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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Check One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For The Fiscal Year Ended July 1, 2007



| ̈ | 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

CHAMPPS ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)



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

303-804-1333

(Registrants telephone number, including area code)

Securities registered pursuant to
Section 12 (b) of the Act:

Common Stock, par value $.01 per share

Securities registered pursuant to Section 12 (g) of the Act:

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months 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 or any amendment to this Form 10-K:  x

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

Large Accelerated Filer ̈Accelerated Filer  x                Non-Accelerated Filer ̈

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act):    YES ̈NO  x

The aggregate market value of common stock held by non-affiliates of the registrant based on the closing price of the common stock as reported by the
Nasdaq Global Market on December 29, 2006 of $6.95 per share, was $62,496,645. 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 voting securities, outstanding at August 31, 2007: 13,795,028 (consisting of 13,097,368 shares of outstanding common shares which are net of 191,480 treasury shares and 697,660 restricted
shares or restricted share units).

DOCUMENTS INCORPORATED BY REFERENCE

None.



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FORM 10-K INDEX



|              |  |                                                                                                                 |  |     
|------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                 |  | Page
|             
|PART I       
|              |  |                                                                                                                
|Item 1        |  | Business                                                                                                        |  | 3   
|Item 1A       |  | Risk Factors                                                                                                    |  | 17  
|Item 1B       |  | Unresolved Staff Comments                                                                                       |  | 26  
|Item 2        |  | Properties                                                                                                      |  | 26  
|Item 3        |  | Legal Proceedings                                                                                               |  | 26  
|Item 4        |  | Submission of Matters to a Vote of Security Holders                                                             |  | 27  
|             
|PART II      
|              |  |                                                                                                                
|Item 5        |  | Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 27  
|Item 6        |  | Selected Financial Data                                                                                         |  | 29  
|Item 7        |  | Managements Discussion and Analysis of Results of Operations and Financial Condition                           |  | 31  
|Item 7A       |  | Quantitative and Qualitative Disclosure about Market Risk                                                       |  | 52  
|Item 8        |  | Financial Statements and Supplementary Data                                                                     |  | 52  
|Item 9        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 52  
|Item 9A       |  | Controls and Procedures                                                                                         |  | 53  
|Item 9B       |  | Other Information                                                                                               |  | 53  
|             
|PART III     
|              |  |                                                                                                                
|Item 10       |  | Directors and Executive Officers and Corporate Governance                                                       |  | 54  
|Item 11       |  | Executive Compensation                                                                                          |  | 58  
|Item 12       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 76  
|Item 13       |  | Certain Relationships and Related Transactions, and Director Independence                                       |  | 80  
|Item 14       |  | Principal Accountant Fees and Services                                                                          |  | 81  
|             
|PART IV      
|              |  |                                                                                                                
|Item 15       |  | Exhibits and Financial Statement Schedules                                                                      |  | 82  
|              |  |                                                                                                                
|Signatures    |  |                                                                                                                 |  | 83  
|Exhibit Index |  | 84                                                                                                             



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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains 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, and they are subject to a number of risks, uncertainties
and assumptions that could cause actual results to differ materially from those discussed in or implied by these forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors,
including:



| |  |  | our ability to successfully develop and implement strategies to increase revenues and profitability;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | our ability to achieve our key strategic initiatives, including menu changes, bar reinvigoration and real estate site selection strategy;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the highly competitive nature of the casual dining restaurant industry;
| | - |  | -----------------------------------------------------------------------



| |  |  | our ability to open and operate additional restaurants profitably;
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to secure additional debt or equity financing in the future;
| | - |  | ------------------------------------------------------------------------



| |  |  | our ability to control restaurant operating costs, including commodity prices, energy and insurance costs;
| | - |  | ----------------------------------------------------------------------------------------------------------



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



| |  |  | the continued service of key management personnel;
| | - |  | --------------------------------------------------



| |  |  | consumer perceptions of food safety;
| | - |  | ------------------------------------



| |  |  | changes in consumer tastes and trends and general business and economic conditions;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our ability to attract, motivate and retain qualified employees;
| | - |  | ----------------------------------------------------------------



| |  |  | labor shortages or increased labor charges;
| | - |  | -------------------------------------------



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| |  |  | our ability to protect our name and logo and other proprietary information;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the impact of litigation and assessments;
| | - |  | -----------------------------------------



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



| |  |  | our ability to fully utilize income tax operating loss and credit carryforwards;
| | - |  | --------------------------------------------------------------------------------



| |  |  | our inability to cancel or renegotiate unfavorable leases;
| | - |  | ----------------------------------------------------------



| |  |  | our ability to repay or refinance our indebtedness;
| | - |  | ---------------------------------------------------



| |  |  | our ability to maintain effective internal controls;
| | - |  | ----------------------------------------------------



| |  |  | the ability of our restaurants to cover their asset values and avoid asset impairment charges;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our ability to complete the merger with F&H Acquisition Corp. including our ability to satisfy the conditions set forth in the merger agreement with F&H
Acquisition Corp;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the possibility of a termination of the merger agreement with F&H Acquisition Corp.; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our ability to preserve our business organization and our relationships with employees, customers and suppliers pending the completion or termination of the
merger with F&H Acquisition Corp.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Certain of these factors are discussed in more detail under Item 1A.
Risk Factors. 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 July 1, 2007, July 2, 2006 and July 3, 2005 are referred to as fiscal 2007, 2006 and 2005,
respectively. Fiscal 2005 contained 53 weeks while fiscal 2007 and 2006 each contained 52 weeks.



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PART I



|Item 1. | Business.
|------- | ---------

Recent Developments

On July 3, 2007, we entered into an Agreement and Plan of Merger (the Merger Agreement) with F&H Acquisition Corp., a Delaware
corporation (F&H), and Last Call Acquisition Corp., a Delaware corporation and a newly-formed, wholly-owned subsidiary of F&H (Merger Sub), pursuant to which, upon the terms and subject to the conditions set forth
therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation (the Merger).

Under the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Company common stock (other than any shares held in treasury by the Company and any shares as to which the holder has
properly demanded appraisal of his or her shares under Delaware law) will be converted into the right to receive $5.60 in cash, or $74.8 million in total, without interest (the Merger Consideration). Following completion of the Merger,
we will be a wholly-owned subsidiary of F&H. F&H is the parent company of Fox & Hound Restaurant Group, a pub-themed concept with 88 units in operation. F&H is owned by two private equity fund sponsors, Newcastle Partners, L.P. and
Steel Partners II L.P., and the senior management of F&H.

Stockholders are scheduled to vote on the approval and adoption of the
Merger Agreement at a special meeting of stockholders to be called for that purpose which will be held on September 28, 2007, and if the Merger is approved, it is currently anticipated that the Merger will be completed on October 1, 2007.
Completion of the Merger is subject to the satisfaction of certain other customary closing conditions as set forth in the Merger Agreement, including the absence of certain changes and the obtaining of certain third party consents. The Merger is not
subject to any financing condition.



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Additional information about the Merger and the Merger Agreement is contained in our proxy statement
dated August 28, 2007, copies of which have been filed with the Securities and Exchange Commission (SEC) and mailed to our stockholders.

Statements throughout this Annual Report on Form 10-K that set forth managements intentions, beliefs or views are those of its present management and assume that the Company continues as an independent entity.
Should the Merger be completed and a change in management occurs, new management may have different intentions, beliefs or views.

Overview

Champps offers an energetic, upscale casual dining experience with an extensive menu of freshly prepared items, set in a comfortable
atmosphere that promotes social interaction among our guests. Our ambience, including our multiple video walls and large state-of-the-art televisions coupled with our music, television broadcasts and special promotional events, create an energetic
and participatory dining experience. We consider ourselves an upscale alternative to the typical sports-themed restaurant and bar. We believe that our restaurants appeal to a wide range of diners including families with children, business
professionals, couples and singles, as well as sports fans of all ages.

As of September 1, 2007, we owned and operated 48 restaurants
in 18 states and had 13 additional restaurants operating under franchise or license agreements in five states primarily under the names Champps Americana, Champps Restaurant and Champps Restaurant and Bar. Overall, we operate and franchise or
license in a total of 21 states. Our menu is comprised of items primarily made from scratch on the premises. Our menu includes a large selection of appetizers as well as main course salads, entrée and pasta selections, premium sandwiches,
specialty burgers and wraps, along with additional regularly changing specials. Our menu 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. Our average check per dining room guest was approximately $14.01 in fiscal 2007, excluding alcoholic beverages.



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We did not open any company-owned restaurants and closed one company-owned restaurant in fiscal 2007. Our
current restaurants range in size from approximately 7,000 to nearly 12,100 square feet and seat 207 to 360 guests. During fiscal 2007, the average unit sales of our restaurants opened for the entire 12 months was approximately $4.0 million. Our
average unit sales are higher than many restaurant companies in the casual dining industry. 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.

Our financial results for fiscal 2007 included:



| |  |  | Consolidated revenues decreased by 4.3% to $198.1 million.
| | - |  | ----------------------------------------------------------



| |  |  | A loss before income taxes of $0.9 million was recorded in fiscal 2007 compared to income before income taxes of $0.6 million in the prior fiscal year. Included in
fiscal 2007s and 2006s results were asset impairment charges and restaurant closings/disposals of $0.5 million and $2.1 million, respectively. Also, included in fiscal 2007s results was potential company sale expense of $0.7
million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A loss from discontinued operations, net of tax, of $0.3 million was recorded in fiscal 2007 compared to $3.1 million in the prior fiscal year. The loss from
discontinued operations, net of tax, relates to the operations of three locations which were closed in May 2006 and one location closed in January 2007 including related asset impairment charges and restaurant closing/disposal costs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A net loss of $7.9 million, or $0.60 diluted loss per share, was reported in fiscal 2007 compared to a net loss of $1.6 million, or $0.12 diluted loss per share, in
fiscal 2006. The net loss for 2007 included additional income tax expense of $8.1 million related to charges to establish a valuation allowance on certain income tax credits whose full realization is not more likely than not based on our income
trends.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At July 1, 2007, we had cash and cash equivalents of $19.4 million, reflecting a net increase of $9.9 million for fiscal 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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Business strategy

Our objectives continue to revolve around building our brand awareness and guest loyalty. We intend to achieve this goal principally by providing our guests with exceptional food, uncompromising service and an
exciting ambiance during each of our four day-parts, thus increasing our sales and profits.

Over the last two fiscal years, we have been
working on certain key strategic initiatives outlined below. We believe we have made significant progress in many of these areas, but our goal of reversing our negative comparable sales trends and ultimately improving our long-term profitability has
not yet materialized. We believe that beginning in the second half of fiscal 2006 our efforts have been hampered by macroeconomic factors that were generally believed to negatively impact sales of many companies in the full-service casual restaurant
industry. These macroeconomic factors include higher gas prices, higher health care costs, higher interest rates and lower consumer confidence. We plan to continue to pursue our key strategic initiatives and enhancements thereto, described below, as
we believe our goals can ultimately be achieved through these initiatives.



| |  |  | Menu Changes: Our main goal has been to renew the focus in the menu on popular, memorable and craveable items favored by our customers. We have been and plan
to continue revising and improving our menu. The menu changes are intended to allow for better execution, increased quality of our menu items and ultimately greater guest satisfaction. Improving our consistency in food execution was a key focus to
improve guest satisfaction during fiscal 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also, we revamped our menu specials program in fiscal 2006. Our specials
have been developed with the assistance of outside culinary experts and are now featured more prominently within our menu utilizing a full color layout. The specials are also being rotated less frequently than in past years to build consumer trial
and improve operational execution. We have seen an increase in our menu mix associated with specials as a result of these efforts.

Because
of our confidence in our product offerings, we increased our menu prices by approximately 1.6% in September 2006, and will consider additional increases in fiscal 2008.



| |  |  | Validation and Training Programs: This continuous improvement effort is aimed at improving our systems and developing our people and culture while creating a
heightened awareness of Champps mission of offering exceptional food and hospitality to our customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In fiscal
2006, we recertified and validated all of our restaurant managers and we also targeted certain training toward our hourly employees. Heightened and enhanced training was also a key focus for us in fiscal 2007. We revamped a number of our training
programs including use of new training tools and techniques and also are in the process of providing leadership development programs for select management level employees. We completed a visioneering process near the end of fiscal 2006
to define and communicate our foundational ideas, principles and stakeholder commitments with the help of a consultant who pioneered the process. The visioneering program was rolled-out system-wide in fiscal 2007 as a key focus in our 2007 training
program.



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| |  |  | Bar Reinvigoration: For several years prior to fiscal 2006, our alcohol sales had declined as a percentage of overall revenues. Our goal has been to reverse
this trend and attract new customers to our bars by improving service levels, ingredient quality and drink presentation. Over the past two fiscal years, we have implemented a training program aimed at improving customer service levels, updated or
replaced draft beer systems, and added beer mug chillers in all of our restaurants. We also reworked many of our recipes and drink mixes and developed new specialty drinks for promotions. Prices have been adjusted based on competitive considerations
and we have modified happy hour programs in a number of stores to enhance the guest experience.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revised General Manager Bonus Plan: At the start of fiscal 2006, we implemented a more aggressive and performance-based bonus plan for our managers based on
monthly unit level cash flow improvements over the prior year. We believe this plan provides our restaurant managers with greater performance-based compensation and an increased sense of accountability and ownership in their restaurants
success. This bonus plan has been further enhanced by creating cash-flow arrangements under which selected general managers and directors of operations may purchase a cash flow interest in the restaurants they operate and oversee. As of July 1,
2007, 21 of our general managers and five of our directors of operations had executed such agreements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Real Estate Strategy: While we did not open any new restaurants in fiscal 2007, our site selection process has been upgraded to include more rigorous
evaluation of the success factors for new site development to allow us to achieve our expected investment returns on renewed future growth. To aid in this process, we are using a multi-factor, risk-analysis regression software model, developed by an
outside consultant, aimed at accurately predicting sales levels and decreasing the risks associated with opening new restaurants. We expect to resume opening new restaurants in fiscal 2008. Also, as part of our real estate strategy, we closed three
underperforming restaurants in May 2006 and closed one underperforming location in January 2007. We also plan to actively monitor and evaluate our restaurant portfolio on an ongoing basis to determine if further closures are warranted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Franchise Development: We value franchising as a potentially profitable function but we purposely did not actively pursue this initiative in fiscal 2006 as
we viewed the other initiatives (such as menu design and prototype development) as important precursors to our franchising efforts. We started increasing our franchising sales efforts in the second half of fiscal 2007 and have signed a development
agreement with a new franchisee candidate to develop two new restaurants in Northern California.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Growth strategy

In fiscal 2004 and 2003, we opened seven restaurants in each year. However, we slowed our restaurant growth in both fiscal 2006 and fiscal 2005, opening
only one new restaurant in fiscal 2006 and four new restaurants in fiscal 2005. Also, we closed three underperforming stores in May 2006 and closed another restaurant in January 2007. We did not open any restaurants in fiscal 2007, but plan to open
at least one new company-operated restaurant in fiscal 2008. We have focused our attention on reversing the negative sales trends at our existing restaurants instead of continuing to expand the concept as we have done in the past.



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Site selection will be critical to our future growth plans. Members of our senior management will
evaluate, inspect and approve each restaurant site prior to its acquisition. Also, we have retained an outside consulting firm to assist us with our future potential restaurant site selection process. The consulting firm uses up to 600 factors to
determine the probable revenue levels of future restaurant sites. By using this analytical process, we intend to decrease the risk associated with opening new restaurants at underperforming locations. Since the revenue of a new restaurant is the
largest factor impacting its future profitability, we feel that if we have more certainty related to the new restaurants revenue, our risk will decrease. This outside consulting firm will also identify new markets where we should concentrate
our site selection efforts based upon local demographics and competitive factors.

We plan to pursue opening more franchised Champps
locations. In August 2007, we franchised a location in San Antonio, Texas which we previously operated as a corporate location. In fiscal 2007, we signed a development agreement with a new franchise candidate to develop two new restaurants in
Northern California. A licensed/joint venture Champps operation opened in the Dallas/Fort Worth, Texas airport terminal in October 2005 and 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 13 franchised/licensed restaurants from our franchisees/licensees. This may require additional capital.

Day-part allocation

We believe our ability to serve our guests in each of our four distinct
day-parts is a strength for our concept. The following table depicts the percentage of overall company-owned restaurant sales during fiscal 2007 attributable to each of our day-parts. During this period, our food sales and alcoholic beverage sales
as a ratio of total food and beverage sales was 71.2% and 28.8%, respectively. Champps merchandise and other sales totaled $357,000 and were only 0.2% of overall sales in fiscal 2007.

