment are stated at
cost. Property and equipment under capital leases are stated at the present value of
minimum lease payments. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements and assets
capitalized pursuant to capital lease obligations are amortized over the shorter of the
initial lease term, contract term or the assets estimated useful life. Useful lives
range from 15 to 35 years for buildings and leasehold improvements, 5 to 7 years for
restaurant equipment, 3 years for software and 5 years for computers and audio-visual equipment.

Other Assets

Other assets predominantly consist of
long-term lease, utility and other deposits, deferred financing fees and liquor licenses.
Deferred financing fees are amortized to interest expense over the life of the related
loan. Liquor licenses are amortized using the straight-line method over the term of the
related restaurant lease.

F-9

---

Impairment or Disposal of
Long-Lived Assets and Goodwill

The Company evaluates the carrying
value of long-lived assets including property, equipment and related identifiable
intangible assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Under SFAS No. 144, an assessment is made to
determine if the sum of the expected future undiscounted cash flows from the use of the
assets and eventual disposition is less than the carrying value. If the sum of the
expected undiscounted cash flows is less than the carrying value, an impairment loss is
recognized based on fair value. The Company evaluates each individual restaurant for
impairment. Each restaurant has cash flows that are largely independent and its assets and
liabilities are largely independent from other assets and liabilities. In addition, the
Company evaluates each individual restaurant for impairment after it has been open six
full quarters as the initial two quarters of operations are generally characterized by
operating inefficiencies associated with start-up operations. Impairment testing is
completed whenever events or changes in circumstances indicate that the assets
carrying amount may not be recoverable. The Company considers four consecutive quarters of
negative cash flow or losses to be a potential for an individual restaurant to be impaired
and utilizes a present value technique in determining fair value. The present value
technique used utilizes a single set of estimated cash flows and a single interest rate
that is commensurate with the risk of the operation.

The Company evaluates impairment of
goodwill and other unidentifiable intangible assets in accordance with SFAS No. 142
Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142,
the Company is required to assess impairment at least annually by means of a fair
value-based test. The determination of fair value requires the Company to make certain
assumptions and estimates related to the two restaurants for which its goodwill relates
and is highly subjective.

Loss Contingencies and
Self-Insurance Reserves

The Company maintains accrued
liabilities and reserves relating to the resolution of certain contingent obligations and
reserves for self-insurance. Significant contingencies include those related to litigation
and state tax assessments. Contingent obligations are accounted for in accordance with
SFAS No. 5, Accounting for
Contingencies, which requires that the Company assess each contingency to determine
estimates of the degree of probability and range of possible settlement. Those
contingencies that are deemed to be probable and where the amount of such settlement is
reasonably estimable are accrued in the Companys financial statements. If only a
range of loss can be determined, the best estimate within that range is accrued; if none
of the estimates within that range is better than another, the low end of the range is
accrued. Reserves for self-insurance are determined based on the insurance companies
incurred loss estimates, industry development factors and managements judgment.

The assessment of contingencies is a
highly subjective process that requires judgments about future events. Contingencies are
reviewed at least quarterly to determine the adequacy of the accruals and related
financial statement disclosure. The ultimate settlement of contingencies may differ
materially from amounts accrued in the financial statements.

Leases

The Company leases most of its
properties including its corporate office. Leases are accounted for under the provisions
of SFAS No. 13 Accounting for Leases and subsequent amendments which requires
that leases be evaluated and classified as operating leases or capital leases for
financial reporting purposes.

The Company periodically enters into
sale/leaseback transactions with unrelated third parties in connection with the
construction of new restaurants. Such transactions qualify as sales under SFAS No. 66,
Sales of Real Estate because they include a normal leaseback, adequate initial
and continuing investment by the buyer/lessor and the transfer of all risks and rewards of
ownership to the buyer/lessor. The Company has not incurred gains or losses in connection
with its sale/leaseback transactions.

F-10

---

Deferred Rent Liabilities

For leases that contain rent
escalations, the Company records the total rent payable during the lease term on a
straight-line basis over the term of the lease and records the difference between the rent
paid and the straight-line rent as a deferred rent liability. In addition, lease incentive
payments (tenant improvement allowances) received from landlords are recorded
as deferred rent liabilities and are amortized on a straight-line basis over the lease
term as a reduction of rent expense.

Revenue Recognition

Revenue from restaurant sales is
recognized when food and beverage products are sold. Revenues from our gift cards are
recognized upon redemption. Until redemption of the gift cards, outstanding balances on
such cards are included in other accrued expenses on our accompanying
consolidated balance sheets.

Franchising and Royalty
Income

Royalty revenues from franchised
restaurants are recognized as revenues when earned in accordance with the respective
franchise agreement. The Company recognized royalty revenues of $579,000, $616,000 and
$648,000 during 2004, 2003 and 2002, respectively.

Franchise fees for new franchises are
recognized as revenue when substantially all commitments and obligations have been
fulfilled, which is generally upon commencement of operations by the franchisee. No
franchise fees for new franchises were recognized in fiscal 2004, 2003 or 2002.

Advertising Costs

Advertising costs are expensed as
incurred. Advertising expenses were $4.7 million, $4.1 million and $3.5 million in fiscal
2004, 2003 and 2002, respectively.

Pre-opening Expense

Pre-opening costs are expensed as
incurred and include the direct and incremental costs incurred in connection with the
commencement of each restaurants operations. Pre-opening costs are principally
comprised of training-related costs. Pre-opening expenses were $1.9 million, $3.1 million
and $2.6 million in fiscal 2004, 2003 and 2002, respectively.