Sales by Day Part - Fiscal 2007



|                 |  |            |   |  |                         |   |  |                                 |  
|---------------- |  | ---------- | - |  | ----------------------- | - |  | ------------------------------- | -
|                 |  | Food Sales |   |  | AlcoholicBeverage Sales |   |  | Food andAlcoholicBeverage Sales |  
|Lunch            |  |            |   |  |                         |   |  |                                 |  
|Open to 4:00 PM  |  | 41.3       | % |  | 16.5                    | % |  | 34.3                            | %
|After Work       |  |            |   |  |                         |   |  |                                 |  
|4:00 to 7:00 PM  |  | 29.6       | % |  | 36.8                    | % |  | 31.6                            | %
|Dinner           |  |            |   |  |                         |   |  |                                 |  
|7:00 to 10:00 PM |  | 26.1       | % |  | 35.7                    | % |  | 28.8                            | %
|Late Night       |  |            |   |  |                         |   |  |                                 |  
|10:00 to close   |  | 3.0        | % |  | 11.0                    | % |  | 5.3                             | %
|                 |  |            |   |  |                         |   |  |                                 |  
|                 |  | 100.0      | % |  | 100.0                   | % |  | 100.0                           | %
|                 |  |            |   |  |                         |   |  |                                 |  



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Restaurant design and ambiance

Our restaurants have an ambiance enhanced by a layout that encourages social interaction, large parties and promotes a high-energy environment. All of our restaurants have multiple levels that enable us to offer our
guests multiple seating options that appeal to various 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 which can accommodate large parties, 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 room and bar areas.

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.

Currently our restaurants range in size from 7,000 to 12,100 square feet.
In recent years, the majority of our restaurants have ranged in size from 8,000 to 9,800 square feet. We have been able to maintain the number of seats in our restaurants despite their smaller size by reducing the square footage of our kitchens and
bars. The reduction in our kitchen size has resulted in a more streamlined, efficient kitchen that can still handle our above average volumes. The reduction in our bar size was made to more accurately reflect the liquor volumes we are currently
generating.

Menu

Currently, we offer
our guests a comprehensive selection of approximately 84 items, primarily made on the premises from scratch, which includes a selection of 19 appetizers, 14 main course salads, 26 entrée and pasta selections and 25 premium sandwiches,
specialty burgers and wraps. We also feature six to eight specials that typically change quarterly, allowing us to routinely refine our menu offerings and keep our selections fresh for our frequent visitors. We believe that the broad range of our
menu provides multiple dining options during each of our day-parts.

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



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The food items on our current menu range from $5.79 to $14.49 for appetizers, $7.99 to $13.49 for main
plate salads, $9.49 to $19.99 for entrée and pasta selections and $7.99 to $10.99 for premium sandwiches, specialty burgers and wraps. For fiscal 2007, our average guest check in our dining room was approximately $14.01, excluding alcoholic
beverages. Our sophisticated, full service bar offers approximately 24 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 28.8% of total food and beverage sales during fiscal 2007.

Food preparation and quality control

We believe our food quality and control standards are maintained at a high level. Our systems are designed to provide freshly prepared items based on the
specifications set by our corporate culinary personnel and overseen at each of our restaurants by an executive kitchen manager and up to three management assistants. We invest substantial time in training and testing of our kitchen employees to
adhere to our strict standards and preparation guidelines to maintain our quality control. We design our facilities to ensure food is maintained in accordance with the requirements of the local health codes where we do business. We audit our
sanitary conditions at each restaurant and train all of our management employees regarding safe handling practices of food products.

Marketing and
advertising

Historically, we have relied primarily on guest referrals rather than external marketing initiatives to promote our brand.
Frequent visits from our loyal guests are necessary to generate the high volume of sales in our restaurants. Within our restaurants we continually promote special events and upcoming entertainment activities as well as special menu items or drinks
to increase guest frequency, average guest spending and overall sales. Marketing activities are communicated to our guests within our restaurants via printed displays such as posters, banners, table top displays and menu
inserts. Additionally, we regularly utilize video presentations on our many monitors to promote menu items and special events. During the last three fiscal years, our expenditures for advertising and promotions were less than 2.0% of total
restaurant sales.

On occasion we engage in paid advertising for individual restaurant locations including newspaper and radio
advertisements. We have a permission based e-loyalty program in place which allows us to send news of special offers and events to regular customers via email.

We utilize a variety of local marketing systems to gain awareness in the community around our restaurants. We frequently work with area schools, hotels, theatres, office buildings and retail establishments to
encourage new or repeat traffic in our restaurants.

In 2007, we raised $50,000 for the Boys and Girls Clubs of America in connection with
our March college basketball tournament promotion which featured a chance to go to the tournament finals with former NBA player, Spud Webb.



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Operations

Restaurant management. As of September 1, 2007, we had six directors of operations who oversee approximately eight restaurants each and who supervise the general managers at each restaurant in their area. 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.

Restaurant employees 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 employee 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 employees. All employees 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 employee morale. For example, our Pin Program rewards and recognizes the efforts of employees with pins that are worn proudly on uniforms to publicly acknowledge their commitment to guest service.

Training.New members of our restaurant management team are provided with an intensive ten-week training program to ensure they
have the appropriate knowledge to excel in their position. All new 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. All managers also participate in on-going training, including food and alcohol safe serving certifications.

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 employees with a 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, safely and responsibly serve alcohol products, 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 undergo 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 employee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 employees 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 employees and managers
as new restaurants open or positions become available.



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General manager and director of operations partner programs

In fiscal 2006, we started inviting certain of our general managers and directors of operation (collectively referred to as partners) to enter
into a seven-year employment agreement and also enter into an agreement to purchase an interest in their restaurants monthly cash flows (cash flow bonus interest) for the duration of the agreement to facilitate the development,
leadership and operation of our restaurants. As of July 1, 2007, 21 of our general managers and five of our directors of operations had executed such agreements. Under the agreement, each partner is required to make a capital contribution
in exchange for their percentage cash flow bonus interest in the restaurant or region the partner manages and we have the option to purchase their cash flow bonus interest after a seven-year period at a predetermined cash flow multiple, or earlier
under certain conditions. Part of the partners capital contribution may be financed over a two-year period. The cash flow bonus interest purchased by each partner is five percent for general manager partners and three percent for directors of
operations.

Restaurant franchise and licensing agreements

As of September 1, 2007, we had 13 franchised or licensed restaurants. In August 2007, we franchised a location in San Antonio, Texas which we previously operated as a corporate location. A franchise location in
Omaha, Nebraska was closed in January 2007 and a new licensed/joint venture restaurant opened in the Dallas/Fort Worth, Texas airport terminal in October 2005. Seven of our current franchised / licensed restaurants are located in the Minneapolis,
Minnesota area and two are located in Milwaukee, Wisconsin. We also have one franchised / licensed restaurant in each of Dallas, Texas, Des Moines, Iowa, and Sioux City, South Dakota. We have a total of six franchisees/licensees, of which three own
10 of the 13 franchised or licensed restaurants.

We have signed development agreements with new franchisee candidates to open two new
Champps restaurants in Northern California and three Champps restaurants in Southern Texas.

Our revenue from current franchisee / licensee
agreements represented approximately 0.3% of our revenue in fiscal 2007. Each franchisee / licensee 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. 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 minimized.

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 current operations and long-term plans.



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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
pre-negotiated prices. We also periodically enter into selective short-term pricing 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 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.

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 location of the restaurants, amount and frequency of advertising and 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 employees. We believe that the flexibility of our multiple day-part model, the quality of our freshly prepared menu items and our unique entertainment including our sports-theme focus and excellent service have created an
attractive, high sales volume restaurant model.

Seasonality

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 2007, 2006, and 2005, our relative sales
were highest in our second quarter (October through December), followed by our third quarter (January through March), then by our first quarter (July through September). Our fourth quarter (April through June) 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.

Employees

As of September 1, 2007, we had
approximately 5,400 employees on the Champps team, 31 whom worked at our corporate headquarters with the remainder working in our restaurants or as field support personnel. We do not have any collective bargaining agreements. We consider our
employee relations to be good.



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History

The original Champps concept began operations in 1984 and grew to eight restaurants by December 1995. In 1996, DAKA International, Inc. (DAKA), a large publicly traded food service management and restaurant company, purchased
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 Services. 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. Today, we operate predominantly with a single
brand know as Champps or Champps Americana.

Operating locations

We lease all but one of our restaurants. The initial term of our restaurant leases 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.

Our existing company-operated restaurants average approximately 9,160 square
feet in size for conditioned space with the range among our restaurants varying from approximately 7,000 to 12,100 square feet. Our average restaurant has approximately 285 seats in the conditioned space, with the number of seats varying from 207 to
360 seats among our restaurants. Many of our restaurants have seating in non-conditioned porches, patios or terraces which add up to 132 additional seats and 41 seats on average.



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The following table sets forth our company-operated and franchised / licensed restaurants at July 1,
2007.



|                                            |  |                                                 |  |             
|------------------------------------------- |  | ----------------------------------------------- |  | ------------
|Company Owned Restaurant Locations Total 49 |  | Franchised / Licensed Restaurant Locat Total
12
|                                            |  |                                                
|CALIFORNIA                                  |  | MINNESOTA                                       |  | IOWA        
|Irvine                                      |  | Eden Prairie                                    |  | Des Moines  
|COLORADO                                    |  | Minnetonka                                      |  | MINNESOTA   
|Colorado Springs                            |  | Richfield                                       |  | Burnsville  
|Denver                                      |  | NEW JERSEY                                      |  | Maple Grove 
|Littleton                                   |  | Edison                                          |  | Maplewood   
|DELAWARE                                    |  | Marlton                                         |  | Minneapolis 
|Wilmington                                  |  | NEW YORK                                        |  | New Brighton
|FLORIDA                                     |  | Rochester                                       |  | St. Paul    
|Ft. Lauderdale                              |  | NORTH CAROLINA                                  |  | Woodbury    
|Tampa                                       |  | Durham                                          |  | SOUTH DAKOTA
|GEORGIA                                     |  | Raleigh                                         |  | Sioux Falls 
|Alpharetta                                  |  | OHIO                                            |  | TEXAS       
|ILLINOIS                                    |  | Cincinatti                                      |  | Dallas      
|Lincolnshire                                |  | Columbus (3)                                    |  | WISCONSIN   
|Lombard                                     |  | Dayton                                          |  | Milwaukee   
|Orland Park                                 |  | Lyndhurst                                       |  | Brookfield  
|Schaumburg                                  |  | Valley View                                     |  |             
|Skokie                                      |  | West Chester                                    |  |             
|INDIANA                                     |  | Westlake                                        |  |             
|Indianapolis (2)                            |  | PENNSYLVANIA                                    |  |             
|LOUISIANA                                   |  | King of Prussia                                 |  |             
|Baton Rouge                                 |  | Philadelphia (2)                                |  |             
|MARYLAND                                    |  | TEXAS                                           |  |             
|Columbia                                    |  | Addison                                         |  |             
|MICHIGAN                                    |  | Houston                                         |  |             
|Lansing                                     |  | Las Colinas                                     |  |             
|Livonia                                     |  | San Antonio (a)                                 |  |             
|Troy                                        |  | VIRGINIA                                        |  |             
|Utica                                       |  | Arlington                                       |  |             
|                                            |  | Fairfax                                         |  |             
|                                            |  | Reston                                          |  |             
|                                            |  | Richmond                                        |  |             



|(a) | This location was franchised in August 2007.
|--- | --------------------------------------------

Restaurants expected to
open

We have signed a lease for a new site in Naperville, Illinois which is expected to open in fiscal 2008.



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Closed restaurants

We closed three restaurants in May 2006 and one restaurant in January 2007. It may prove prudent to close additional restaurants in the future. As of July 1, 2007, we had exited two of the closed locations
through a lease termination agreement and purchased one closed location from our landlord in consideration of a payment in the amount of $3.2 million in fiscal 2006 with disposal of the location occurring in fiscal 2007 through resale of the
property for $2.6 million. We expect to exit the other closed location through a sublease which is signed and scheduled to commence in September 2007. We have recorded a liability associated with this sublease of $0.7 million at July 1, 2007,
as the sublease rentals we receive will be less than our obligations under the master lease agreement.

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 2007,
the maximum fee was equal to the lesser of $355,000 or 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 our, 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 illegally over-served alcoholic beverages to the intoxicated person. For
fiscal 2007, we carried 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.
Complying with 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.



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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 especially for tipped employees will
generally increase our labor costs.

Available Information

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 About / Invest / Financial Information, as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Code of Business Conduct and Ethics is available on our website under the headings About / Invest / Corporate Governance.



|Item 1A. | Risk Factors
|-------- | ------------

In evaluating our business, you
should carefully consider the risks and uncertainties discussed in this section in addition to other information presented in this Annual Report on Form 10-K. The risks and uncertainties described below may not be the only risks we face. If any of
these risks and uncertainties actually occurs, our business operating results or financial condition could be materially affected and the market price of our stock may decline. Risks related to our Company and business include:

Our key strategic initiatives may not be successful and could fail to improve our comparable store sales and our long-term profitability

As part of our key strategic initiatives designed to improve our comparable store sales and our long-term profitability, weve been refining our
menu, training and bar programs to reinvigorate that portion of our business, among other initiatives. These steps have not yet proven their viability and are subject to additional refinement and further costs. We may find that these steps are too
costly or do not produce improved customer acceptance, revenues or profitability. We cannot assure you that our new real estate strategy, which includes a Champps specific site model, will improve the profitability and success of our new restaurants
compared to our previous site selection process.

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.



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

As of July 1, 2007, we owned and operated 49 restaurants. 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 anticipated 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.

The success
of our restaurants depends in large part on location. There can be no assurance that current locations will continue to be attractive, as demographic patterns change. Possible declines in neighborhoods or businesses where our restaurants are
located, or economic conditions surrounding those neighborhoods, could result in reduced sales in those locations.

Our future growth depends on our
ability to open new restaurants, and we may not be able to achieve our goals for 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 2007, we have expanded our operations from 12 company-owned restaurants in nine states to 49 company-owned restaurants in 18
states. We did not open any restaurants in fiscal 2007, but expect to open at least one new company-operated restaurant in fiscal 2008. 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 future 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;
| | - |  | --------------------------------------------------------------------------------------



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| |  |  | 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.

Future growth 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 could 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;
| | - |  | ----------------------------------------



| |  |  | adverse weather conditions;
| | - |  | ---------------------------



| |  |  | 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 future revenue will not meet our expectations and pre-opening
and construction 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.



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We may require additional capital to expand our business

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 Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources.

Our franchisees / licensees could take actions that could harm our business

Franchisees / licensees are independent operators and are not employed by us. We provide training and support to franchisees / licensees, but any number of factors beyond our control may diminish the quality of
franchised / licensed restaurant operations. Consequently, franchisees / licensees 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 / licensees 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 / licensed restaurants may
limit our ability to expand in a desired market through company-owned restaurants.

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 success depends, in part, upon the popularity of the menu items
served in the Champps environment and our dining style. 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.



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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 or outbreaks of disease in a food product, such as bovine spongiform encephalopathy (i.e. mad cow disease) or avian influenza. 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.

Increases in utility, insurance or other costs
could have a material adverse effect on our results of operations

Our restaurants operating margins are affected by fluctuations
in the price of utilities such as natural gas, electricity and water. The premiums that we pay for our insurance programs, including workers compensation, general liability, health and directors and officers liability, may increase
at any time as may the amount we pay for claims experienced under our high deductible programs. Also, our restaurants incur a number of other costs in order to operate not limited to supplies, services, banking/credit card fees and repair and
maintenance costs. All such costs may increase at any time and negatively affect our operating margins.

We depend on the services of key executives and
management, the loss of who could materially harm our business

Our future success significantly depends on the continued service and
performance of our executive officers and key employees, such as regional directors of operation, restaurant general managers and kitchen managers. Competition for these key employees is intense. The loss of the services of members of our senior
management and key employees or the inability to attract additional qualified personnel as needed could adversely harm our business until suitable replacements can be found.

Litigation or assessments could have a material adverse effect on our business

We are subject to
complaints or allegations from current and former or prospective employees 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 that could have a material adverse effect 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 illegally over-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.



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In connection with the spin-off of DAKA in late 1997, we assumed certain contingent liabilities of DAKA.
Under our Post-Closing Covenant Agreement with DAKA, we are responsible for certain resulting liabilities and handling the defense of these claims, including the appeals, which have previously been significant.

From time-to-time, Champps and its predecessors have been party to various assessments of taxes, penalties and interest from federal, state and local
agencies. 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 to recognize additional charges as these matters are ultimately resolved. Any resulting charges could be significant.

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 marks, trademarks and trade names. 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. From time to time, we pursue litigation to protect our name and logo, which can be costly and, if unsuccessful, could impair our rights. 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.

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 employees 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.



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For fiscal 2007, approximately 28.8% of our restaurant food and beverage sales were 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 employees 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 employees 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 employees records and it is permissible for the IRS to estimate the amount of cash tips given to employees based on tips included on credit card receipts.

The reporting of tips is the responsibility of the employees receiving the tips. We encourage and train our employees to abide by the law and report 100%
of the tips that they receive. While we believe our employees 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 2004.

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

As of July 1, 2007, we had federal
net operating loss (NOL) carryforwards of approximately $36.1 million and FICA tax credit carryforwards of approximately $12.5 million. The federal NOLs expire at various times through 2023 and the FICA tip tax credits expire at
various times through 2027. Also as of July 1, 2007, we had certain state net operating loss carryforwards totaling $5.0 million expiring at various dates through 2024. In fiscal 2007, we recorded a valuation allowance expense of $8.1 million
against our deferred tax assets as we now expect that certain of our FICA tax credit carryforwards will no longer more likely than not be realized.



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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 2007, 2006, and 2005, our relative sales were highest in our second quarter (October through December), followed by our third quarter (January through March), then by our first quarter (July through September). Our fourth
quarter (April through June) recorded the lowest relative sales for those years. Factors influencing sales variability in addition to those noted above include the frequency and popularity, or lack thereof, of sporting events, holidays (including
which day of the week the holiday occurs) and weather.

We may be locked into long-term and non-cancelable leases that we want to cancel, and may be
unable to renew leases that we want to extend at the end of their terms

Most of our current leases are non-cancelable and typically
have terms ranging from 15 to 20 years and renewal options for terms ranging from five to 20 years. Leases that we enter into in the future likely will also be long-term and non-cancelable and have similar renewal options. We may remain committed to
perform our obligations under the applicable lease if we close restaurants, which would include, among other things, payment of rents for the balance of the lease terms. Additionally, the potential losses associated with our inability to cancel
leases may result in our keeping open restaurant locations that are performing significantly below targeted levels. As a result, ongoing operations at underperforming restaurant locations could impair our results of operations.

In addition, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional
cost, if at all. As a result, we may be required to close or relocate a restaurant, which could subject us to construction and other costs and risks, and could have a material adverse effect on our business and results of operations.

We may not be able to repay or refinance our indebtedness

Our long-term debt is principally comprised of a $15.0 million face value issuance of 5.5% convertible notes due December 2007. The notes are convertible at the option of the holder at any time prior to maturity into shares of our common
stock, at a conversion price of $10.66 per share, subject to adjustment upon certain events. Based on the current market price of our common stock, it is not likely that the convertible debt holders will convert their debt into shares prior to
December 2007. In connection with the Merger, we have called the notes for redemption at par plus accrued and unpaid interest subject to the completion of the Merger and the availability of sufficient funds. If the Merger is not completed for any
reason, we expect to repay the notes either with available cash, the proceeds from credit facility borrowings, new debt or a combination of these sources. If we seek additional financing there are no assurances that we will be able to do so at that
time, and the terms of the debt may not be as favorable as our existing debt.



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A failure to maintain effective internal controls over financial reporting could have a material adverse effect on our
business and stock price

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to perform an evaluation of
our internal controls over financial reporting and to have our registered independent accounting firm attest to such evaluation. We have devoted significant resources to document, test, monitor and improve our internal controls and will continue to
do so in the future; however, we cannot be certain that these measures will ensure that our internal controls will be adequate in the future. If we fail to timely complete our future internal controls evaluations, or if our registered independent
accounting firm cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. If we fail to maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud, which would have a material adverse effect on our operating results and cause us to fail to satisfy our public reporting requirements.

If certain of our restaurants fail to perform at a level sufficient to cover their asset value, we may be forced to incur further write-downs of our assets, which
could negatively impact our financial performance

Based on our evaluation of the
estimated fair values of impaired assets of our underperforming restaurants we recorded asset impairment charges of $0.3 million covering one restaurant, $4.3 million covering three restaurants and $6.6 million covering four restaurants during
fiscal 2007, fiscal 2006 and fiscal 2005, respectively1. Additionally, we have five additional restaurants open for at least six quarters which had
triggering events and cash flow over the last twelve months not high enough to sufficiently cover the restaurants long-term asset values if such cash flows continue for the remainder of the restaurants lives. As of July 1, 2007, the
long-lived asset value of these five restaurants was $7.4 million. We have not recorded an impairment charge at this time for these restaurants because management believes that each of these restaurants has the opportunity to improve their cash
flows to a level sufficient to cover their asset value once external factors impacting their sales are properly addressed. However, there can be no assurance that we will not experience circumstances in the future that require us to write-down
assets of these or other restaurants.

Failure to Complete the Proposed Merger Could Adversely Affect Our Business

If the Merger is not completed for any reason, our business could suffer for a number of reasons, including the following:



| |  |  | The share price of our common stock may decline to the extent that the current market price of our common stock reflects an assumption that the sale would be
completed;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|1 | $2.1 million and $4.6 million of asset impairment charges in fiscal 2006 and
fiscal 2005, respectively, were recorded as discontinued operations.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Certain costs related to the Merger, including legal and certain financial advisory fees, must be paid even if the sale is not completed;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may be required to pay F&H Acquisition Corp. a termination fee of $2.25 million and reimburse it for its out-of-pocket fees and expenses incurred up to a
maximum of $750,000, if the merger agreement is terminated under certain circumstances defined in the Merger agreement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional lawsuits may be filed against us (see Item 3. Legal Proceedings below);
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Our management and employees attention may be diverted from day-to-day operations;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | A failed merger may result in negative publicity and/or a negative impression of us in the investment community.
| | - |  | ----------------------------------------------------------------------------------------------------------------



|Item 1B. | Unresolved Staff Comments.
|-------- | --------------------------

None.



|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 our owned and franchised / licensed restaurant locations and discussion of restaurants to open and closed restaurants, which is incorporated herein by reference.



|Item 3. | Legal Proceedings.
|------- | ------------------

In connection with the spin-off
of DAKA in late 1997, the Company assumed certain contingent liabilities of DAKA and its subsidiaries (see sections entitled Indemnifications and Representations Related to Predecessor Companies and Accrued Insurance Costs in
Note 9 of Notes to Consolidated Financial Statements) including liabilities of DAKAs insurance coverage provided by American International Group, Inc. (AIG) or its subsidiaries for the 1994 through 1997 policy periods. DAKAs
insurance coverage included Large Deductible workers compensation policies that contained a Final Premium section, which set forth AIGs obligations to determine the Final Premium once the policy period
ends. While the insurance policies were in place, surety bonds were purchased as collateral for the policies. Champps eventually replaced the surety bond with an irrevocable standby letter of credit for the payment of claims under the insurance
policies, however AIG has not released the surety bond or the letter of credit. Champps maintains that it has satisfied its obligations under the insurance policies, and that AIG has accepted final payment from Champps as evidenced by a letter
agreement between Champps and AIG. AIG asserts that the policies were with National Union Fire Insurance Company of Pittsburgh, PA (National Union), a subsidiary of AIG, and that the letter agreement is not valid. National Union contends
that it is owed more than $2 million by Champps. Champps intends to vigorously defend its position in this matter.



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In June 2004, Champps filed suit against AIG and National Union in the United States District Court for
the District of Massachusetts based on the defendants failure to release Champps from further liability under the insurance policies and for wrongfully withholding a $526,000 irrevocable standby letter of credit and a surety bond posted in the
amount of $526,254 (the Federal Court Action). In August 2004, National Union filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York. In December 2004, the Court granted National
Unions Petition to Compel Arbitration (the National Union Arbitration).

In February 2005, Champps filed an Amended
Complaint in the Federal Court Action, in which it named only AIG as a defendant. In March 2005, Champps withdrew its Amended Complaint in the Federal Court Action, and filed suit against AIG in state court in Massachusetts (the State Court
Action). In July 2005, the Court granted AIGs motion to stay the State Court Action pending resolution of the National Union Arbitration in New York.

The National Union Arbitration is in its preliminary phase, and the Company intends to vigorously defend any claims of further liability. The Company has not yet conducted discovery on AIGs liability assertions.

On July 13, 2007, a purported stockholder class action complaint was filed against us, our directors, and F&H Acquisition Corp.
in the District Court of Douglas County, Colorado. The amended complaint alleges, among other things, that the named defendants breached their fiduciary duties or aided and abetted in the breach of those fiduciary duties in connection with the
proposed acquisition of the Company by F&H Acquisition Corp. by failing to maximize stockholder value and by failing to disclose certain material information relating to the sale process leading up to the Merger. Among other things, the
complaint seeks to enjoin the completion of the Merger. We believe that the claims asserted are without merit and all of the defendants intend to defend the suit vigorously. The absence of an injunction prohibiting the consummation of the Merger is
a condition of the completion of the Merger.

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.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

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

PART II



|Item 5. | Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|------- | ----------------------------------------------------------------------------------------------------------------

Our common stock is listed on the NASDAQ Global Select 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.



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##### Table of Contents

|                      |  |      |      |     |   |     
|--------------------- |  | ---- | ---- | --- | - | ----
|                      |  | High |      | Low
|Fiscal 2007           |  |      |      |     |   |     
|First Fiscal Quarter  |  | $    | 6.57 |     | $ | 4.76
|Second Fiscal Quarter |  |      | 7.12 |     |   | 5.96
|Third Fiscal Quarter  |  |      | 6.80 |     |   | 5.26
|Fourth Fiscal Quarter |  |      | 5.85 |     |   | 4.43
|Fiscal 2006           |  |      |      |     |   |     
|First Fiscal Quarter  |  | $    | 8.18 |     | $ | 6.83
|Second Fiscal Quarter |  |      | 7.38 |     |   | 6.46
|Third Fiscal Quarter  |  |      | 8.35 |     |   | 6.56
|Fourth Fiscal Quarter |  |      | 8.25 |     |   | 6.31

On August 31, 2007, there were approximately 1,726 holders of record of the Companys
common stock. On August 31, 2007, the closing price of the Companys common stock was $5.39 per share.

We have never declared or
paid dividends on our common stock. We have not ruled out the possibility of paying dividends on our common stock in the future. Such decisions will be based on various financial considerations including without limitation the availability of cash
and the need for cash for expansion, debt repayment or other needs.

During the fourth quarter ended July 1, 2007, there were no sales
of equity securities that were not registered under the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

In January 2006, our Board of Directors approved a plan to use up to $5.0 million to repurchase our common stock from time to time over the next two
years. Purchases under the program may be made in the open market or in private transactions. Purchases under the program will depend, among other factors, on the prevailing stock price, market conditions, alternative investment opportunities and
are expected to be funded primarily with available cash balances and operating cash flow. There is no minimum or maximum number of shares to be repurchased under the program. The repurchased shares will be held in treasury and used for issuance
under our equity incentive plans. No shares were repurchased during the fourth quarter ended July 1, 2007. As of July 1, 2007, under this authorization we have repurchased a total of 191,480 shares of our common stock for approximately
$1.3 million.

Performance Graph

The
following graph compares the cumulative 5-year total return to shareholders on Champps Entertainment, Inc.s common stock relative to the cumulative total returns of the Russell 3000 index and the S&P Small Cap Restaurant index. An
investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on June 30, 2002 and its relative performance is tracked through July 1, 2007. Historic stock price is not
indicative of future stock price performance.

This performance graph shall not be deemed to be soliciting material or to be
filed under either the Securities Act of 1933, as amended or the Securities Act of 1934, as amended.



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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Champps Entertainment, Inc., The Russell 3000 Index

And The S&P Small Cap Restaurant Index

LOGO



|* | $ 100 invested on 6/30/02 in stock or index-including reinvestment of dividends.
|- | --------------------------------------------------------------------------------



|                            |  |         |  |         |  |         |  |        |  |        |  |       
|--------------------------- |  | ------- |  | ------- |  | ------- |  | ------ |  | ------ |  | ------
|                            |  | 6/30/02 |  | 6/29/03 |  | 6/27/04 |  | 7/3/05 |  | 7/2/06 |  | 7/1/07
|Champps Entertainment, Inc. |  | 100.00  |  | 38.98   |  | 70.36   |  | 60.77  |  | 53.73  |  | 38.90 
|Russell 3000                |  | 100.00  |  | 100.95  |  | 115.89  |  | 131.60 |  | 143.70 |  | 172.54
|S&P Small Cap Restaurant    |  | 100.00  |  | 98.54   |  | 115.49  |  | 153.22 |  | 147.61 |  | 153.93

Securities Authorized for Issuance Under Equity Compensation Plans.

The information regarding securities authorized for issuance under equity compensation plans is presented in Part III, Item 12 of this Annual Report
on Form 10-K.



|Item 6. | 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 July 1, 2007, July 2, 2006, July 3, 2005, June 27, 2004 and June 29, 2003 and
the statements of operations data for each of the five fiscal years in the period ended July 1, 2007 presented below are derived from our audited consolidated financial statements.

Historical results for three restaurants closed in May 2006 and one restaurant closed in January 2007 have been excluded from income from continuing
operations and classified as discontinued operations. Certain other amounts have been reclassified for earlier periods to conform to the fiscal 2007 presentation. These reclassifications have no impact on net income (loss) or net income
(loss) per share.



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##### Table of Contents

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 in Part II, Item 7 of this Annual Report on Form 10-K.



|                                                                       |  |                                       |         |   |                 |   |         |                 |  |   |              |   |  |                  |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------------- | - | ------- | --------------- |  | - | ------------ | - |  | ---------------- | ------- | - |  | - | ------- | -
|                                                                       |  | As of and for the Fiscal Years Ended  |        
|                                                                       |  | July 1,2007 (a)                       |         |   | July 2,2006 (b) |   |         | July 3,2005 (c) |  |   | June 27,2004 |   |  | June 29,2003 (d) |        
|                                                                       |  | (in thousands, except per share data) |        
|Statements of Operations Data:                                         |  |                                       |         |   |                 |   |         |                 |  |   |              |   |  |                  |         |   |  |   |         |  
|Total revenue                                                          |  | $                                     | 198,069 |   |                 | $ | 207,030 |                 |  | $ | 210,669      |   |  | $                | 198,968 |   |  | $ | 171,012 |  
|Severance                                                              |  |                                       | (136    | ) |                 |   | 110     |                 |  |   | 655          |   |  |                  |        |   |  |   |        |  
|Asset impairment charges and restaurant closings / disposals           |  |                                       | 530     |   |                 |   | 2,136   |                 |  |   | 2,015        |   |  |                  |        |   |  |   |        |  
|Potential company sale expense                                         |  |                                       | 666     |   |                 |   |        |                 |  |   |             |   |  |                  |        |   |  |   |        |  
|Expenses (income) related to predecessor companies                     |  |                                       | 12      |   |                 |   | (5      | )               |  |   | 358          |   |  |                  | 1,171   |   |  |   | 282     |  
|Debt extinguishment costs                                              |  |                                       |        |   |                 |   |        |                 |  |   |             |   |  |                  | 587     |   |  |   | 290     |  
|Income (loss) from continuing operations                               |  |                                       | (7,510  | ) |                 |   | 1,534   |                 |  |   | 3,051        |   |  |                  | 4,856   |   |  |   | 19,049  |  
|Loss from discontinued operations, net of tax                          |  |                                       | 340     |   |                 |   | 3,092   |                 |  |   | 3,300        |   |  |                  | 584     |   |  |   | 983     |  
|Net income (loss)                                                      |  |                                       | (7,850  | ) |                 |   | (1,558  | )               |  |   | (249         | ) |  |                  | 4,272   |   |  |   | 18,066  |  
|Basic income (loss) per share:                                         |  |                                       |         |   |                 |   |         |                 |  |   |              |   |  |                  |         |   |  |   |         |  
|Income (loss) from continuing operations                               |  |                                       | (0.57   | ) |                 |   | 0.12    |                 |  |   | 0.24         |   |  |                  | 0.38    |   |  |   | 1.52    |  
|Loss from discontinued operations, net of tax                          |  |                                       | (0.03   | ) |                 |   | (0.24   | )               |  |   | (0.26        | ) |  |                  | (0.05   | ) |  |   | (0.08   | )
|Net income (loss)                                                      |  |                                       | (0.60   | ) |                 |   | (0.12   | )               |  |   | (0.02        | ) |  |                  | 0.33    |   |  |   | 1.44    |  
|Diluted income (loss) per share:                                       |  |                                       |         |   |                 |   |         |                 |  |   |              |   |  |                  |         |   |  |   |         |  
|Income (loss) from continuing operations                               |  |                                       | (0.57   | ) |                 |   | 0.12    |                 |  |   | 0.23         |   |  |                  | 0.37    |   |  |   | 1.42    |  
|Loss from discontinued operations, net of tax                          |  |                                       | (0.03   | ) |                 |   | (0.24   | )               |  |   | (0.25        | ) |  |                  | (0.04   | ) |  |   | (0.07   | )
|Net income (loss)                                                      |  |                                       | (0.60   | ) |                 |   | (0.12   | )               |  |   | (0.02        | ) |  |                  | 0.33    |   |  |   | 1.35    |  
|Basic weighted average shares                                          |  |                                       | 13,102  |   |                 |   | 13,151  |                 |  |   | 12,887       |   |  |                  | 12,793  |   |  |   | 12,536  |  
|Diluted weighted average shares                                        |  |                                       | 13,102  |   |                 |   | 13,213  |                 |  |   | 13,118       |   |  |                  | 13,000  |   |  |   | 13,683  |  
|Balance Sheet Data:                                                    |  |                                       |         |   |                 |   |         |                 |  |   |              |   |  |                  |         |   |  |   |         |  
|Total assets                                                           |  | $                                     | 129,724 |   |                 | $ | 136,702 |                 |  | $ | 137,311      |   |  | $                | 133,749 |   |  | $ | 135,922 |  
|Long-term debt and capital lease obligations including current portion |  |                                       | 14,908  |   |                 |   | 14,707  |                 |  |   | 14,649       |   |  |                  | 18,563  |   |  |   | 28,550  |  
|Total shareholders equity                                             |  |                                       | 69,402  |   |                 |   | 76,728  |                 |  |   | 76,061       |   |  |                  | 75,008  |   |  |   | 69,934  |  



|(a) | The fiscal year ending July 1, 2007 had recorded income tax expense of $8.1 million related to a valuation allowance placed against a portion of our FICA tip tax credit
carryforwards.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Effective the beginning of fiscal 2006, the Company adopted SFAS 123(R), Share-Based Payment.
|--- | -----------------------------------------------------------------------------------------------



|(c) | Consisted of 53 weeks. The other fiscal years presented consisted of 52 weeks.
|--- | ------------------------------------------------------------------------------



|(d) | The fiscal year ending June 29, 2003 had recorded income tax benefits of $15.1 million primarily related to reversals of valuation allowances previously recorded on deferred
tax assets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|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 dining market. As of
July 1, 2007, we owned and operated 49 restaurants and franchised/licensed 12 restaurants primarily under one of the following names: Champps Americana, Champps Restaurant or Champps Restaurant and Bar. We operate and franchise / license
restaurants in 21 states with larger concentrations of restaurants in the upper Midwest, mid-Atlantic and Texas. Champps menu consists 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.