Income Taxes

Income taxes are accounted for under
the asset and liability method. The Company recognizes deferred tax assets and liabilities
for the future tax consequences attributable to differences between the carrying value for
financial reporting purposes and the tax basis of assets and liabilities. Deferred tax
assets and liabilities are recorded using the enacted tax rates expected to apply to
taxable income in the years in which such differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities resulting from a change in tax
rates is recognized as a component of income tax expense (benefit) in the period that such
change occurs. Net operating loss and other credit carryforwards, including FICA tip tax
credits and targeted jobs tax credits, are recorded as deferred tax assets. A valuation
allowance is recorded for the tax benefit of the deferred tax assets not expected to be
utilized.

F-11

---

Accounting for
Stock-Based Compensation

The Company maintains stock option
plans under which the Company may grant incentive stock options and non-qualified stock
options to associates, consultants and non-employee directors. Stock options have been
granted with exercise prices at or above the fair market value on the date of grant.
Options vest and expire according to the terms established at the grant date.

SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require, companies to record compensation cost for stock-based
employee compensation plans based on the fair market value of options granted. The Company
has chosen to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, because the grant price is equal to or is above the market price on the date of
grant for options issued by the Company, no compensation expense is generally recognized
for stock options initially issued to employees.

On December 31, 2002, The Financial
Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for
Stock Based Compensation  Transition and Disclosure, which amends SFAS No.
123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of
stock-based compensation. The Company intends to continue to account for its stock-based
compensation according to the provisions of APB Opinion No. 25 until more definitive
pronouncements are issued requiring companies to record compensation costs upon the
issuance of options.

Had compensation cost for the
Companys stock options been recognized based upon the estimated fair value on the
grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS
No. 148, the Companys net earnings and earnings per share would have been as
follows (in 000's except earnings per share data):

|                                           | June 27,2004 | June 29,2003 | June 30,2002
|------------------------------------------ | ------------ | ------------ | ------------
|Net earnings, as reported                  |              |              | $           
|Add: Stock-based employee compensation     |              |             
|expense included in net income, net of     |              |             
|related tax effects                        |              |              |             
|Deduct: Total stock-based employee         |              |             
|compensation expense determined under fair |              |             
|value based method for all awards, net of  |              |             
|related tax effects                        |              |              |             
|                                           |              |              |             
|Pro forma net income                       |              |              | $           
|                                           |              |              |             
|Earnings per share:                        |              |             
|Basic - as reported                        |              |              | $           
|Basic - pro forma                          |              |              |             
|Diluted - as reported                      |              |              | $           
|Diluted - pro forma                        |              |              |             

The fair value of each stock option
granted in 2004, 2003 and 2002 under the Companys stock option plans was estimated
on the date of grant using the Black-Scholes option-pricing model.

F-12

---

The following key
assumptions were used to value grants issued for each year:

| | Weighted AverageRisk Free Rate | Average ExpectedLife | Volatility | Dividend Yield
| | ------------------------------ | -------------------- | ---------- | --------------
| | 2002                           |                      |            | 3.25          
| | 2003                           |                      |            | 1.40          
| | 2004                           |                      |            | 2.06          

Comprehensive Income

Comprehensive income consists of two
components, net income and other comprehensive income. Other comprehensive income refers
to revenue, expenses, gains and losses that under generally accepted accounting principles
are recorded as an element of shareholders equity but are excluded from net income.
The Companys other comprehensive income in 2004 was comprised of unrealized
investment gains on available for sale securities.

# 2. Prepaid Expenses and
Other Current Assets

The components of prepaid expenses
and other current assets were as follows (in 000s):

|                                                   | June 27,2004 | June 29,2003
|-------------------------------------------------- | ------------ | ------------
|Prepaid rents, real estate taxes and related costs |              |             
|Prepaid insurance                                  |              |             
|Prepaid licenses and permits                       |              |             
|Prepaid contracts and other                        |              |             
|Build-to-suit construction costs                   |              |             
|                                                   |              |             
|                                                   |              |             
|                                                   |              |             

The build-to-suit construction costs
relate to construction projects where the Company is considered the owner. One such
project was under development at June 29, 2003 while no such projects were under
development at June 27, 2004.

# 3. Property and Equipment

Property and equipment consisted of
the following (in 000s):

|                                          | June 27,2004 | June 29,2003
|----------------------------------------- | ------------ | ------------
|Land                                      |              |             
|Buildings & leasehold improvements        |              |             
|Software                                  |              |             
|Equipment                                 |              |             
|Equipment under capital lease             |              |             
|Construction in progress                  |              |             
|                                          |              |             
|                                          |              |             
|Accumulated depreciation and amortization |              |             
|                                          |              |             
|Total property and equipment              |              |             
|                                          |              |             
|                                          |              |             

F-13

---

In fiscal 2004, the Company acquired
certain equipment under capital lease. Accumulated depreciation for equipment under
capital lease totaled $1,921,000 at June 29, 2003.

General and administrative expense on
the consolidated statement of operations included $379,000, $377,000 and $366,000 of
depreciation and amortization expense for the years ended June 27, 2004, June 29, 2003 and
June 30, 2002.

All personal property and real
property of the Company are secured by a blanket lien under the Companys $25.0 million
senior secured credit facility.

# 4. Other Assets, Net

The components of other assets were
as follows (in 000s):

|                              | June 27,2004 | June 29,2003
|----------------------------- | ------------ | ------------
|Deferred financing costs      |              |             
|Liquor licenses               |              |             
|Available for sale securities |              |             
|Long-term deposits            |              |             
|Other                         |              |             
|                              |              |             
|                              |              |             
|                              |              |             

The available for sale securities are
common stock investments held by the Company which are reported at fair value, with
unrealized gains, net of tax, reported as a separate component of shareholders
equity. The Company has a zero cost basis in these securities. The securities were sold in
July 2004 for $294,000.

Accumulated amortization for other
assets, net totaled $990,000 and $426,000 at June 27, 2004 and June 29, 2003,
respectively.

# 5. Accrued Expenses and
Other Long-Term Liabilities

The components of accrued expenses
were as follows (in 000s):

|                                                           | June 27,
2004 | June 29,
2003
|---------------------------------------------------------- | ------------- | -------------
|Salaries, wages and related taxes                          |               |              
|Accrued taxes, predominantly sales and estimated property  |               |              
|Build-to-suit construction liability                       |               |              
|Accrued insurance                                          |               |              
|Predecessor obligations (sales taxes, legal and insurance) |               |              
|Other                                                      |               |              
|                                                           |               |              
|                                                           |               |              
|                                                           |               |              

F-14

---

The components of other long-term
liabilities were as follows (in 000s):

|                                                           | June 27,2004 | June 29,2003
|---------------------------------------------------------- | ------------ | ------------
|Tenant improvement allowances                              |              |             
|Deferred rents                                             |              |             
|Predecessor obligations (sales taxes, legal and insurance) |              |             
|Other                                                      |              |             
|                                                           |              |             
|                                                           |              |             
|                                                           |              |             

Tenant improvement allowances are reimbursements
received from certain landlords for initial construction costs and are amortized on a
straight-line basis over the lease term as a reduction in rent. The tenant improvement
allowances are recorded when the Company has completed its obligations and the tenant
improvement allowance is receivable. Tenant improvement allowances of $4.1 million were
received for new restaurants during the current fiscal year.

Deferred rents represent the
cumulative difference between actual rent paid and rent expensed on a straight-line basis.

# 6. Leases

The Company has entered into lease
agreements for certain restaurant facilities and office space. The fixed terms of the
leases range up to 20 years and, in general, contain multiple renewal options for various
periods ranging from 5 to 20 years. Nearly all of the leases contain escalation clauses.
Certain leases contain provisions that require additional payments based on sales
performance (contingent rentals) and the payment of common area maintenance
charges and real estate taxes. Contingent rentals are accrued monthly as the liabilities
are incurred utilizing pro-rated monthly sales targets.

The Company has a commitment for the
development and sale/leaseback of up to seven restaurants from AEI Fund Management, Inc.
(AEI) that provides a maximum $24.5 million financing commitment through an
agreement executed January 8, 2003. Under the agreement, AEI purchases the land and funds
a substantial portion of the construction costs of new restaurants selected by the Company
for participation under the agreement. The Company serves as the developer of the site and
is responsible for completing the project on time and within budget. Once the project is
completed per the terms of the development agreement, the Company enters into a lease with
AEI for the property. The Company, as seller-lessee, has no continuing involvement in the
property other than that of lessee. For accounting purposes, the Company is considered the
owner of the property during the construction period due to the Companys obligation
to develop the property and AEIs option to sell the funded assets to the Company in
the event of a default under the development agreement.

As of June 27, 2004 and June 29,
2003, the Company had none and $2.7 million, respectively, of construction costs that had
been funded by AEI. Since the projects were not complete as of those dates and the Company
had additional obligations relative to the development agreements, the Company is
considered the owner of the projects during the construction period. These amounts are
classified as prepaid expenses and other current assets and accrued expenses on the
consolidated balance sheets.

F-15

---

Future minimum lease payments pursuant to leases with
non-cancelable lease terms excluding option periods in excess of one year at June 27, 2004
were as follows (in 000s):

|Fiscal Years Ending                 | Operating Leases
|----------------------------------- | ----------------
|2005                                |                 
|2006                                |                 
|2007                                |                 
|2008                                |                 
|2009                                |                 
|Thereafter                          |                 
|                                    |                 
|Total future minimum lease payments |                 
|                                    |                 

Total rent expense in 2004, 2003 and
2002 approximated $13,497,000, $11,800,000 and $10,160,000, respectively. Contingent
rentals in rent expense for 2004, 2003 and 2002 approximated $362,000, $382,000 and
$526,000, respectively.

# 7. Long-term Debt

Long-term debt consisted of the
following (in 000s):

|Lender                         | Interest rate | Face amount | June 27, 2004                      | June 29, 2003 | Nature of debt | Nature of collateral | Maturity
|------------------------------ | ------------- | ----------- | ---------------------------------- | ------------- | -------------- | -------------------- | --------
|Convertible Subordinated Notes |               |             | 5.50%                              |               |                |                      | $15,000 
|LaSalle Bank N.A.              |               |             | Prime - Prime +.50% or LIBOR +2-3% |               |                |                      | 25,000  
|GE Capital                     |               |             | CP + 3.75%                         |               |                |                      | 3,022   
|GE Capital                     |               |             | CP + 3.75%                         |               |                |                      | 1,978   
|GE Capital                     |               |             | CP + 3.75%                         |               |                |                      | 5,000   
|FINOVA                         |               |             | 10.36%                             |               |                |                      | 4,750   
|FINOVA                         |               |             | 10.36%                             |               |                |                      | 4,750   
|Former Employee                |               |             | 10.00%                             |               |                |                      | 500     
|                               |               |             |                                    |               |                |                      |         
|                               |               |             |                                    |               |                |                      |         
|                               |               |             |                                    |               |                |                      |         
|Less current portion           |               |             |                                    |               |                |                      |         
|                               |               |             |                                    |               |                |                      |         
|Debt, net of current portion   |               |             |                                    |               |                |                      |         
|                               |               |             |                                    |               |                |                      |         

On December 16, 2002, the Company
issued, through a private placement, $15,000,000 of 5.5% Convertible Subordinated Notes
due 2007 (the Notes) and related warrants (the Warrants) to
purchase shares of the Companys Common Stock (the Common Stock) (see
Note 10). The securities were sold to accredited investors in reliance on Regulation D
under the Securities Act of 1933, as amended. The Notes were recorded at their estimated
fair market value of $13,995,000 based upon a $1,005,000 valuation attributable to the
Warrants. The Notes discount of $1,005,000 is being accreted to interest expense
over the term of the Notes. Origination issuance costs of $1,395,000 were incurred with
the issuance of the Notes, are classified as an other asset on the accompanying
consolidated balance sheet and are being amortized as interest expense over the term of
the Notes. The Notes mature on December 15, 2007. Interest is payable semi-annually in
arrears on June 1 and December 1, beginning on June 1, 2003.