The first Champps opened in 1984. At June 2002, we owned 34 restaurants. We opened seven restaurants in each
of our fiscal years 2003 and 2004. In fiscal 2005, we opened four additional locations. We opened one Company-owned restaurant in fiscal 2006 and none in fiscal 2007. Also, a licensee/joint venture restaurant of which we own an eight percent equity
interest opened in the Dallas/Fort Worth airport in October 2005. Our growth in the last two fiscal years has been purposely modest as we concentrated on certain initiatives outlined below aimed at improving our existing operations and redefining
our growth plans and site selection criteria.

We closed three underperforming restaurants in May 2006 and closed one underperforming
restaurant in January 2007. Financial results related to these four restaurants have been classified as discontinued operations in our Consolidated Financial Statements. We may close additional restaurants in the future. The ultimate decision on
whether or not to close restaurants will depend on various factors including, without limitation, reaching mutually acceptable closure or lease concession arrangements with the landlords; assessing the alternatives of operating or subleasing to
third parties; analyzing the improvement or further deterioration in revenues or profitability; and reviewing various other financial and operational considerations.

Our current restaurants range in size from approximately 7,000 square feet to 12,100 square feet, with an average of about 9,200 square feet. We have built smaller restaurants starting in fiscal 2003, averaging
approximately 8,500 square feet. Pre-opening expenses have historically averaged approximately $340,000 per restaurant but may increase in the future because of the new accounting requirement requiring expensing of rents during the construction
period.

Historically, our primary sources of liquidity for funding our operations and expansion have been cash provided from operations,
and other standard restaurant financing methods. Also, in 2003 we issued $15.0 million of 5.5% convertible subordinated notes due in December 2007 and warrants and in 2004 we secured a $25.0 million revolving bank credit facility. As of July 1,
2007, we did not have any outstanding borrowings under the bank credit facility, but had $2.8 million of letters of credit placed under the facility.



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Key factors that can be used in evaluating and understanding our restaurants and assessing our business
include the following:



| |  |  | Comparable sales or same store sales - this indicator compares the revenue performance of our restaurants open for more than 18 full months 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Average unit volumes - a per store average sales amount. This indicator helps us assess the changes in customer traffic, pricing and impact of adding different
sized restaurants.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Store operating margin - restaurant sales less restaurant-level operating costs (product costs, labor costs, other operating expenses and occupancy). We review
store operating margins both in absolute dollar terms and as a percentage of restaurant sales.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. Our operating margins are also susceptible to fluctuations in prices of food
commodities, costs associated with delivering the products to our stores and other operating necessities such as natural gas and other utility supplies. The timing of revenues and expenses associated with opening new restaurants is also expected to
result in fluctuations in our quarterly and annual results. Changes in any of these factors could adversely affect us and our financial results.

Our comparable sales trends have been negative for twelve consecutive quarters after being modestly positive for fiscal year 2004. We believe that certain site selection factors may have contributed to the lower sales, as well as, other
external factors (such as the NHL hockey strike for the entire 2004/2005 NHL season) and economic factors affecting consumer spending.

Our
average weekly sales per restaurant have also 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. However, the average sales per square foot for
our newer stores have been substantially lower than those of our more established locations. We have implemented a new site selection process which incorporates an improved analytical evaluation, which we believe will lead to more attractive
restaurant results.

From a store operating margin perspective, our other operating expenses and occupancy have increased as a percent of
restaurant sales primarily due to the fixed nature of these costs over lower average sales volumes for our restaurants. Rising costs coupled with negative comparable sales have also contributed to the decrease in operating margin.

Minimum wage increases have occurred in the last couple fiscal years in a number of states where we operate. While most of our kitchen staff are paid in
excess of minimum wage levels and would typically not be affected by the increases, our server and bar staff are generally paid the tipped minimum wage and we generally must pay a higher hourly wage to those individuals as a result of the state
mandated minimum wage increases.



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Over the last two fiscal years, we have been working on certain key strategic initiatives outlined below.
We believe we have made significant progress in many of these areas, but our goal of reversing our negative comparable sales trends and ultimately improving our long-term profitability has not yet materialized. We believe that beginning in the
second half of fiscal 2006 our efforts have been hampered by macroeconomic factors that were generally believed to negatively impact sales of many companies in the full-service casual restaurant industry. These macroeconomic factors include higher
gas prices, higher health care costs, higher interest rates and lower consumer confidence. We plan to continue to pursue our key strategic initiatives and enhancements thereto, described below, as we believe our goals can ultimately be achieved
through these initiatives.



| |  |  | Menu Changes: Our main goal has been to renew the focus in the menu on popular, memorable and craveable items favored by our customers. We have been and plan
to continue revising and improving our menu. The menu changes are intended to allow for better execution, increased quality of our menu items and ultimately greater guest satisfaction. Improving our consistency in food execution was a key focus to
improve guest satisfaction during fiscal 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also, we revamped our menu specials program in fiscal 2006. Our specials
have been developed with the assistance of outside culinary experts and are now featured more prominently within our menu utilizing a full color layout. The specials are also being rotated less frequently than in past years to build consumer trial
and improve operational execution. We have seen an increase in our menu mix associated with specials as a result of these efforts.

Because
of our confidence in our product offerings, we increased our menu prices by approximately 1.6% in September 2006, and will consider additional increases in fiscal 2008.



| |  |  | Validation and Training Programs: This continuous improvement effort is aimed at improving our systems and developing our people and culture while creating a
heightened awareness of Champps mission of offering exceptional food and hospitality to our customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In fiscal
2006, we recertified and validated all of our restaurant managers and we also targeted certain training toward our hourly employees. Heightened and enhanced training was also a key focus for us in fiscal 2007. We revamped a number of our training
programs including use of new training tools and techniques and also are in the process of providing leadership development programs for select management level employees. We completed a visioneering process near the end of fiscal 2006
to define and communicate our foundational ideas, principles and stakeholder commitments with the help of a consultant who pioneered the process. The visioneering program was rolled-out system-wide in fiscal 2007 as a key focus in our 2007 training
program.



| |  |  | Bar Reinvigoration: For several years prior to fiscal 2006, our alcohol sales had declined as a percentage of overall revenues. Our goal has been to reverse
this trend and attract new customers to our bars by improving service levels, ingredient quality and drink presentation. Over the past two fiscal years, we have implemented a training program aimed at improving customer service levels, updated or
replaced draft beer systems, and added beer mug chillers in all of our restaurants. We also reworked many of our recipes and drink mixes and developed new specialty drinks for promotions. Prices have been adjusted based on competitive considerations
and we have modified happy hour programs in a number of stores to enhance the guest experience.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Revised General Manager Bonus Plan: At the start of fiscal 2006, we implemented a more aggressive and performance-based bonus plan for our managers based on
monthly unit level cash flow improvements over the prior year. We believe this plan provides our restaurant managers with greater performance-based compensation and an increased sense of accountability and ownership in their restaurants
success. This bonus plan has been further enhanced by creating cash-flow arrangements under which selected general managers and directors of operations may purchase a cash flow interest in the restaurants they operate and oversee. As of July 1,
2007, 21 of our general managers and five of our directors of operations had executed such agreements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Real Estate Strategy: While we did not open any new restaurants in fiscal 2007, our site selection process has been upgraded to include more rigorous
evaluation of the success factors for new site development to allow us to achieve our expected investment returns on renewed future growth. To aid in this process, we are using a multi-factor, risk-analysis regression software model, developed by an
outside consultant, aimed at accurately predicting sales levels and decreasing the risks associated with opening new restaurants. We expect to resume opening new restaurants in fiscal 2008. Also, as part of our real estate strategy, we closed three
underperforming restaurants in May 2006 and closed one underperforming location in January 2007. We also plan to actively monitor and evaluate our restaurant portfolio on an ongoing basis to determine if further closures are warranted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Franchise Development: We value franchising as a potentially profitable function but we purposely did not actively pursue this initiative in fiscal 2006 as
we viewed the other initiatives (such as menu design and prototype development) as important precursors to our franchising efforts. We started increasing our franchising sales efforts in the second half of fiscal 2007 and have signed a development
agreement with new franchisee candidates to develop two new restaurants in Northern California and three new restaurants in Southern Texas.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our financial results for fiscal 2007 included:



| |  |  | Consolidated revenues decreased by 4.3% to $198.1 million.
| | - |  | ----------------------------------------------------------



| |  |  | A loss before income taxes of $0.9 million was recorded in fiscal 2007 compared to income before income taxes of $0.6 million in the prior fiscal year. Included in
fiscal 2007s and 2006s results were asset impairment charges and restaurant closings/disposals of $0.5 million and $2.1 million, respectively. Also, included in fiscal 2007s results was potential company sale expense of $0.7
million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A loss from discontinued operations, net of tax, of $0.3 million was recorded in fiscal 2007 compared to $3.1 million in the prior fiscal year. The loss from
discontinued operations, net of tax, relates to the operations of three locations which were closed in May 2006 and one location closed in January 2007 including related asset impairment charges and restaurant closing/disposal costs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A net loss of $7.9 million, or $0.60 diluted loss per share, was reported in fiscal 2007 compared to a net loss of $1.6 million, or $0.12 diluted loss per share, in
fiscal 2006. The net loss for 2007 included additional income tax expense of $8.1 million related to charges to establish a valuation allowance on certain income tax credits whose full realization is not more likely than not based on our income
trends.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At July 1, 2007, we had cash and cash equivalents of $19.4 million, reflecting a net increase of $9.9 million for fiscal 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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Recent Developments

On July 3, 2007, we entered into the Merger Agreement with F&H and Merger Sub, pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into the
Company, with the Company continuing as the surviving corporation.

Under the terms of the Merger Agreement, at the effective time of the
Merger, each issued and outstanding share of Company common stock (other than any shares held in treasury by the Company and any shares as to which the holder has properly demanded appraisal of his or her shares under Delaware law) will be converted
into the right to receive $5.60 in cash, or $74.8 million in total, without interest. Following completion of the Merger, we will be a wholly-owned subsidiary of F&H. F&H is the parent company of Fox & Hound Restaurant Group, a
pub-themed concept with 88 units in operation. F&H is owned by two private equity fund sponsors, Newcastle Partners, L.P. and Steel Partners II L.P., and the senior management of F&H.

Stockholders are scheduled to vote on the approval and adoption of the Merger Agreement at a special meeting of stockholders called for that purpose
which will be held on September 28, 2007, and if the Merger is approved, it is currently anticipated that the Merger will be completed on October 1, 2007. Completion of the Merger is subject to the satisfaction of certain other customary closing
conditions as set forth in the Merger Agreement, including the absence of certain changes and the obtaining of certain third party consents. The Merger is not subject to any financing condition.

Additional information about the Merger and the Merger Agreement is contained in our proxy statement dated August 28, 2007, copies of which have been
filed with the SEC and mailed to our stockholders.

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 approximately 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 18 months. As
of July 1, 2007, 48 restaurants of our total 49 restaurants in operation were included in our comparable sales calculation.

Cost of Sales and Operating Expenses - Product costs are composed primarily of food and beverage expenses. Labor costs include direct hourly and management wages, our restaurant employees wages during training, bonuses,
workers compensation and payroll taxes and benefits for restaurant employees. Other operating expenses 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 land and building operating lease rents, percentage rent, common area maintenance charges, general liability and property insurance and real estate and
personal property taxes. 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. Pre-opening expense, starting January 2, 2006, also includes rental costs under operating leases incurred during a construction period in accordance with a new accounting pronouncement.

Depreciation and Amortization - 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.



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##### Table of Contents

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, stock award costs, restaurant
manager-in-training wages and costs, bonuses and related employee 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.

Other Financial Definitions - Severance expense consists of the cost associated with the
separation agreements with certain former employees. Asset impairment charges and restaurant closings / disposals relate to write-down of assets of certain under-performing restaurants to their estimated fair value and costs for exits and closures
which are not classified as discontinued operations. Other (income) expense, net generally consists of gains or losses on asset disposals primarily from asset replacements and estimated buy-out expense related to the bonus buy-in agreements but also
included a settlement gain relative to credit card fees in fiscal 2007 and an investment gain in fiscal 2005. 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 in 1997. Discontinued operations consist of operating results, asset impairment charges and exit and closure costs for the three restaurants closed in May 2006 and the one restaurant closed in January 2007. Discontinued operations
are reported on a basis net of income taxes.

Fiscal Calendar -We utilize a 52/53 week fiscal year ending on the Sunday closest to
June 30. Fiscal 2007 and fiscal 2006 consisted of 52 weeks while fiscal 2005 consisted of 53 weeks. The extra week in fiscal 2005 fell in the first quarter.



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##### Table of Contents

Results of operations

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



|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|---------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | ----- | -- | ---------------- | - | ------- | - |  | ----- | -- |  | - | ------- | - |  | ----- | --
|                                                           |  | Fiscal Year Ended |        
|                                                           |  | July 1, 2007      |         |   | July 2, 2006 |       |    | July 3, 2005 (a) |  
|Revenue:                                                   |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Sales                                                      |  | $                 | 197,389 |   |              | 99.7  | %  |                  | $ | 206,387 |   |  | 99.7  | %  |  | $ | 210,048 |   |  | 99.7  | % 
|Franchising and royalty, net                               |  |                   | 680     |   |              | 0.3   |    |                  |   | 643     |   |  | 0.3   |    |  |   | 621     |   |  | 0.3   |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Total revenue                                              |  |                   | 198,069 |   |              | 100.0 | %  |                  |   | 207,030 |   |  | 100.0 | %  |  |   | 210,669 |   |  | 100.0 | % 
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Cost of sales and operating expenses                       |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|(as a percentage of sales)                                 |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Product costs                                              |  |                   | 56,448  |   |              | 28.6  | %  |                  |   | 58,180  |   |  | 28.2  | %  |  |   | 59,760  |   |  | 28.5  | % 
|Labor costs                                                |  |                   | 64,570  |   |              | 32.7  |    |                  |   | 65,690  |   |  | 31.8  |    |  |   | 66,589  |   |  | 31.7  |   
|Other operating expenses                                   |  |                   | 31,789  |   |              | 16.1  |    |                  |   | 32,132  |   |  | 15.5  |    |  |   | 30,855  |   |  | 14.7  |   
|Occupancy                                                  |  |                   | 20,536  |   |              | 10.4  |    |                  |   | 20,776  |   |  | 10.1  |    |  |   | 19,943  |   |  | 9.5   |   
|Pre-opening expenses                                       |  |                   |        |   |              |      |    |                  |   | 183     |   |  | 0.1   |    |  |   | 1,339   |   |  | 0.6   |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Total cost of sales and operating expenses                 |  |                   | 173,343 |   |              | 87.8  |    |                  |   | 176,961 |   |  | 85.7  |    |  |   | 178,486 |   |  | 85.0  |   
|(as a percentage of total revenue)                         |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|General and administrative expenses (b)                    |  |                   | 13,085  |   |              | 6.6   |    |                  |   | 14,735  |   |  | 7.1   |    |  |   | 13,889  |   |  | 6.6   |   
|Depreciation and amortization                              |  |                   | 10,356  |   |              | 5.2   |    |                  |   | 10,859  |   |  | 5.2   |    |  |   | 10,494  |   |  | 5.0   |   
|Severance                                                  |  |                   | (136    | ) |              | (0.1  | )  |                  |   | 110     |   |  | 0.1   |    |  |   | 655     |   |  | 0.3   |   
|Asset impairment charges and restaurant closings/disposals |  |                   | 530     |   |              | 0.3   |    |                  |   | 2,136   |   |  | 1.0   |    |  |   | 2,015   |   |  | 1.0   |   
|Potential company sale expense                             |  |                   | 666     |   |              | 0.3   |    |                  |   |        |   |  |      |    |  |   |        |   |  |      |   
|Other expense, net                                         |  |                   | 324     |   |              | 0.2   |    |                  |   | 474     |   |  | 0.2   |    |  |   | (90     | ) |  |      |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Income (loss) from operations                              |  |                   | (99     | ) |              |      |    |                  |   | 1,755   |   |  | 0.8   |    |  |   | 5,220   |   |  | 2.5   |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Other expense:                                             |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Interest expense, net                                      |  |                   | 751     |   |              | 0.4   |    |                  |   | 1,127   |   |  | 0.5   |    |  |   | 1,444   |   |  | 0.7   |   
|Expense (income) related to predecessor companies          |  |                   | 12      |   |              |      |    |                  |   | (5      | ) |  |      |    |  |   | 358     |   |  | 0.2   |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Income (loss) from continuing operations, before tax       |  |                   | (862    | ) |              | (0.4  | )  |                  |   | 633     |   |  | 0.3   |    |  |   | 3,418   |   |  | 1.6   |   
|Income tax expense (benefit)                               |  |                   | 6,648   |   |              | 3.4   |    |                  |   | (901    | ) |  | (0.4  | )  |  |   | 367     |   |  | 0.2   |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Income (loss) from continuing operations                   |  |                   | (7,510  | ) |              | (3.8  | )  |                  |   | 1,534   |   |  | 0.7   |    |  |   | 3,051   |   |  | 1.4   |   
|Loss on discontinued operations, net of tax                |  |                   | 340     |   |              | 0.2   |    |                  |   | 3,092   |   |  | 1.5   |    |  |   | 3,300   |   |  | 1.5   |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Net loss                                                   |  | $                 | (7,850  | ) |              | (4.0  | )% |                  | $ | (1,558  | ) |  | (0.8  | )% |  | $ | (249    | ) |  | (0.1  | )%
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Restaurant operating weeks (c)                             |  |                   | 2,548   |   |              |       |    |                  |   | 2,548   |   |  |       |    |  |   | 2,476   |   |  |       |   
|Restaurant sales per operating week                        |  | $                 | 77.5    |   |              |       |    |                  | $ | 81.0    |   |  |       |    |  | $ | 84.8    |   |  |       |   
|Number of restaurants (end of period)                      |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Company-owned (c)                                          |  |                   | 49      |   |              |       |    |                  |   | 49      |   |  |       |    |  |   | 49      |   |  |       |   
|Franchised                                                 |  |                   | 12      |   |              |       |    |                  |   | 13      |   |  |       |    |  |   | 12      |   |  |       |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   
|Total restaurants                                          |  |                   | 61      |   |              |       |    |                  |   | 62      |   |  |       |    |  |   | 61      |   |  |       |   
|                                                           |  |                   |         |   |              |       |    |                  |   |         |   |  |       |    |  |   |         |   |  |       |   



|(a) | Fiscal 2005 consisted of 53 weeks, while fiscal 2007 and fiscal 2006 each consisted of 52 weeks.
|--- | ------------------------------------------------------------------------------------------------



|(b) | Effective the beginning of fiscal 2006, we adopted SFAS 123(R), Share-Based Payment. We recorded $1.0 million of stock-based compensation in fiscal 2007, $0.9 million of
stock-based compensation and $0.3 million of restricted stock expenses in fiscal 2006 and $0.3 million of restricted stock expense in fiscal 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Excludes three restaurants closed in May 2006 and one restaurant closed in January 2007, whose results have been classified as discontinued operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



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Fiscal 2007 compared to fiscal 2006

Total revenue. Total revenue decreased $8.9 million, or 4.3%, to $198.1 million in fiscal 2007 from $207.0 million for the prior fiscal year. The decrease was due to a comparable same store sales decrease of
4.0% for fiscal 2007 compared to last year. During fiscal 2007, comparable same store food sales decreased 3.8% while comparable same store alcohol sales decreased 4.5%. Restaurant sales per operating week on average for all restaurants decreased
$3,532, or 4.4%, to $77,468 in fiscal 2007 from $81,000 for the prior year.

The average guest check in our dining room, excluding
alcoholic beverages, was approximately $14.01 for fiscal 2007 compared to $13.71 for fiscal 2006, a 2.2% increase. During fiscal 2007, food sales and alcoholic beverage sales represented 71.2% and 28.8% of our total sales, respectively. During
fiscal 2006, food and alcoholic beverage sales represented 71.1% and 28.9% of our total food and beverage sales, respectively.

In addition
to the inclement weather in the third quarter of fiscal 2007, we also believe that our sales were negatively impacted in fiscal 2007 by lower consumer discretionary spending due to higher fuel and utility costs, higher interest rates, and rising
health care costs.

Cost of Sales and Operating Expenses

Product costs. Product costs decreased by $1.8 million, or 3.1%, to $56.4 million in fiscal 2007 from $58.2 million in the prior
fiscal year period. Product costs as a percentage of restaurant sales increased to 28.6% for fiscal 2007 from 28.2% for fiscal 2006. The increased product cost as a percentage of restaurant sales resulted from higher seafood and produce costs
partially offset by lower poultry and beef costs.

Labor costs. Labor costs decreased by $1.1 million, or 1.7%, to
$64.6 million in fiscal 2007 from $65.7 million in the prior year. Labor costs as a percentage of restaurant sales increased to 32.7% in fiscal 2007 from 31.8% in the prior year period due primarily to higher kitchen and management labor costs as a
percentage of restaurant sales resulting primarily from the lower average sales per restaurant, increases in the tipped minimum wage in certain states, higher bonus costs as a result of the rollout of and increased participation in the partnership
bonus program, which started in March 2006 and higher workers compensation costs.

Other operating expense. Other
operating expense decreased by $0.3 million, or 0.9%, to $31.8 million in fiscal 2007 from $32.1 million in the prior fiscal year. Other operating expense as a percentage of restaurant sales increased to 16.1% in fiscal 2007 from 15.5% in the prior
fiscal year. The increase as a percent of sales resulted primarily from higher marketing costs. In fiscal 2007, $0.3 million was spent on testing radio advertising in two markets.

Occupancy. Occupancy expense decreased by $0.3 million, or 1.4%, to $20.5 million in fiscal 2007 from $20.8 million in the prior
year. Occupancy expense decreased primarily due to reduced general and property insurance costs and lower percentage rents. Occupancy expense as a percentage of restaurant sales increased to 10.4% in fiscal 2007 from 10.1% in fiscal 2006 due to the
lower average restaurant sales.

Total Cost of Sales and Operating Expenses. Total cost of sales and operating expenses decreased by
$3.7 million, or 2.1%, to $173.3 million in fiscal 2007 from $177.0 million in fiscal 2006 primarily for the reasons described above.



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##### Table of Contents

General and administrative expenses. General and administrative expenses decreased by $1.6
million, or 10.9%, to $13.1 million in fiscal 2007 from $14.7 million in fiscal 2006. General and administrative expenses decreased as a result of reduced support staff levels and manager-in training costs, reduced compensation expense for
stock-based compensation, reduced legal costs and reduced relocation expense partially offset by higher professional fees and bonus costs. The higher bonus expense resulted from the rollout of and increased participation in the partnership bonus
program by directors of operations, which started in May 2006. General and administrative expenses as a percentage of total revenue decreased to 6.6% for fiscal 2007 from 7.1% in fiscal 2006.

Depreciation and amortization. Depreciation and amortization expense decreased by $0.5 million, or 4.6%, to $10.4 million for fiscal 2007 from
$10.9 million in fiscal 2006. The decrease was primarily due to reduced depreciation on assets whose value were written down in conjunction with an asset impairment charge of $2.1 million recorded in the third quarter of fiscal 2006. We estimate
that an additional $0.4 million of depreciation and amortization expense would have been recorded in fiscal 2007 absent the asset impairment charge. Depreciation and amortization expense as a percentage of revenues was 5.2% in both fiscal 2007 and
fiscal 2006.

Severance.A severance expense of negative $0.1 million was recorded in fiscal 2007 compared to $0.1 million in fiscal
2006. The $0.1 million credit related to the reversal of a severance expense accrued prior to 2006 that will now not be paid. The fiscal 2006 severance expense related to payments to nine employees whose employment with the Company were terminated.

Asset impairment charges and restaurant closings / disposals.An asset impairment charge of $0.5 million was recorded in fiscal
2007 for one location whose future cash flows are not expected to cover its carrying value and to write-off the development costs for a new location project which will not be pursued. An asset impairment charge of $2.1 million was recorded in fiscal
2006 for two locations whose future cash flows were not expected to cover their carrying value.

Potential company sale expense.
Potential company sale expense of $0.7 million was recorded in fiscal 2007 versus none in fiscal 2006. The expense related to legal and board of directors special committee fees associated with the potential sale of the Company.

Interest expense, net.Interest expense, net decreased by $0.3 million, or 27.3%, to $0.8 million for fiscal 2007 from $1.1 million in fiscal
2006. The decrease was due to higher interest income from larger invested excess cash balances.

Income (loss) from continuing
operations, before income taxes. Income before income taxes decreased by $1.5 million to a loss of $0.9 million in fiscal 2007 compared to income of $0.6 million in the prior fiscal year primarily for the reasons described above.

Income tax expense/(benefit). For fiscal 2007, we recorded an income tax expense of $6.6 million compared to an income tax benefit
of $0.9 million in the prior fiscal year. The tax expense for fiscal 2007 included an $8.1 million charge for a valuation allowance placed against our FICA tip tax credit carryforwards because it is no longer more likely than not that we will
realize such credits in full due to the trend in earnings.



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Loss on discontinued operations, net of tax.Loss on discontinued operations, net of tax was $0.3
million in fiscal 2007 and $3.1 million in fiscal 2006. The net loss in fiscal 2007 was due largely to costs associated with the closure of one restaurant in January 2007 and the change in estimate of sublease revenues for one restaurant closed in
fiscal 2006, net of tax benefit. The net loss in fiscal 2006 largely relates to asset impairment, closure and disposal costs associated with three restaurants which closed in May 2006, net of tax benefit.

Fiscal 2006 compared to fiscal 2005

Total
revenue. Total revenue decreased by approximately $3.7 million, or 1.8%, to $207.0 million in fiscal 2006 from $210.7 million for comparable period in the prior fiscal year. In part, revenue decreased because of the effect of the extra operating
week in fiscal 2005. We operated approximately two more stores on average in fiscal 2006 compared to fiscal 2005. Comparable same store sales decreased 3.8% in fiscal 2006 compared to last year on a basis that excludes the extra week in fiscal 2005.
Comparable same store food sales decreased 4.4% while comparable same store alcohol sales decreased 2.2%. Restaurant sales per operating week for all restaurants decreased $3,834, or 4.5%, to $81,000 in fiscal 2006 from $84,834 in the prior year.
This decrease resulted primarily from a decrease in comparable same store sales and, in part, due to the restaurants that were opened in fiscal 2005 and fiscal 2006 generating lower revenues on average than the restaurants opened prior to fiscal
2005.

The average guest check in our dining room, excluding alcoholic beverages, was approximately $13.71 in fiscal 2006 compared to
$13.59 in fiscal 2005, a 0.9% increase. During fiscal 2006, food sales and alcoholic beverage sales represented 71.1% and 28.9% of our total food and beverage sales, respectively. During fiscal 2005, food and alcoholic beverage sales represented
71.6% and 28.4% of our total food and beverage sales, respectively.

Cost of Sales and Operating Expenses

Product costs. Product costs decreased by $1.6 million, or 2.7%, to $58.2 million in fiscal 2006 from $59.8 million in the prior
year period. Product costs as a percentage of restaurant sales were 28.2% for fiscal 2006 and 28.5% for fiscal 2005. Product costs decreased as a percentage of restaurant sales due to lower meat and poultry prices partially offset by higher alcohol
costs.

Labor costs. Labor costs decreased by $0.9 million, or 1.4%, to $65.7 million in fiscal 2006 from $66.6
million in the comparable prior year period. Labor costs as a percentage of restaurant sales increased to 31.8% in fiscal 2006 from 31.7% in the comparable prior year period due primarily to higher bonus costs resulting from our new management bonus
plan, which was put in place at the beginning of fiscal 2006, higher kitchen labor costs, as a percentage of sales, due to the impact of lower average sales per restaurant and increases in the minimum wage during fiscal 2005 for five states in which
we operate. These increases were partially offset by lower management and workers compensation insurance costs.

Other
operating expense. Other operating expense increased by $1.2 million, or 3.9%, to $32.1 million in fiscal 2006 from $30.9 million in the comparable prior year period. Operating expense as a percentage of restaurant sales increased to 15.5% in
fiscal 2006 from 14.7% in the prior year period. The increase as a percent of sales resulted from higher utility costs, lower average restaurant sales and the sales recorded as a result of the extra week in fiscal 2005.



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Occupancy. Occupancy expense increased by $0.9 million, or 4.5%, to $20.8 million
in fiscal 2006 from $19.9 million in the comparable prior year period. Occupancy expense as a percentage of restaurant sales increased to 10.1% in fiscal 2006 from 9.5% in the prior year period. Occupancy expense increased due to more locations and
as a percent of sales due to lower average restaurant sales and the sales recorded as a result of the extra week in fiscal 2005.

Pre-opening expenses. Pre-opening expenses were $0.2 million for fiscal 2006 and $1.3 million for the comparable prior year period. We opened one restaurant in fiscal 2006 and we opened four restaurants in fiscal 2005. Pre-opening
expenses as a percentage of revenue were 0.1% for fiscal 2006 and 0.6% for fiscal 2005.

Total Cost of Sales and Operating Expenses.
Total cost of sales and operating expenses decreased by $1.5 million, or 0.8%, to $177.0 million in fiscal 2006 from $178.5 million in the comparable prior fiscal year period primarily for the reasons described above.

General and administrative expenses. General and administrative expenses increased by $0.8 million, or 5.8%, to $14.7 million in fiscal 2006 from
$13.9 million in the comparable prior fiscal year. General and administrative expenses increased as a result of compensation expense for stock-based compensation resulting from adoption of a new accounting standard and the issuance of restricted
stock awards, higher legal costs, a $175,000 litigation settlement received and recorded as a reduction of expense in the first quarter of 2005 and costs associated with our strategic initiatives. These increases were partially offset by reduced
support staff levels. General and administrative expenses as a percentage of total revenue increased to 7.1% for fiscal 2006 from 6.6% in fiscal 2005.

Depreciation and amortization. Depreciation and amortization expense increased by $0.4 million, or 3.8%, to $10.9 million for fiscal 2006 from $10.5 million in fiscal 2005. The increase was primarily due to an
increase in assets associated with the opening of new restaurants, partially offset by reduced depreciation on assets whose value was written down in conjunction with asset impairment charges of $2.1 million and $2.0 million recorded in the third
quarters of fiscal 2006 and fiscal 2005, respectively. We estimate that an additional $0.3 million of depreciation and amortization expense would have been recorded in fiscal 2006 absent the asset impairment charge. Depreciation and amortization
expense as a percentage of revenue was 5.2% in fiscal 2006 and 5.0% in fiscal 2005.

Severance.Severance expense totaled $0.1
million for fiscal 2006 compared to $0.7 million of severance expense in fiscal 2005. The fiscal 2006 severance expense related to payments to nine employees whose services were terminated. The fiscal 2005 severance expense was the result of the
separation agreement with our former chief executive officer and chief operating officer.

Asset Impairment Charges and Restaurant
Closings / Disposals. Asset impairment charges and restaurant closings / disposals of $2.1 million were recorded in fiscal 2006 compared to $2.0 million in fiscal 2005. The fiscal 2006 asset impairment charges and restaurant closings / disposals
were the result of recognition of an asset impairment for two restaurants while the fiscal 2005 impairment charge was the result of recognition of an asset impairment for one restaurant. The difference in asset impairment expense recorded between
the two years was due to the difference in carrying value of long-term assets for the different restaurants associated with the impairment.

Other Income/Expense. There were $0.5 million of other expenses in fiscal 2006 compared to $0.1 million of other income in fiscal 2005. A gain of approximately $0.3 million was recorded in fiscal 2005 related to a one-time sale of an
investment.



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Interest expense and income, net.Interest expense and income, net was $1.1 million in fiscal 2006
and $1.4 million in fiscal 2005. The decrease was due to reduced average debt balances in fiscal 2006 and increased interest income in fiscal 2006 from higher invested excess cash balances compared to those in fiscal 2005.

Expenses related to predecessor companies.For fiscal 2006, we incurred essentially no expenses related to predecessor companies compared to $0.4
million in fiscal 2005. The prior year amount related to court awarded attorney fees relative to a litigation matter.

Income before
income taxes. Income before income taxes decreased by $2.8 million to $0.6 million in fiscal 2006 compared to $3.4 million in the prior year primarily for the reasons described above.

Income tax expense (benefit). For fiscal 2006, we recorded an income tax benefit of $0.9 million compared to an expense of $0.4 million in fiscal
2005. The tax benefit for fiscal 2006 is largely reflective of the federal tax expense associated with the $0.6 million income before income taxes offset by the $1.5 million benefit associated with our FICA tip tax credit. The tax expense for fiscal
2005 is largely reflective of the federal tax expense associated with the $3.4 million income before income taxes, offset by the $1.5 million benefit associated with our FICA tip tax credit.