F-16

---

The Notes are convertible at the
option of the holder at any time prior to maturity into shares of Common Stock, at a
conversion price of $10.66 per share, subject to adjustment upon certain events. At any
time on or after December 15, 2005, the Company may redeem some or all of the Notes at par
plus accrued and unpaid interest. All of the Notes will be automatically converted, at the
Companys option, into shares of common stock at the then effective conversion price
if the closing price of the common stock exceeds 150% of the then effective conversion
price for any 15 out of 20 consecutive trading days at any time within three years after
the first issuance date of the Notes. If the automatic conversion date occurs prior to
December 15, 2004, the Company will make an additional cash payment with respect to the
Notes in an amount equal to $110.00 per $1,000 principal amount of the Notes converted
(representing 24 months of interest), less the amount of interest actually paid on the
Notes prior to the automatic conversion date.

Upon certain change in control events or if
the Common Stock is no longer traded on a national exchange or an established automated
over-the-counter trading market in the United States, a Noteholder may require the Company
to repurchase such holders Notes in cash at 110% of the principal amount of the
Notes, plus accrued but unpaid interest, if any.

The Notes are subordinated in right
of payment to existing and future senior indebtedness and other liabilities of the Company
and its subsidiaries. The Company and its subsidiaries are not prohibited from incurring
senior indebtedness or other debt under the Agreement governing the Notes.

In March 2004,
the Company finalized a three-year $25,000,000 senior secured credit facility with a new
lender, LaSalle Bank. The facility may be used to refinance certain existing debt, support
growth and general working capital needs and provide up to $5,000,000 for the issuance of
letters of credit. The facility is secured by a blanket lien on all personal assets and
real property of the Company. Borrowings under the facility bear interest depending on a
total funded debt to EBITDA ratio and may range from prime to prime plus 50 basis points
or, if elected, LIBOR plus 200 to 300 basis points. An up-front fee of $188,000 was paid
and we are required to pay an annual unused commitment fee of between 37.5 basis points to 50 basis points.
Outstanding borrowings under the facility may be converted to a five-year term loan if the
ratio of senior debt to EBITDA exceeds specified levels. The facility requires the Company
to maintain a minimum fixed charge coverage ratio and tangible net worth level and not
exceed thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios.
The facility limits the opening of new restaurants to a maximum of twenty-four over a
three-year period and also limits the amount of dividends and/or stock repurchases. As of
June 27, 2004, the Company had $2,500,000 of outstanding borrowings and $1,330,000 of
letters of credit placed under this facility with $19,412,000 available for additional
borrowings. The weighted-average annual interest rate on credit line borrowings at June
27, 2004 was 3.7%.

In February 2003, the Company
finalized a commitment for bank financing with First National Bank of Colorado under which
it could borrow up to $8,000,000. The commitment had two parts: $2,000,000 available to
provide short-term working capital and to support the issuance of letters of credit; the
remaining $6,000,000 available to provide interim financing associated with construction
of new restaurant locations. The Company cancelled the $6,000,000 interim construction
financing facility in April 2004 as a result of the placement of a new facility with a new
lender. The working capital facility expires in January 2005 at which time all outstanding
borrowings are due. Outstanding borrowings bear interest at the Wall Street Journal prime
rate and require monthly interest payments. There was an initial commitment fee of
$42,500. The Company is required to maintain a funded debt to EBITDA (earnings before
interest, tax, depreciation and amortization) ratio of not more than 2 to 1 and a debt to
tangible net worth ratio not to exceed 1.25 to 1. Also, the Company is limited to
$5,000,000 of annual replacement capital expenditures and the $2,000,000 working capital
line must be repaid for 10 consecutive days each quarter. As of June 27, 2004, no amounts
were drawn and $1.8 million of letters of credit were placed under this commitment.

The GE Capital loans require that the
Company maintain a maximum debt to net worth ratio, a minimum debt coverage ratio, a
minimum ratio of earnings before interest, taxes, depreciation and amortization compared
to debt and a maximum funded indebtedness ratio.

F-17

---

In September 2002, the Company
executed a proposal for an additional $5,000,000 term loan collateralized with equipment
with GE Capital. The Company received $500,000 of proceeds in fiscal 2003 and received
the remaining $4,500,000 from the loan in August 2003. These loans were repaid in late
fiscal 2004.

At June 27, 2004, the Company was in
compliance with all debt covenants and required financial ratios under its debt
agreements.

In fiscal 2004 and 2003, the Company
repaid certain debt with existing balances totaling $15,200,000 and $5,200,000 respectively,
before scheduled maturity. Related prepayment costs and unamortized debt issuances costs
totaling $587,000 and $290,000, respectively, were recorded as debt extinguishment costs
in the accompanying consolidated statement of operations.

The Company incurred interest expense
of $2,480,000, $2,372,000 and $2,039,000 in fiscal years 2004, 2003 and 2002,
respectively. Of these amounts, $142,000, $310,000 and $271,000 were capitalized in each
respective year. Interest income totaled $237,000, $236,000 and $155,000 in 2004, 2003 and
2002, respectively.

Principal amounts of long-term debt
outstanding as of June 27, 2004 due during each of the four succeeding fiscal years were
$942,000 in 2005, $620,000 in 2006, $2,696,000 in 2007 and $14,305,000 in 2008.