Loss from discontinued operations, net of tax.Loss from discontinued operations, net of tax increased $0.2 million to $3.1 million in fiscal 2006
from $3.3 million in fiscal 2005. The fiscal 2006 loss was due largely to $2.1 million of pre-tax impairment expense, $2.0 million of pre-tax lease termination and closure costs and $1.0 million of pre-tax operating losses related to three stores
closed in May 2006 and one store closed in January 2007 while the fiscal 2005 loss was due largely to $4.6 million of pre-tax impairment expense and $0.9 million of pre-tax operating losses related to those same stores.

Liquidity and Capital Resources

As of July 1,
2007, our cash balance was $19.4 million, which reflects a $9.9 million increase during the fiscal year. Our cash balance increased primarily as a result of reduced capital expenditures. 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 in the restaurant industry.

For
fiscal years 2007, 2006 and 2005, we generated cash flow from operating activities of $11.9 million, $13.8 million and $19.6 million, respectively. The decrease in cash flow from operations from 2007 compared to 2006 was primarily due to reduced
profitability and reduced proceeds from tenant improvement allowances. The decrease in cash flow from operations from 2006 compared to 2005 was primarily due to reduced profitability, costs associated with store closures and lease terminations, and
reduced proceeds from tenant improvement allowances. Proceeds from tenant improvement allowances in the amount of $2.0 million and $3.0 million in fiscal years 2006 and 2005, respectively, contributed to cash flow from operating activities. Tenant
improvement allowances are reimbursements received from certain of our landlords for a portion of initial construction expenditures. 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 July 1, 2007, we had $36.1 million of such carryforwards and $12.5 million of credits available through 2027 to offset federal taxes.



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Historically, a significant portion of our cash flow generated from operating activities has been
invested in capital expenditures, the majority of which was for the construction of new restaurants. However, we did not open any new stores in fiscal 2007 and opened only one new restaurant in fiscal 2006, the capital expenditures of which were
mostly incurred in the prior year. We opened four new restaurants in fiscal 2005. The following table, in thousands, details our capital expenditures.



|                                         |  |                   |       |             |   |              |  |   |       
|---------------------------------------- |  | ----------------- | ----- | ----------- | - | ------------ |  | - | ------
|                                         |  | Fiscal Year Ended
|                                         |  | July 1,2007       |       | July 2,2006 |   | July 3, 2005
|New store construction                   |  | $                 | 141   |             | $ | 479          |  | $ | 12,747
|Existing store remodel and refurbishment |  |                   | 3,841 |             |   | 3,763        |  |   | 2,841 
|Corporate related capital expenditures   |  |                   | 149   |             |   | 223          |  |   | 340   
|                                         |  |                   |       |             |   |              |  |   |       
|Purchase of property and equipment       |  | $                 | 4,131 |             | $ | 4,465        |  | $ | 15,928
|                                         |  |                   |       |             |   |              |  |   |       

We expect to spend from $6.0 million to $8.0 million for capital expenditures in fiscal 2008.
These expenditures will primarily be for upgrades to existing restaurants but are expected to include construction costs for one new restaurant expected to open in fiscal 2008 and for new restaurants expected to open in fiscal 2009. We review our
capital expenditures budget frequently and amounts are subject to change.

In fiscal 2006 and 2005, we elected to prepay $0.1 million and
$1.0 million, respectively, of our existing debt to reduce our annual interest costs. The funds to prepay the debt came from excess cash and borrowings under our $25.0 million senior bank credit facility described below. No debt extinguishment costs
were recorded with the 2006 and 2005 prepayments.

We have a $25.0 million senior secured credit facility, which expires in September 2010.
We initially used a portion of the facility to refinance certain of our existing debt. The facility may also be used to support opening new restaurants and general working capital needs and provide up to $7.0 million for the issuance of letters of
credit. The facility provides for a $10.0 million one-time increase in the aggregate commitment amount if requested by us between September 30, 2007 and December 31, 2007 and approved by the lenders. The facility is secured by a blanket
lien on all of our personal and real property. Borrowings under the facility bear interest depending on a total funded debt to EBITDA ratio and can range from the prime rate to prime plus 0.5 percent or, if elected by us, LIBOR plus 1.8 to 3.0
percent. Total funded debt is defined as all indebtedness of our consolidated entities, including senior and subordinated debt, capital lease obligations and contingent liabilities. We originally paid an up-front fee of $188,000 and are required to
pay an annual unused commitment fee of 0.375 to 0.5 percent.

The facility limits our opening of new company-owned restaurants to a maximum
of eight in any fiscal year and also sets limits on the amount of dividends and/or stock repurchases that can be made by us to $2.0 million per fiscal year if the total senior debt to EBITDA ratio is equal to or more than 1.00 to 1.00. In order to
declare dividends or re-acquire stock through share repurchases, we must also maintain a margin of at least .25 to 1.00 with each of our financial covenants. As of July 1, 2007, we had no outstanding borrowings under this facility and had
placed letters of credit of $2.8 million under the facility with $22.2 million available for additional borrowing.



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The facility requires us to maintain a minimum fixed charge coverage ratio and tangible net worth level
and not exceed certain thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios. EBITDA is defined in the facility as (the) Consolidated Entities net income for such period, plus (a) without duplication the
sum of (i) interest expense, (ii) federal and state income taxes, (iii) depreciation and amortization expenses, (iv) start-up costs associated with the opening of new restaurants, (v) one-time prepayment fees associated with
payment in full of all Indebtedness of Borrower that is pre-paid at the Closing Date with proceeds from the 3-Year Loan, (vi) non-cash impairment expenses associated with write down of assets, and (vii) non-cash stock-based compensation
expenses; minus (b) without duplication, extraordinary gains, in each case as charged against (or added to, as the case may be) revenues to arrive at net income for such period, all as determined in accordance with GAAP. As of
July 1, 2007, we were in compliance with all debt covenants and financial ratios contained in the facility.

Our long-term debt is
principally comprised of a $15.0 million face value issuance of 5.5% convertible notes due December 2007. The notes are convertible at the option of the holder at any time prior to maturity into shares of our common stock, at a conversion price of
$10.66 per share, subject to adjustment upon certain events. Based on the current market price of our common stock, it is not likely that the convertible debt holders will convert their debt into shares prior to December 2007. In connection with the
Merger, we have called the notes for redemption at par plus accrued and unpaid interest subject to the completion of the Merger and the availability of sufficient funds. If the Merger is not completed for any reason, we expect to repay the notes
either with available cash, the proceeds from credit facility borrowings, new debt, or a combination of these sources. If we seek additional financing there are no assurances that we will be able to do so at that time, and the terms of the debt may
not be as favorable as our existing debt.

For additional information regarding our material debt instruments, including our $15.0 million
convertible subordinated notes and related warrants and our $25.0 million senior secured bank credit facility, please refer to the information provided under Note 7 Long-term Debt, to the accompanying consolidated financial statements.

In January 2006, our Board of Directors approved and announced a plan to use up to $5 million to repurchase our common stock from time to
time over the next two years. Through July 1, 2007, we purchased 191,480 shares of common stock for $1.3 million under this plan. Purchases under the program may be made in the open market or in private transactions. Purchases under the program
will depend, among other factors, on the prevailing stock price, market conditions, alternative investment opportunities and are expected to be funded primarily with available cash balances and operating cash flow. There is no minimum or maximum
number of shares to be repurchased under the program. The repurchased shares will be held in treasury and used for issuance under our equity incentive plans. We have never declared or paid dividends on our common stock and currently have no plans to
do so.

We closed three restaurants in May 2006 and one restaurant in January 2007. We may close additional restaurants in the future. We
exited one location in June 2006 and another in January 2007 through lease terminations at a cost of $1.6 million. We purchased one closed location from the landlord for $3.2 million in fiscal 2006 and resold the property for $2.6 million in fiscal
2007. The other closed location is expected to be disposed of through a sublease scheduled to start in September 2007.



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During fiscal 2007 and 2006, we did not incur any significant costs related to predecessor company
matters. During fiscal 2005, we expended approximately $1.4 million for settlements and on-going legal costs related to the predecessor company matters. We believe that such costs in fiscal 2008 and beyond will not be significant and, if any, will
be limited to on-going legal costs. 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.

We believe our cash flow from
operations, together with funds available under our $25.0 million credit facility ($22.2 million available at July 1, 2007) will be sufficient to fund our operations, debt repayment, share repurchases, expansion and any additional potential
restaurant closure costs at least through the end of fiscal year 2008. However, changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses or other events, including those described
previously under Forward Looking Statements and in Part I, Item 1A. 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 or grow our business.

On July 3, 2007, we entered into a merger agreement to be acquired by F&H Acquisition Corp., the holding company for Fox & Hound
Restaurant Group, for $5.60 per share in cash, or an aggregate purchase price of $74.8 million. See discussion in Managements Discussion and Analysis of Results of Operations and Financial Condition  Recent Developments.

Potential company sale costs of $666,000 were incurred for the fiscal year ended July 1, 2007 and largely consist of legal and board
of directors special committee fees associated with the potential sale of the Company during an earlier sale process and with the above mentioned transaction. If the sale described above is consummated, additional significant transaction as
well as severance costs are expected to be incurred. We could be required to pay F&H Acquisition Corp. a termination fee of $2.25 million and reimburse it for its out-of-pocket fees and expenses incurred up to a maximum of $750,000 with respect
to the transaction contemplated by the merger agreement, if the merger agreement is terminated under certain circumstances defined in the Merger agreement.



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Contractual obligations and commitments

Payments, including interest, due by period as of July 1, 2007 (in 000s):



|                                             |  |       |         |                  |   |                  |  |                   |        |                 |   |        |  |   |        
|-------------------------------------------- |  | ----- | ------- | ---------------- | - | ---------------- |  | ----------------- | ------ | --------------- | - | ------ |  | - | -------
|Contractual obligations                      |  | Total |         | One yearand less |   | Two tothreeyears |  | Four to fiveyears |        | After fiveyears
|Operating leases                             |  | $     | 175,964 |                  | $ | 15,831           |  | $                 | 31,850 |                 | $ | 29,534 |  | $ | 98,749 
|Long-term debt                               |  |       | 15,448  |                  |   | 15,448           |  |                   |       |                 |   |       |  |   |       
|Letters of credit                            |  |       | 2,847   |                  |   | 2,847            |  |                   |       |                 |   |       |  |   |       
|Partner deposit and accrued buyout liability |  |       | 3,987   |                  |   |                 |  |                   |       |                 |   |       |  |   | 3,987  
|Royalties                                    |  |       | 20,709  |                  |   | 370              |  |                   | 783    |                 |   | 847    |  |   | 18,709 
|                                             |  |       |         |                  |   |                  |  |                   |        |                 |   |        |  |   |        
|                                             |  | $     | 218,955 |                  | $ | 34,496           |  | $                 | 32,633 |                 | $ | 30,381 |  | $ | 121,445
|                                             |  |       |         |                  |   |                  |  |                   |        |                 |   |        |  |   |        

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. The table, as presented above, includes only the non-cancelable portion of
our leases as we are only obligated for that period. 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 face value
issuance of 5.5% convertible notes due December 2007. The notes are convertible at the option of the holder at any time prior to maturity into shares of our common stock, at a conversion price of $10.66 per share, subject to adjustment upon certain
events. Based on the current market price of our common stock, it is not likely that the convertible debt holders will convert their debt into shares prior to December 2007. In connection with the Merger, we have called the notes for redemption at
par plus accrued and unpaid interest subject to the completion of the Merger and the availability of sufficient funds. If the Merger is not completed for any reason, we expect to repay the notes either with available cash, the proceeds from credit
facility borrowings, new debt or a combination of these sources. If we seek additional financing there are no assurances that we will be able to do so at that time, and the terms of the debt may not be as favorable as our existing debt.

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 regularly have commitments under contracts for the purchase of property and equipment
and for the construction of buildings under build-to-suit arrangements or otherwise. As of July 1, 2007, we did not have any such contractual commitments which were not reflected as assets or liabilities in our consolidated financial
statements.



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Partner deposit and accrued buyout liability payments are estimates only and may vary significantly in
amounts and timing of settlement based on employee turnover, return of deposits to us in accordance with employee agreements and change in buyout values of our participating employees. (See Note 1 of Notes to Consolidated Financial Statements
included in Item 8 of our Annual Report on Form 10-K).

We are obligated to pay a licensing fee for the use of the
Champs and Champps service marks, trademarks and trade names. Although this agreement runs in perpetuity, under royalties in the schedule above we have presented only 30 years of our obligation. (See
Trademarks in the Business section, Part 1, Item 1 of this report)

In addition to the above, we could incur a
contractual merger transaction fee estimated to total $800,000 that would be payable if the proposed merger signed July 3, 2007 is approved by our shareholders and closes. If the proposed merger is not approved, we could be required to pay a
termination fee of $2.25 million and to reimburse out-of-pocket fees and expenses, up to a maximum of $750,000.

Impact of inflation

Over the last three years, we have not operated in a period of high general inflation, although we have at times experienced material increases in
specific commodity costs and utilities. Also, a large number of our restaurant employees are paid at rates based on the applicable minimum wage, and increases in the tipped 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 cannot predict whether inflation will have an impact on our results of operations in the future.

Seasonality

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 2007, 2006, and 2005, our relative sales were highest in our second quarter (October through December),
followed by our third quarter (January through March), then by our first quarter (July through September). Our fourth quarter (April through June) 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.

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, loss contingencies generally related to litigation and assessments, self-insured risks relating to workers compensation, general liability and medical claims, the useful lives and recoverability of our long-lived assets such as
property and equipment, goodwill and other intangibles, lease accounting, fair value of stock based compensation including estimating forfeitures, valuation of deferred tax assets and the recording of income tax expense.



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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 may include those related to litigation and state tax assessments. 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: Reasonable Estimation of the Amount of a Loss 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 for 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 are 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 exposure under those
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 practices.

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 consolidated 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 shorter of the estimated useful lives of the assets or reasonably assured lease term for leasehold improvements. 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 as the cash flows associated with the assets are realized. The
annualized effect of a one year increase in the estimated useful lives of our property and equipment would decrease our depreciation expense by approximately $0.9 million. The effect of a one year decrease in the estimated useful lives would
increase our depreciation expense by approximately $1.1 million.

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.



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We separately evaluate each individual restaurant for impairment. Generally, a restaurant is not
evaluated for impairment until 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. However, we may review a restaurant sooner for
impairment if it is operating significantly below our expectations or other factors indicate that impairment could be likely. We consider a total of four trailing quarters of negative cash flow or losses to be an indication that an individual
restaurant may be impaired. In evaluating whether an impairment charge is appropriate, we estimate the future cash flows for such potentially impaired restaurants utilizing such factors as restaurant sales trends, local conditions, demographics and
competition, management plans and initiatives and other factors deemed appropriate in the circumstances.

During fiscal 2007, we recorded an asset impairment charge of $0.3 million covering one restaurant. During fiscal 2006 and 2005, we recorded asset impairment charges of $4.3 million covering three restaurants and $6.6
million covering four restaurants, respectively, part of which was classified as discontinued operations2. Additionally, five restaurants open for at least
six quarters had triggering events and cash flow over the last twelve months not high enough to sufficiently cover the restaurants long-term asset values if such cash flows continue for the remainder of the restaurants lives. As of
July 1, 2007, the long-lived asset value of these five restaurants was $7.4 million. We have not recorded an impairment charge at this time for these restaurants because our management believes certain plans can be implemented to improve the
future prospects of those restaurants.

We evaluate impairment of goodwill and other 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 July 1, 2007, 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 are 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 and SFAS No. 98, both entitled Accounting for Leases, as well as other subsequent amendments and authoritative
literature. To classify the lease as either an operating or a capital lease we use the non-cancelable term of the lease if there is no penalty to cancel the lease at the conclusion of the non-cancelable period. If a penalty exists, we use the
non-cancelable period plus option(s) in determining the term to use when classifying the lease. A penalty is deemed to occur if we would forego an economic benefit, or suffer an economic detriment by not renewing the lease. This penalty can either
be pursuant to the lease provisions or can arise from the retirement of an asset with value. This same lease term is used to calculate straight-line rent and in calculating depreciation expense for our leasehold improvements. 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. The FASB has announced its intention to review lease accounting standards and
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.



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|2 | $2.1 million and $4.6 million of asset impairment charges in fiscal 2006 and
fiscal 2005, respectively, were recorded as discontinued operations.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



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Stock-based compensation

We have granted stock options and restricted stock awards to certain employees and non-employee directors. Effective at the beginning of fiscal 2006, we account for stock-based compensation in accordance with the fair
value recognition provisions of SFAS No. 123 (Revised), Accounting for Stock-Based Compensation. Under the fair value provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the requisite service period (usually the vesting period). Determining the fair value of stock-based awards at the date requires judgment, including estimating the expected term of stock options, the
expected volatility of our stock and expected dividends. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be materially impacted.

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 of enactment. 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 that are not considered
more likely than not to be utilized based on projected future taxable income, feasible tax planning strategies and the reversal of temporary taxable differences. As of July 1, 2007, we had net deferred tax assets of $27.0 million. In fiscal
2007, we recorded an $8.1 million income tax expense to provide a valuation allowance against our FICA tip tax credit carryforwards we now believe are not more likely than not to be fully realized over the carryforward period based on current trends
of income. We currently believe that it is still more likely than not that we will be able to realize our deferred tax assets related to our net operating loss carryforwards. However, negative evidence such as cumulative net losses over a period of
time or continued reductions in the level of operating results may cause us to conclude that it is not likely that we are going to be able to realize all or a portion of our net deferred tax assets and we would record additional valuation allowance
accordingly. As of July 1, 2007, we had federal net operating loss carryforwards of approximately $36.1 million, expiring at various dates through 2023 and FICA tip credit carryforwards of approximately $12.5 million, expiring at various dates
through 2027.

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.



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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.

New and Future Accounting Pronouncements

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which requires entities that voluntarily make a
change in accounting principle to apply that change retrospectively to prior periods financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, Accounting
Changes (APB 20), which previously required that most voluntary changes in accounting principle be recognized by including in the current periods net income the cumulative effect of changing to the new accounting principle.
SFAS No. 154 also makes a distinction between retrospective application of an accounting principle and the restatement of financial statements to reflect the correction of an error. SFAS No. 154 applies to
accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 154 in fiscal 2007 and the adoption did not have a material impact on our Consolidated Financial Statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 in fiscal 2007 did not have a material impact on our Consolidated Financial Statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN
48 defines the threshold for recognizing the benefits of tax-return positions in the financial statements as more-likely-than-not to be sustained by the taxing authority, while earlier authoritative literature provided no specific
guidance. FIN 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. While we are still considering the implications of the pronouncement, we do not believe the adoption of FIN 48 in fiscal 2008 will
have a material impact on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, (SFAS 157). SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement applies under other
accounting pronouncements that currently require or permit fair value measurements and is effective as of the beginning of the first fiscal year beginning after November 15, 2007. While we are still considering the implications of the
pronouncement, we do not believe the adoption of SFAS 157 in fiscal 2009 will have a material impact on our Consolidated Financial Statements.



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In February 2007, the Financial Accounting Standards Boards (FASB) issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, (SFAS 159). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an
instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. We have not yet determined the
impact this interpretation will have on our financial position in fiscal 2009.



|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.

We have been subject to
interest rate market risk for short-term invested cash and cash equivalents. The principal of such invested funds is not subject to fluctuating value because of their highly liquid short-term nature. As of July 1, 2007, we had $22.0 million of
such funds invested in short-term maturing investments.

Many of the ingredients purchased for use in the food and beverages 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 pricing agreements for the products we use 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 2.9%.
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-36 of this Annual Report on Form 10-K and is incorporated herein by reference.



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

None.



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|Item 9A. | Controls and Procedures.
|-------- | ------------------------

Evaluation of Disclosure 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 Securities and Exchange
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.
The effectiveness of our disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the
likelihood of future events, and the inability to eliminate errors or misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, any system of internal
control, including our system, can provide only reasonable assurance regarding managements control objectives.

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) as of July 1, 2007, 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 July 1, 2007.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended July 1, 2007, there was no change in our internal control and procedures over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

Our management report on internal control over
financial reporting and our registered public accounting firms attestation report on managements assessment of our internal control over financial reporting are included in Part II, Item 8, on pages F-1 and F-2, respectively, of
this Annual Report on Form 10-K.



|Item 9B. | Other Information.
|-------- | ------------------

None.



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PART III



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

Directors:



|                     |  |     |  |               
|-------------------- |  | --- |  | --------------
|Name                 |  | Age |  | Director Since
|Stephen F. Edwards   |  | 44  |  | May 2001      
|James Goodwin        |  | 51  |  | March 1999    
|Ian Hamilton         |  | 51  |  | December 2002 
|Michael P. ODonnell |  | 51  |  | September 2002
|Karl S. Okamoto      |  | 45  |  | March 2005    
|Charles G. Phillips  |  | 59  |  | December 2002 

Stephen F. Edwards.Mr. Edwards has served as a senior managing director of
Atticus Capital, L.L.C., a private investment management company since July 2002. From 1995 to June 2002, Mr. Edwards served as a senior managing director at Bruckmann, Rosser, Sherrill & Co., LLC, a private equity investment firm.

James Goodwin. Since 1998, Mr. Goodwin has served as the chairman and managing member of Half Moon Capital Management, LLC, a
private investment management company.

Ian Hamilton. Mr. Hamilton has served as the president of The Hamilton Group, a sports
marketing and entertainment company he founded in March 2002, since its inception. From August 2000 to March 2002, Mr. Hamilton served as the commissioner of the Professional Bowlers Association. Mr. Hamilton previously served as the
president of Planet Hollywood Internationals Official All Star Café from March 1997 to August 2000. From September 1983 to March 1997, Mr. Hamilton was the global director of Tennis Sports Marketing at Nike, Inc. Mr. Hamilton
serves as a board member of U.S. Sports Development, Inc. and the Tim & Tom Gullikson Foundation.

Michael P. ODonnell.Mr. ODonnell has served as our chairman of the board and has been the president and chief executive officer of Champps Entertainment, Inc. since March 2005. Mr. ODonnell served as president and chief executive officer of
Sbarro, Inc. from September 2003 to March 2005 and continues to serve as a director of Sbarro, Inc. Mr. ODonnell has also served as a director of Cosi, Inc. since March 2006. From August 1998 through May 2002, he served in various
capacities with Outback Steakhouse, Inc., including chief executive officer and as a director for all new businesses of Outback, including the following Outback joint ventures Roys, Flemings, Carrabbas Italian Grill and Cheeseburger in
Paradise.

Karl S. Okamoto. Mr. Okamoto currently works as a private investor. Mr. Okamoto served as a senior managing
director of Atticus Capital, LP a private investment management firm from July 2004 to July 2006. From 2001 to July 2004, he served as an independent consultant. From 1999 to 2001, Mr. Okamoto served as an executive officer and member of the
board of directors of Harvest Book Company, LLC. Mr. Okamoto was previously a partner with Kirkland & Ellis and Dechert, LLP.



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Charles G. Phillips.Since February 2005, Mr. Phillips has served as a partner at, and the
chief operating officer of Prentice Capital Management, a private investment management firm that specializes in the retail/consumer sector. Mr. Phillips served as president of Gleacher Partners, an investment banking and private equity
firm, from 1997 to 2001, and was a managing director of that firm from 2001 until his retirement in 2002. Prior to joining Gleacher Partners, Mr. Phillips held senior positions at other leading investment banking firms, including nine
years at Morgan Stanley where he served as a managing director within the investment banking division; and founded and led that firm's high yield finance activities. Mr. Phillips has served as a director of California Pizza Kitchen, Inc. since
November 2000. Mr. Phillips has previously served as a director of several public and private companies and investment funds and serves on the governing bodies of a number of educational and non-profit organizations.

Executive officers:



|                     |  |     |  |                                                                
|-------------------- |  | --- |  | ---------------------------------------------------------------
|Name                 |  | Age |  | Positions                                                      
|Michael P. ODonnell |  | 51  |  | Chairman, President and Chief Executive Officer                
|Donna L. Depoian     |  | 47  |  | Vice President, Secretary and General Counsel                  
|J. David Miller      |  | 56  |  | Vice President of Construction and Development                 
|David D. Womack      |  | 44  |  | Executive Vice President, Treasurer and Chief Financial Officer

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

Michael P. ODonnell. See information above.

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.

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

David D. Womack. Mr. Womack was appointed our vice president, chief financial officer and treasurer in August 2005 after serving as our vice president and controller. He also assumed the duties of executive vice president in
January 2007. He started with Champps in April 2002 as its controller, left the Company in September 2004 and returned in June 2005. During his absence from the Company, he served as vice president and controller for VICORP Restaurants, Inc. From
April 1997 until April 2002, Mr. Womack served in various capacities including controller, chief financial officer and chief executive officer for the Wynkoop Brewing Company.



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Compliance With Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Champps executive officers, directors and persons who own more than
10% of a registered class of Champps equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish copies to Champps.

Based upon a review of the reports furnished to Champps and representations made to Champps by its officers and directors, Champps believes that, during
fiscal year 2007, its officers, directors and its 10% beneficial owners, complied with all applicable reporting requirements.

Code of Business Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all officers and employees, including our Chief Executive
Officer, Chief Financial Officer, principal accounting officer and persons performing similar functions. Our Code of Business Conduct and Ethics is available on our web site at www.champps.com under the headings About / Invest /
Corporate Governance.

Governance of the Company

The Companys Board of Directors has three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Governance Committee (collectively, the Committees and each, a
Committee). The Board of Directors has adopted a charter for each Committee. In addition, the Board of Directors has adopted a Code of Business Conduct and Ethics including separate appendices for i) Code of Ethics for Chief Executive
Officer and Senior Financial Officers, ii) Code of Business and Ethics for Members of the Board of Director; and a iii) Whistleblower Policy. The charter for each committee and the Codes of Business Conduct and Ethics may also be viewed in full text
on the Companys website at www.champps.com under the headings About / Invest / Corporate Governance. The Company will provide to any shareholder printed copies of these documents if they contact the Company in writing,
Attention: Investor Relations, Champps Entertainment, Inc., 10375 Park Meadows Drive, Suite 560, Littleton, Colorado, 80124.

Communications with Our
Board of Directors

Stockholders may communicate with the board of directors, our non-management directors as a group, or any of the
directors by sending written communications addressed to the board of directors or any of the directors to: Champps Entertainment, Inc. at 10375 Park Meadows Drive, Suite 560, Littleton, Colorado 80124, Attention: Corporate Secretary. All
communications other than those determined in good faith by the general counsel to be frivolous are compiled by the corporate secretary and forwarded to the board of directors or the individual director(s) accordingly. Inquiries not forwarded will
be retained by Champps and will be made available to any director upon request.



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Audit Committee

Our audit committee consists of Messrs. Phillips, Hamilton and Goodwin. The audit committee acts pursuant to a written charter that was adopted by our board of directors on March 8, 2000, subsequently amended on
May 22, 2002, February 18, 2004, and most recently on September 28, 2005 and it is available on our website at www.champps.com under the headings About / Invest / Corporate Governance. The audit committee
reviews and assesses the adequacy of its charter on an annual basis. The audit committees duties include overseeing the internal accounting controls and procedures. The audit committee reports to the board of directors with respect to other
audit and accounting matters including the review of the financial statements of Champps. The audit committee also makes recommendations concerning the engagement of independent public accountants and communicates with Champps independent
auditors on matters of auditing and accounting. The audit committee met four times during fiscal year 2007.

Each of the audit committee
members is independent as defined in the SEC and NASD rules as they relate to members of audit committees. Our board of directors determined that each of the members of the audit committee is able to read and understand fundamental
financial statements, including Champps balance sheet, income statement and cash flow statement. In addition, our board of directors has determined that Mr. Charles Phillips qualifies as an audit committee financial expert
within the meaning of the regulations of the SEC. Mr. Phillips serves as chairman of the audit committee.

Compensation Committee

The compensation committee of the board of directors has responsibility for establishing, implementing and continually monitoring adherence with our
compensation philosophy for the named executive officers.

The compensation committee consists of Messrs. Edwards, Hamilton, and Okamoto
(chair), each of whom is an independent non-employee director of Champps. The compensation committee exercises all powers of our board of directors in connection with officer and employee compensation matters, including administering Champps
2005 Stock Incentive Plan, 2003 Stock Option and Incentive Plan, 1997 Stock Option and Incentive Plan and the 1997 Employee Stock Purchase Plan. The compensation committees duties and responsibilities include annually reviewing and approving
corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating his performance in light of such goals and objectives, and setting the chief executive officers annual compensation, including salary,
bonus, incentive and equity compensation, based on such evaluation and within the context of existing employment agreements. The compensation committee is also tasked with annually reviewing and approving the evaluation process and compensation
structure for our other executive officers based on recommendations from the chief executive officer. The day-to-day design and administration of our health and welfare plans applicable to employees and executive officers on a non-discriminatory
basis are implemented generally by our management. The compensation committee or entire board of directors remains responsible for significant changes to or adoption of new employee benefit plans. The compensation committee has the authority to
delegate any of its responsibilities to subcommittees, but did not do so in fiscal 2007. The compensation committee met one time during fiscal year 2007.



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The compensation committee retained Pearl Meyer and Partners, an independent compensation consulting firm
and division of Clark Consulting, as an outside advisor in fiscal 2005 to conduct a comprehensive review and study of our executive compensation program. Specifically, the study benchmarked and examined compensation including salary, short-term
incentives and long-term incentives, executive benefits and perquisites as well as the total compensation resulting from such programs. During 2005, Pearl Meyer assisted the board of directors and the compensation committee with developing a
competitive peer group of publicly traded U.S.-based restaurant companies of generally similar revenue and market cap size to which to compare compensation programs and compensation levels. Pearl Meyer met individually with the members of the
compensation committee and senior management to learn about our business operation and strategy as a public company, key performance metrics and targets, and the markets in which we compete. Pearl Meyer then developed guidelines for executive
compensation programs which were one of the materials used by the committee in its compensation deliberations and decisions at the time. For, example, the committee used certain of the data and recommendations from the Pearl Meyer study in approving
the employment agreements for Messrs. ODonnell, Womack and Miller described below. For fiscal 2007, the compensation committee continued to use the fiscal 2005 Pearl Meyer study, in part, as a basis for its compensation decisions.

The peer group restaurants selected by the compensation committee pursuant to the Pearl Meyer study compete with us in the casual dining segment of
the dining industry and operate with similar metrics, markets and challenges. The peer group restaurants (Peer Restaurants) include the following: Ark Restaurant Corp., Benihana Inc., Buca, Inc., Buffalo Wild Wings, Inc., Dave &
Busters, Inc., Frischs Restaurant, Inc., Lubys Inc., Max & Ermas Restaurants, Inc., Quality Dining, Inc., Rubios Restaurant, Inc., Total Entertainment Restaurant Corp., and Worldwide Restaurant Concepts, Inc.

Our compensation committee operates under the compensation committee charter adopted by our board of directors, a copy of which is
available on our website at www.champps.com under the headings About/Invest/Corporate Governance, or in print, without charge, to any stockholder who sends a request to Champps Entertainment, Inc., 10375 Park Meadows Drive, Suite 560,
Littleton, Colorado 80124, Attention: Investor Relations.



|Item 11. | Executive Compensation.
|-------- | -----------------------

Compensation Committee
Report

The Report of the Compensation Committee does not constitute soliciting material and should not be deemed filed or
incorporated by reference into any other of our filings under the Securities Act of 1933 or the Securities Act of 1934, except to the extent we specifically incorporate this Report.

The compensation committee, comprised of independent directors, reviewed and discussed the Compensation Discussion and Analysis with our management.
Based on this review and discussion, the compensation committee recommended to our board of directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.



|                            
|----------------------------
|THE COMPENSATION COMMITTEE  
|                            
|Karl S. Okamoto, Chair      
|Stephen Edwards Ian Hamilton



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Compensation Discussion and Analysis

The following discussion and analysis describes the material elements of compensation awarded to, earned by or paid to executive officers included in the
Summary Compensation Table on page 65 (the named executive officers) and should be read in conjunction with the information presented in the compensation tables, the footnotes to those tables and the related disclosures appearing
elsewhere in this Form 10-K.

The compensation committee (for purposes of this analysis, the committee) of the board of
directors has responsibility for establishing, implementing and continually monitoring adherence with our compensation philosophy for the named executive officers. For more information on our compensation committee and its policies and procedures,
see Item 10, Directors, Executive Officers and Corporate Governance above.

General Executive Compensation Philosophy

We believe that the most effective executive compensation program is one that is designed to:



| |  |  | Attract, retain and motivate key executive officers;
| | - |  | ----------------------------------------------------



| |  |  | Link the interests of executive officers with stockholders;
| | - |  | -----------------------------------------------------------



| |  |  | Support our goal of providing superior value to our stockholders and customers; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Provide appropriate incentives for executive officers, based on achieving key operating and organization goals.
| | - |  | ---------------------------------------------------------------------------------------------------------------

The committee evaluates compensation to help ensure that we maintain our ability to attract and retain qualified employees in key positions and that
compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies. To that end, the committee believes executive compensation packages provided to our executives
should include both cash and stock-based compensation that reward performance as measured against our established goals.

As described in
more detail below, the principal elements of our executive compensation program include base salary, annual bonus, long-term incentives including stock options and restricted stock and for certain individuals, which includes each of the named
executive officers, the ability to receive certain equity awards on a deferred basis. As mentioned above and discussed below, the committee periodically reviews data about the compensation of executives in the restaurant industry. Based on this
review, we believe that the elements of our executive compensation program are in general reasonable compared to those offered by our industry competitors. Base salaries are targeted at a level that will attract and retain qualified executives and
motivate performance. Annual cash bonus awards are designed to focus an executives efforts on annual corporate goals and to provide rewards for achievement of such goals. All corporate office employees, including executives and support staff,
are eligible for annual bonus awards. An individuals total annual cash compensation is assessed using the above-described factors, and equity incentives are used to provide an upside tied to longer-termed growth in stockholder value as it is
our philosophy to motivate our executives through equity compensation so our interests are aligned with our stockholders and achieving our business goals.