# 8. Income Taxes

Deferred tax assets and (liabilities)
were comprised of the following (in 000s):

|                                 | June 27,2004 | June 29,2003
|-------------------------------- | ------------ | ------------
|Deferred tax assets:             |              |             
|Net operating loss carryforwards |              |             
|Deferred rent                    |              |             
|FICA tip tax credits             |              |             
|Accrued expenses                 |              |             
|Capital leases                   |              |             
|Other                            |              |             
|                                 |              |             
|Total deferred tax assets        |              |             
|                                 |              |             
|Deferred tax liabilities:        |              |             
|Property and equipment           |              |             
|Goodwill                         |              |             
|Other                            |              |             
|                                 |              |             
|Total deferred tax liabilities   |              |             
|                                 |              |             
|Net deferred tax assets          |              |             
|                                 |              |             
|Current portion                  |              |             
|Long-term                        |              |             

F-18

---

The following is a reconciliation of
income taxes at the federal statutory rate to the Companys income tax expense
(benefit) (in 000s):

|                                                   | Fiscal Year Ended
|-------------------------------------------------- | -----------------
|
|Income tax provision computed at statutory federal |                  
|income tax rates                                   |                  
|FICA tip tax credit                                |                  
|Non- deductible costs                              |                  
|Decrease in the valuation allowance                |                  
|State income tax provision, net of federal benefit |                  
|Expired net operating loss carryforward            |                  
|Other, net                                         |                  
|                                                   |                  
|Income tax expense (benefit)                       |                  
|                                                   |                  

Total income tax expense includes
current income tax expense of $523,000, $2,762,000 and $768,000 and deferred income tax
expense (benefit) of $702,000, ($15,963,000) and ($559,000) in 2004, 2003 and 2002,
respectively. As of June 27, 2004, the Company had federal net operating loss
carryforwards of approximately $50.9 million expiring at various dates through 2020. The
Companys FICA tip tax credits totaling $5.6 million may be used to offset federal
income taxes and expire at various dates through 2024. During fiscal 2003, the Company
determined that it was more likely than not that it would realize the tax benefits of its
deferred tax assets based on projections of future taxable income and the reversal of
deferred tax liabilities. As a result, the valuation allowance on deferred tax assets
decreased $15,195,000 in fiscal 2003. The valuation allowance on deferred tax assets
decreased $1,763,000 in fiscal 2002.

Average annual taxable income of
approximately $3.0 million would need to be generated over the future carryforward years
for full realization of the deferred tax asset related to the net operating loss
carryforwards. Estimated taxable income for the fiscal year ended June 27, 2004 was $6.0
million.

# 9. Commitments and
Contingencies

Fuddruckers
Representations and Indemnity

The agreement whereby Fuddruckers was
sold contains various representations and warranties by the Company, certain of these
representations and warranties survived the closing which expired on December 31, 2000. The
remaining representations and warranties will continue in effect as stated in the
Agreement.

The maximum aggregate liability of
the Company on account of any breach of any representation or warranty is limited to the
amount of the final purchase price. There is no limit on the liability of the Company to
the purchaser on account of any breach by the Company of any of its covenants or
agreements under the agreement or on account of indemnification obligations covering
matters other than breaches of representations and warranties, provided that, if the
purchaser is entitled to recover any losses in excess of the final purchase price, the
Company may either (i) require the purchaser to reconvey to the Company full ownership and
control of the shares and all assets (to the extent then owned by the purchaser or
Fuddruckers) that were transferred pursuant to the agreement in such a manner as to
rescind the transactions contemplated by the agreement based upon a formula price. During
2004, no claims for indemnification were presented by the purchaser and the Company
believes the risk for significant claims for indemnification being presented in the future
by the purchaser is remote.

F-19

---

Spin-Off Indemnifications

The Company agreed to assume certain
liabilities in connection with the spin-off of DAKA International and its subsidiaries to
Compass. In addition, the Company entered into a post-closing covenants agreement that
provided for post-closing payments by the Company to Compass under certain circumstances.
The Company also agreed to indemnify Compass for certain losses on liabilities existing
prior to the effective date of the spin-off but unidentified at such date. This
indemnification began to expire on December 31, 1999. The Company believes the risk of a
significant claim for indemnification being presented by Compass is remote.

Accrued Insurance Costs

The Company is self-insured for
certain losses related to workers compensation claims, general liability and
medical/dental claims. The Company has purchased stop-loss coverage in order to limit its
exposure to significant levels of such claims. Self-insured reserves are accrued based
upon the Companys estimates of the aggregate liability for uninsured claims incurred
using certain assumptions that are based upon historical experience. Actual amounts
required to settle those obligations may exceed those estimates.

Through June 29, 1997, the Company
was self-insured for workers compensation, general liability, and various other
risks up to specified limits. The Companys share of prior workers compensation
and general liability programs of DAKA International through June 29, 1997 were allocated
using labor costs and the aggregate costs of such programs were determined through
actuarial studies which determined the estimated amount required to be provided for
incurred incidents. In connection with the spin-off of DAKA, the Company is
obligated to indemnify Compass for all claims arising subsequent to the effective date of
the spin-off including claims related to associates of DAKA International not continuing
with the Company after the spin-off, that relate to events occurring prior to the
effective date of the spin-off. The Company believes that any claims related to its
obligation to further indemnify Compass after June 27, 2004 are adequately accrued.

Tax Contingencies

In December 2001, the State of
Florida proposed to assess subsidiaries of DAKA International $2.4 million in unpaid state sales taxes,
and an additional $2.9 million in penalties and interest as of December 2001. The Company
was contractually obligated to indemnify DAKA for this matter. In February 2004, the
Company paid $0.1 million to the Florida Department of Revenue in full settlement of the
matter.

Additionally, the Company, from
time-to-time, has been party to various other assessments of taxes, penalties and interest
from Federal and state agencies. Tax reserves are accrued based upon the Companys
estimates of the ultimate settlement of the contingencies. The Company believes that
amounts are adequately accrued. Actual amounts required to settle those obligations may
exceed those estimates.

Litigation

The Company has agreed to assume
certain contingent liabilities of DAKA International in connection with the spin-off and
has agreed to assume certain contingent liabilities of Fuddruckers for periods prior to
its sale to King Cannon.

In connection with the spin-off of DAKA International, Inc. in
late 1997, the Company assumed certain contingent
liabilities of DAKA International and its subsidiary, Daka, Inc. In March 2000, a former associate of
Daka was awarded approximately $0.2 million in compensatory damages, $4.8 million in
punitive damages and $0.3 million in legal fees in a jury trial based on the
associates claim of negligent supervision and retaliation due to alleged conduct
that occurred in 1996 at a former Daka food service location. On September 20, 2000, Daka
filed a Notice of Appeal with the Court of Appeals for the District of Columbia. Under our
Post-Closing Covenant Agreement with DAKA, the Company has been responsible for handling
the defense of these claims, including the appeals. The Court of Appeals affirmed the
award of compensatory damages in the amount of $187,500 and attorneys fees in the
amount of $276,000. However, the Court of Appeals vacated the $4.8 million punitive
damages award as constitutionally excessive and remanded the case to the trial court for
redetermination of punitive damages in accordance with legal principles outlined in its
opinion. In January 2004, the Company paid approximately $0.6 million for these items
including accrued interest. On remand, by Order dated May 26, 2004, the trial court
awarded punitive damages in the amount of $937,500. The Company accrued a liability for
the full amount of this award in the fourth quarter of fiscal 2004. On July 9, 2004, Daka
filed a Notice of Appeal with the Court of Appeals for the District of Columbia and this
matter is now pending in that court. In addition on June 23, 2004, plaintiffs
counsel filed a motion for additional attorneys fees in the amount of $375,000 which
has not been accrued for by the Company. Daka plans to vigorously oppose this motion and
in the event the trial court grants the motion for attorneys fees in whole or in
part, Daka plans to file a Notice of Appeal for the award of the legal fees. Depending on
the timing and nature of the ruling by the Court of Appeals, the Company also could incur
substantial additional legal expenses in pursuing Dakas appeal and the ultimate
resolution of this matter.

F-20

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Revisions to the estimate may be made
in the future and will be reported in the period in which additional information is known.
Based upon the Companys analysis, and the advice of outside legal counsel, the
Company believes that the ultimate outcome of this matter will not have any further
material adverse effect on the Companys consolidated financial position or results
of operations.

From time-to-time, additional
lawsuits are filed against the Company in the ordinary course of business. Such lawsuits
typically involve claims from customers and others related to operational issues common to
the food service industry. A number of such claims may exist at any given time. In
addition, the Company also encounters complaints and allegations from former and current
associates or others from time-to-time that are believed to be common for businesses such
as the Companys. In addition to the matters described above, the Company is currently not
a party to any litigation that management believes could have a material adverse effect on
the Companys consolidated financial position or results of operations and the
Company is not aware of any such threatened litigation.

Reserves

The Company had previously recorded
liabilities as of June 27, 1999 associated with the activities of certain predecessor
companies which were either spun-off or sold to other entities. Adjustments to the
reserves are recorded as a charge or credit to expense based upon changes in
managements estimate of the amount of the ultimate settlement. The Company believes
that these reserves are adequate to provide for the outcome of the related contingencies.
Such amounts are expected to be paid over the next year as the amounts become known and
payable.

The following table displays the
activity and balances relating to the reserves (in 000s):

|                         | Predecessor
Obligations
|------------------------ | -----------------------
|Balance at July 1, 2001  |                        
|Expense recognition      |                        
|Payments                 |                        
|                         |                        
|Balance at June 30, 2002 |                        
|Expense recognition      |                        
|Payments                 |                        
|                         |                        
|Balance at June 29, 2003 |                        
|Expense recognition      |                        
|Payments                 |                        
|                         |                        
|Balance at June 27, 2004 |                        
|                         |                        

F-21

---

During fiscal 2004, the Company recognized
additional liabilities of $1,171,000 related to adjustments to the liabilities for the
McCrae vs. Daka litigation as a result of the appellate decision and trial court
redetermination and on-going litigation costs partially offset by a reduction in the
liability for the State of Florida proposed tax assessment due to the favorable settlement
of the proposed assessment.

During fiscal 2003, the Company
recognized additional liabilities of $282,000 associated with legal expenses and other
expenses of predecessor companies, all of which are identified as expenses related to
predecessor companies on the consolidated statement of operations.

During fiscal 2002, the Company
recognized additional liabilities of $541,000 associated with additional anticipated legal
and other expenses of the predecessor companies. This amount consisted of $305,000
identified as expenses related to predecessor companies on the consolidated statement of
operations and $236,000, less a tax benefit of $83,000, identified as a loss from
discontinued operations.

The predecessor obligations reserves
are included in the balances for accrued expenses and other long-term liabilities.

# 10. Shareholders
Equity and Income Per Share

The authorized capital stock of the
Company consists of 30.0 million shares of common stock, of which 12,813,665 and
12,764,050 shares were issued and outstanding as of June 27, 2004 and June 29, 2003,
respectively. The Company also has 5.0 million shares of authorized preferred stock, none
of which is issued.

The Companys credit
arrangements restrict the amount of dividend payments or capital stock repurchases to a
maximum amount of $7.5 million over a three year period beginning March 2004. Moreover,
certain financial covenant ratios under the credit facilities require a minimum amount of
tangible net worth, as defined.

On December 16, 2002, the Company
issued warrants to purchase 386,961 shares of common stock of the Company in conjunction
with the issuance of the Notes described in Note 7. Each warrant is exercisable for one
share of common stock at an initial exercise price of $11.10 per share, subject to
adjustment upon certain events. The warrants are exercisable (in whole or in part) at any
time on or before December 15, 2007, unless terminated earlier at the Companys
option upon certain events. At any time after December 15, 2004, if the closing price of
common stock exceeds 175% of the then effective exercise price of the warrants for any 15
out of 20 consecutive trading days, the Company may terminate the warrants. Any
unexercised warrants as of December 15, 2007 will automatically expire. The warrants had an estimated fair market value
of $1,005,000 as of the date of issuance and were recorded as additional paid-in capital,
net of issuance costs of $100,000.

F-22

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The following table sets forth the
computation of basic and diluted earnings per share (in 000s except per share data):

|                                                               | Fiscal Year Ended
|-------------------------------------------------------------- | -----------------
|
|Basic income per share:                                        |                  
|Income before discontinued operations                          |                  
|Loss from discontinued operations                              |                  
|                                                               |                  
|Net income                                                     |                  
|                                                               |                  
|Weighted average shares outstanding                            |                  
|Income before discontinued operations per share - basic        |                  
|Loss from discontinued operations per share - basic            |                  
|                                                               |                  
|Net income per share - basic                                   |                  
|                                                               |                  
|Diluted income per share:                                      |                  
|Income before discontinued operations                          |                  
|Plus income impact of assumed conversion of 5.5%               |                  
|convertible subordinated notes                                 |                  
|                                                               |                  
|Income before discontinued operations plus assumed conversions |                  
|                                                               |                  
|Loss from discontinued operations                              |                  
|                                                               |                  
|Net income plus assumed conversions                            |                  
|                                                               |                  
|Weighted average shares outstanding                            |                  
|Net effect of dilutive stock options based on the              |                  
|treasury stock method using average market price (a)           |                  
|Net effect of dilutive warrants based on the                   |                  
|treasury stock method using average market price               |                  
|Assumed conversion of 5.5% convertible subordinated notes      |                  
|                                                               |                  
|Total shares outstanding for computation of per share earnings |                  
|                                                               |                  
|Income before discontinued operations per share - diluted      |                  
|Loss from discontinued operations per share - diluted          |                  
|                                                               |                  
|Net income per share - diluted                                 |                  
|                                                               |                  

| | (a) |  | For
the years ended June 27, 2004, June 29, 2003 and June 30, 2002, 220,763, 67,154 and
11,800 stock options, respectively, would have been anti-dilutive and, therefore,
were not considered in the computation of diluted income per share.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Not included
in calculation because the securities had not yet been issued.
| | --- |  | ---------------------------------------------------------------------------

| | (c) |  | Not included in
calculation because the assumed conversion of warrants into 386,961 common shares was
anti-dilutive.
| | --- |  | --------------------------------------------------------------------------------------------------------------------

| | (d) |  | Not included in calculation because the assumed conversion of
convertible notes into 1,407,129 common shares was anti-dilutive.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------

F-23

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# 11. Stock Options and
Employee Benefit Plans

Stock Options

In 1997 and 2003, the Company adopted
stock option and incentive plans for the benefit of the associates and non-employee
directors of the Company whereby the Company authorized and reserved for issuance an
aggregate of 2,615,000 shares of common stock. As of June 27, 2004, options to purchase
approximately 742,000 shares of common stock remained available for grant under the plans.

On November 4, 1999, the Company
authorized and reserved for issuance 750,000 shares of common stock in connection with a
non-qualified stock option agreement entered into with William H. Baumhauer, the Companys chief
executive officer. The options were to expire on June 30, 2001 and were exercisable at
$4.00 per share. On September 28, 2000, Mr. Baumhauer's employment agreement was amended and
restated. At that time the expiration date of the
options previously granted on November 4, 1999 were extended to June 30, 2003. The Company
recorded non-cash compensation expense of $189,000 and $286,000 for the years ended June
30, 2002 and July 1, 2001, respectively, related to the extension of termination dates on
these options which resulted in a remeasurement date. Although the price of the options
extended were above the fair market value on the original grant date, the price of the
options were below the fair market value of the underlying stock on the extension date.
The non-cash compensation expense was included in general and administrative expenses.

On September 13, 2002, Mr. William
Baumhauer announced he had entered into a stock trading plan, which complies with the
requirements of Rule 10b5-1 of the Securities and Exchange Commission. Under the plan, Mr.
Baumhauer may sell enough shares of stock which he owns to pay the price to exercise
1,009,000 stock options, pay the withholding taxes associated with the exercise of the
stock options and repay a loan to the Company of $550,000. Rule 10b5-1 permits employees
to adopt written plans at a time when they are not aware of material nonpublic information
and to sell shares according to the plan on a regular basis, regardless of any subsequent
nonpublic information they receive or the price of the stock at the time of the sale.
Stock trading plans permitted under this rule allow an employee to minimize the effects of sales by
spreading them over a more extended period than the traditional trading
windows permitted under typical insider trading policies, and also avoid being
prohibited from selling any shares for long periods of time due to nonpublic information
they may possess during traditional windows.

In fiscal 2003, Mr. Baumhauer
exercised options to purchase 1,009,000 shares of common stock of the Company under this
plan with an aggregate exercise price of approximately $4,620,000. Mr. Baumhauer satisfied
the exercise price of options and paid certain of his withholding tax liabilities by
tendering to the Company 471,588 common shares held by him more than six months and having
a fair market value of approximately $3,583,000 plus cash of $1,037,000.

On July 31, 2003, Mr. Baumhauer terminated the stock trading plan.

The Company has granted options to
the Companys board of directors, its executive officers, managers and directors in
the corporate office, the regional directors of operations and the general managers of the
restaurants. In addition, options have been granted to the corporate office associates
below the level of manager and director.

F-24

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The following table presents activity
under the Companys stock option plans:

|                             | Number of Options | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value
|---------------------------- | ----------------- | ------------------------------- | --------------------------------------
|Outstanding at July 1, 2001  |                   |                                 |                                       
|Granted                      |                   |                                 |                                       
|Exercised                    |                   |                                 |                                       
|Forfeited                    |                   |                                 |                                       
|                             |                   |                                 |                                       
|Outstanding at June 30, 2002 |                   |                                 |                                       
|Granted                      |                   |                                 |                                       
|Exercised                    |                   |                                 |                                       
|Forfeited                    |                   |                                 |                                       
|                             |                   |                                 |                                       
|Outstanding at June 29, 2003 |                   |                                 |                                       
|Granted                      |                   |                                 |                                       
|Exercised                    |                   |                                 |                                       
|Forfeited                    |                   |                                 |                                       
|                             |                   |                                 |                                       
|Outstanding at June 27, 2004 |                   |                                 |                                       
|                             |                   |                                 |                                       

The number of options exercisable at
the dates presented below and their weighted average exercise price were as follows:

|              | Options Exercisable | Weighted Average Exercisable Price
|------------- | ------------------- | ----------------------------------
|June 30, 2002 |                     |                                   
|June 29, 2003 |                     |                                   
|June 27, 2004 |                     |                                   

The following table sets forth
information regarding options outstanding at June 27, 2004:

|Number of Options | Range of Prices | Weighted Average Price | Weighted Average RemainingContractual Life | Number CurrentlyExerciseable | Weighted AverageGrant Date Fair Value
|----------------- | --------------- | ---------------------- | ------------------------------------------ | ---------------------------- | -------------------------------------
|                  | 108,701         |                        |                                            | $4.00 - $4.82                |                                      
|                  | 320,019         |                        |                                            | 4.94 - 5.75                  |                                      
|                  | 386,600         |                        |                                            | 6.03 - 7.11                  |                                      
|                  | 221,468         |                        |                                            | 7.50 - 13.80                 |                                      

In August 2004, the Companys
Board of Directors granted an additional 420,700 options to purchase common stock at a
grant price of $7.85.

F-25

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Employee Stock Purchase
Plan

The Company has reserved 400,000
shares of its common stock to be offered under its 1997 Stock Purchase Plan (the
Purchase Plan). As of June 27, 2004, 224,810 shares of common stock had been
issued under the Purchase Plan. Under the Purchase Plan, eligible associates of the
Company may participate in quarterly offerings of shares made by the Company. The
participating associates purchase shares at a discount from the lower of fair value at the
beginning or end of each quarterly offering period through payroll deductions. In fiscal
2002, associates purchased 32,151 shares for a total of $207,000. In fiscal 2003,
associates purchased 33,849 shares for a total of $252,000. In fiscal 2004, associates
purchased 39,450 shares for a total of $191,000.

Employee Benefit Plan

The Company sponsors a 401(k)
retirement plan enabling associates to contribute up to 15% of their annual compensation.
The Companys discretionary contributions to the 401(k) Plan are determined by the
Companys Board of Directors. The Companys contribution to the Plan for fiscal
years 2003 and 2002 were $55,000 and $74,000, respectively. For fiscal 2004, the
Companys discretionary contribution estimate of $64,000 has been accrued and is
pending approval by the Board of Directors.

# 12. Fair Value of
Financial Instruments

The estimated fair value of financial
instruments has been determined by the Company using available market information and
appropriate valuation methodologies. The following methods and assumptions were used to
estimate the fair value of the Companys financial instruments for which it was
practicable to estimate that value:

Current assets and liabilities 
The carrying amount of cash, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the short-term maturity of these instruments.

Notes payable  The carrying
value of notes payable approximates fair value based upon current market rates available
to the Company for similar instruments.

# 13. Related Party
Transactions

In fiscal 2001, the Company amended
Mr. William Baumhauers employment contract. Mr. Baumhauer is the Companys
chairman of the board, president and chief executive officer. As part of the amended
employment contract, the Company loaned $550,000 to Mr. Baumhauer. The loan was evidenced
by a promissory note that bears interest at 9.0% and was due on September 30, 2003. The
proceeds of the loan were used to exercise options to purchase 178,000 shares of the
Companys common stock and pay related tax liabilities. The loan was secured by a
pledge of the purchased stock. In fiscal 2003, Mr. Baumhauer repaid $350,000 of the loan.
The remainder of the loan of $200,000 plus accrued interest of $116,000 was repaid in
fiscal 2004.

F-26

---

# 14. Quarterly Financial Data
(Unaudited)

The Companys quarterly results
of operations for fiscal years 2004 and 2003 are summarized as follows (in 000s
except per share data):

|Fiscal 2004                               | Quarter ended
|----------------------------------------- | -------------
|
|Revenue                                   |              
|Pre-opening expenses                      |              
|Expenses related to predecessor companies |              
|Debt extinguishment costs                 |              
|Income from continuing operations         |              
|Net income                                |              
|Basic income per share:                   |              
|Net income                                |              
|Diluted income per share:                 |              
|Net income                                |              

|Fiscal 2003                               | Quarter ended
|----------------------------------------- | -------------
|
|Revenue                                   |              
|Pre-opening expenses                      |              
|Expenses related to predecessor companies |              
|Debt extinguishment costs                 |              
|Income from continuing operations         |              
|Net income                                |              
|Basic income per share:                   |              
|Net income                                |              
|Diluted income per share:                 |              
|Net income                                |              

|(a) |  | Net
income in the fourth quarter of fiscal 2003 included a benefit for income taxes of $13.4
million as a       result of the reversal of previously recorded deferred tax valuation
allowance.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27

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