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Outside Advisor and Peer Group

The committee retained Pearl Meyer and Partners, an independent compensation consulting firm and division of Clark Consulting, as an outside advisor in fiscal 2005 to conduct a comprehensive review and study of our
executive compensation program. Specifically, the study benchmarked and examined compensation including salary, short-term incentives and long-term incentives, executive benefits and perquisites as well as the total compensation resulting from such
programs. During 2005, Pearl Meyer assisted the board of directors and the compensation committee with developing a competitive peer group of publicly traded U.S.-based restaurant companies of generally similar revenue and market cap size to which
to compare compensation programs and compensation levels. Pearl Meyer met individually with the members of the committee and senior management to learn about our business operation and strategy as a public company, key performance metrics and
targets, and the markets in which we compete. Pearl Meyer then developed guidelines for executive compensation programs which were one of the materials used by the committee in its compensation deliberations and decisions at the time. For, example,
the committee used certain of the data and recommendations from the Pearl Meyer study in approving the employment agreements for Messrs. ODonnell, Womack and Miller described below. For fiscal 2007, the committee continued to use the fiscal
2005 Pearl Meyer study, in part, as a basis for its compensation decisions.

The peer group restaurants selected by the committee pursuant
to the Pearl Meyer study compete with us in the casual dining segment of the dining industry and operate with similar metrics, markets and challenges. The peer group restaurants (Peer Restaurants) include the following: Ark Restaurant
Corp., Benihana Inc., Buca, Inc., Buffalo Wild Wings, Inc., Dave & Busters, Inc., Frischs Restaurant, Inc., Lubys Inc., Max & Ermas Restaurants, Inc., Quality Dining, Inc., Rubios Restaurant, Inc., Total
Entertainment Restaurant Corp., and Worldwide Restaurant Concepts, Inc.

Setting Executive Compensation

During its initial determination and annual review of compensation for named executive officers, the committee considers:



| |  |  | market data provided by our outside compensation consultant;
| | - |  | ------------------------------------------------------------



| |  |  | individual experience;
| | - |  | ----------------------



| |  |  | level of responsibility;
| | - |  | ------------------------



| |  |  | our financial performance;
| | - |  | --------------------------



| |  |  | internal review of the executives compensation, both individually and relative to other executive officers; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the individual performance of the executive.
| | - |  | --------------------------------------------

The committee makes all compensation decisions for the chief executive officer and approves recommendations regarding compensation levels and equity awards to all our other named executive officers. The chief executive officer annually
reviews the performance of each member of the executive team other than himself, whose performance is reviewed by the committee. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and
annual award amounts, are presented to the committee. The committee can exercise its discretion in modifying any adjustments or awards to executives recommended by the Chief Executive Officer.



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Executive Compensation Components

Base Salary

Base salaries (paid in cash) for our named executive officers are established based on
the scope of their responsibilities, taking into account competitive market compensation. Base salaries are reviewed annually, and adjusted from time to time to realign salaries after taking into account individual responsibilities, performance,
experience and other criteria.

The committee reviews the recommendations of the chief executive officer in August or September of each
year. As applicable, the chief executive officer proposes adjustments to base salary amounts based on his evaluation of individual performance and expected future contributions. Base salaries are considered by the committee as a starting point for
discussions regarding total compensation together with other elements of compensation. Any other elements of the total compensation that are dependent on the determination of base salary, such as annual bonus, are expressed as percentages of base
salary.

All of our named executive officers have employment agreements. For a discussion of these employment agreements, see
Employment Agreements below. Since a majority of the employment agreements were adopted in 2005, the chief executive officer and the committee have not recommended or approved increase to the named executive officers base salaries
with the exception of Mr. Womack who received an increase with his promotion to executive vice president.

Annual Performance-Based Incentive

The committee utilized the cash bonus program under the Fiscal Year 2007 Corporate Salaried Associates Bonus Plan to link executives
bonuses with the Companys annual fiscal performance. Together, base salary and target level bonuses were designed in the named executive officers original employment contracts to result in total cash compensation below or near the median
percentile for total cash compensation paid by the Peer Restaurants.

The payment amount, if any, of any bonus award is determined based on
achievement of our pre-tax income in comparison to our prior years pre-tax income as adjusted for unusual items. Pre-tax income was used as the bonus achievement measure because it is generally believed to be easily understood by the bonus
participants and is not influenced by income tax changes or adjustments which could be outside the control of the bonus participants. The pre-tax income target levels and bonus funding percentages are formulated by the chief executive officer and
chief financial officer and submitted to the committee. The committee considers, among other things, bonus levels paid by the Peer Restaurants, and market conditions. The committee may adjust our pre-tax income results for unusual, non-recurring or
other items in the committees discretion, or may grant special bonuses on an individual or group basis in recognition of extraordinary achievements, or to address other special situations. The committee generally reviews and establishes target
annual bonus opportunities for the named executive officers, usually in August or September of each year, based upon our approved budget and performance targets.



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Typically, members of management, excluding the chief executive officer, are assigned target bonuses that
are expressed as a percentage of their respective base salaries. In order to align bonus opportunity to creation of stockholder value, we believes that achievement of our overall performance goals is central to the executive bonus calculation since
those individuals have a greater responsibility for our overall performance. Our annual incentive bonus plan for fiscal 2007 provided for a target cash bonus, calculated at 30% of an officers base salary (excluding the CEO), with a bonus range
from 0% to 60%. Mr. ODonnells employment agreement provided for a target bonus of $200,000 and, subject to committee discretion, an amount less than or greater than $200,000 may be made upon partial or excess achievement of the
applicable performance goals. These targets and percentages for fiscal 2007 are set forth in the table below in more detail.



|                       |       |                  |     |  
|---------------------- | ----- | ---------------- | --- | -
|Pre-tax Income (000s) |       | % Bonusat Target |    
|$                      | 2,974 |                  | 0   | %
|                       | 3,674 |                  | 25  | %
|                       | 4,374 |                  | 50  | %
|                       | 5,074 |                  | 75  | %
|                       | 5,774 |                  | 100 | %
|                       | 6,474 |                  | 125 | %
|                       | 7,174 |                  | 150 | %
|                       | 7,874 |                  | 175 | %
|                       | 8,574 |                  | 200 | %

The named executive officers start to receive their bonuses if our pre-tax income exceeds the
prior years pre-tax income. No bonuses are awarded if our pre-tax income does not exceed the prior years pre-tax income, and bonuses are capped at a specified percentage of an officers base salary that corresponds to the maximum
prescribed level. In fiscal 2007, under the annual incentive bonus plan, no bonuses were paid to the named executive officers including our CEO as our pre-tax income was less then the prior years pre-tax income.

Long-Term Incentive Program

We believe that
long-term improvement in our performance is achieved through an ownership culture that encourages long-term performance by our executive officers. We believe that long-term incentives encourage concentration of executives efforts on the
behaviors within their control that they believe are necessary to ensure our long-term success, as reflected in increases over time to our stock price, earnings, cash flow and other elements.

The principal elements of our long-term incentives are the awards of non-qualified stock options (discontinued in fiscal 2006), restricted stock and
restricted stock units. The issuance of the restricted stock and restricted stock units has been granted by the committee in connection with the hire or promotion of the named executive officers. The Company does not have a program, plan or practice
of timing its equity grants in coordination with the release of material non-public information.

Annual Non-qualified Stock Option
Awards. Stock option awards were historically granted annually in the August-September timeframe to employees at the corporate home office, including executives, support staff, regional operations directors and to the general managers of our
restaurants. The grant price was the market price of a share of our common stock at the close of market on the date of grant. The committee believed that option grants naturally tie to our performance because the options require stock price
improvement to become valuable. The annual grant for employees was made by the committee, following the recommendation of the chief executive officer. These annual grants of stock option awards to employees were discontinued in fiscal 2006 and
instead, the committee has chosen to grant one-time restricted stock awards to select employees as discussed below. This decision was made as it was believed that the use of restricted stock promoted retention and long-term stock ownership better
than stock options.



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Restricted Stock and Restricted Stock Units. While we had not historically made grants of
restricted stock to our employees, in fiscal 2006 we did, and may in the future, elect to make grants of restricted stock or restricted stock units to certain of our senior executives, including the named executive officers, and our directors. This
decision to use restricted stock was made, in part, to provide an additional tool for our compensation programs. We also believe that grants of restricted stock align the interest of our executive officers with those of our stockholders and provide
an incentive to our executive officers to build stockholder value while limiting the executives risk during a time when retention of our key talent is critical to our success. Moreover, restricted stock serves as an executive retention tool as
it typically vests only if the executive remains with us for a certain period of time or upon reaching certain performance goals. To date, all awards of restricted stock were made in connection with the negotiation and execution of employment
agreements with certain of our named executive officers. The committee approved these restricted stock grants as a part of their approved respective employment agreements after reviewing and evaluating the overall percentage of equity incentives
held by these officers as compared to similar officers of other restaurant companies as provided in the 2005 Pearl Meyer study. For additional information on these grants, see the Outstanding Equity Awards table below.

In fiscal 2006, we established the Champps Entertainment, Inc. Deferred Compensation Plan for the benefit of our executives and members of our board of
directors. The plan permits executive officers, including each of the named executive officers, and directors to elect to receive deferred stock units in lieu of an award of restricted stock by including a deferral election.

When participants elect to defer under the plan, they also elect when the amounts will ultimately be distributed. Participants can elect to have
deferrals for a particular year paid in a future year if the participant is still employed at that time. Such in-service distributions are made at least two years following the year of deferral and may be in the form of a lump sum or through annual
distributions not to exceed five years. Otherwise, payment of a participants account is made following the participants termination of employment in the form of (i) a single lump sum following separation of service, (ii) a
single lump sum on January 31 of any of the succeeding five years following separation of service, or (iii) in annual installments not to exceed five years, as so elected at the time of deferral. Key employees, including each of the named
executive officers, are also constrained in that their deferrals may only be distributed as a result of a separation of service on the last day of the month in which occurs on the six month anniversary of their separation from service (as required
by Section 409A of the Internal Revenue Code).

The plan is considered to be non-qualified plans for federal tax purposes,
meaning that the arrangements are deemed to be unfunded and an executives interest in the plan is no greater than that of an unsecured general creditor of the Company. For information on the named executive officers who have elected to
participate in the plan and receive restricted stock units in lieu of restricted stock, see Outstanding Equity Awards Table at Fiscal Year-End below.

No restricted stock awards were issued to the named executive officers in fiscal 2007 as it was believed that the prior awards of stock-based compensation to the named executive officers were sufficient compensation
and motivation for the current fiscal year.



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Personal Benefits and Perquisites

We provided the named executive officers with perquisites and other personal benefits that we and the committee believe are reasonable and consistent with its overall compensation program to better enable us to
attract and retain superior employees for key positions. The committee periodically reviews the levels of perquisites and other personal benefits provided to named executive officers. For additional information regarding our perquisites and other
personal benefits provided to our named executive officers, see Summary Compensation Table and related footnotes below.

Severance and Termination
Payments

The employment agreements with our named executive officers provide for payments upon termination, and in certain cases, upon
termination within a certain period of time following a change of control. For a more detailed explanation of these provisions, including an estimate of the potential payments, see the Potential Payments upon Termination or Change of
Control below. The committee approved the inclusion of these arrangements in the employment agreements to encourage employment with the named executive officers at the time of hire and make their compensation competitive with what they could
earn at other peer companies.

Deductibility to Executive Compensation

Section 162(m) of the Internal Revenue Code under the Omnibus Budget Reconciliation Act of 1993 limits the deductibility of compensation over $1 million paid by a company to an executive officer. The policy of
the compensation committee is to establish and maintain a compensation program that maximizes the creation of long-term stockholder value. The committee attempts to generally structure most compensation approaches to ensure deductibility under
162(m). However, the committee reserves the right to adopt programs giving consideration to factors other than deductibility where the committee believes stockholder interests are best served by retaining flexibility. In such cases, the committee
may consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its compensation objectives. As discussed above, performance bonuses are
generally paid under the 2007 Plan and thus, are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code.

Employment Agreements

Michael P. ODonnell. On March 2, 2005, we entered into an
employment agreement with Mr. ODonnell to serve as our chief executive officer and president. Under the employment agreement, we pay Mr. ODonnell an annual base salary of $450,000 plus a target annual performance-based
incentive of $200,000, subject to Mr. ODonnell remaining employed by us on the last day of each applicable fiscal year and satisfaction of certain performance goals established by the committee. The committee may, in its discretion, pay
an amount less than or greater than $200,000 upon partial or excess achievement of the applicable performance goals. Mr. ODonnell is eligible to participate in our present and future employee benefits and is entitled to $1 million of life
insurance coverage, long-term disability coverage and an automobile allowance. On December 7, 2005, in accordance with his employment agreement, Mr. ODonnell was granted 514,680 shares of restricted common stock. 128,670 shares of
the restricted common stock vest as to 1/3 of the shares on each anniversary of the date of grant and upon a change of control. The remaining 386,010 shares of restricted stock vest after seven years or earlier upon satisfaction of certain average
market price maintenance requirements and upon a change of control if certain market price targets are met.



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On July 28, 2005, we amended Mr. ODonnells agreement to provide
Mr. ODonnell a car allowance of $1,000 per month.

David D. Womack. On August 17, 2005, we entered into an
employment agreement with Mr. Womack to serve as our vice president, treasurer and chief financial officer. The agreement provided that we pay Mr. Womack an annual base salary of $200,000 plus bonus potential of up to 30% of his annual
base salary pursuant to criteria contained in our corporate bonus plan and a car allowance of $500 per month. Effective January 1, 2007, Mr. Womacks employment agreement was amended to appoint him as an executive vice president and
increase his annual base salary to $250,000. On December 7, 2005, in accordance with his employment agreement, Mr. Womack was granted 32,000 shares of restricted common stock that vest over three years or upon a change in control and
60,000 shares of restricted stock that vest after the seventh year of his employment or sooner upon satisfaction of certain average market price maintenance requirements under the 2005 Stock Incentive Plan.

J. David Miller. On August 18, 2005, we entered into an employment agreement with Mr. Miller to serve as our vice president of
construction and development. The agreement provides that we will pay Mr. Miller an annual base salary of $156,000 plus bonus potential of up to 30% of his annual base salary pursuant to criteria contained in our corporate bonus plan and a car
allowance of $500 per month.

Donna L. Depoian. On February 26, 1999, we entered into an employment agreement with
Ms. Depoian to serve as our vice president, general counsel and secretary. The agreement provides for an initial term of one year and for successive one-year renewals thereafter. Under the agreement, Ms. Depoian receives an annual base
salary of $120,000, subject to adjustment at the discretion of the board of directors. Ms. Depoians current annual salary is $149,600 plus bonus potential of up to 30% of her annual base salary pursuant to criteria contained in our
corporate bonus plan and she receives a car allowance of $500 per month.

We offer our named executive officers and directors the option to
receive all or a portion of their equity awards on a deferred basis under our Deferred Compensation Plan, discussed previously.

Summary Compensation
Table

The following table sets forth summary information concerning compensation awarded to, earned by, or accrued for services
rendered to us in all capacities by our principal executive officer, principal financial officer, each of our two other most highly compensated executive officers who were serving as executive officers at the end of fiscal year 2007 and our former
officer (collectively, the named executive officers), for the fiscal year 2007.



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|                                                                           |  |      |  |               |         |              |   |                    |  |                     |         |                              |   |          |  |   |        |  |   |          
|-------------------------------------------------------------------------- |  | ---- |  | ------------- | ------- | ------------ | - | ------------------ |  | ------------------- | ------- | ---------------------------- | - | -------- |  | - | ------ |  | - | ---------
|Name and Principal Position                                                |  | Year |  | Salary($) (2) |         | Bonus($) (3) |   | StockAwards($) (4) |  | OptionAwards($) (4) |         | All OtherCompensation($) (5) |   | Total($)
|Michael P. ODonnellChairman, Chief ExecutiveOfficer and President         |  | 2007 |  | $             | 450,000 |              | $ |                   |  | $                   | 567,533 |                              | $ |         |  | $ | 27,808 |  | $ | 1,045,341
|David D. WomackExecutive Vice President andChief Financial Officer         |  | 2007 |  |               | 223,077 |              |   |                   |  |                     | 135,261 |                              |   |         |  |   | 8,457  |  |   | 366,795  
|Donna L. DepoianVice President, GeneralCounsel and Secretary               |  | 2007 |  |               | 149,600 |              |   |                   |  |                     |        |                              |   | 5,983    |  |   | 8,555  |  |   | 164,138  
|J. David MillerVice President ofConstruction and Design                    |  | 2007 |  |               | 156,000 |              |   |                   |  |                     |        |                              |   | 5,983    |  |   | 7,848  |  |   | 169,831  
|Richard Scanlan (1)Former Senior Vice Presidentand Chief Operating Officer |  | 2007 |  |               | 139,423 |              |   | 85,892             |  |                     |        |                              |   |         |  |   | 13,720 |  |   | 239,035  



|(1) | As part of a letter agreement, Mr. Scanlan resigned as senior vice president and chief operating officer on August 16, 2006 and surrendered all his rights to any
restricted stock. Also as a part of that letter agreement, Mr. Scanlan entered into and amendment and restatement of his existing employment agreement, whereby he continued to serve as a director of operations  market partner for Champps
overseeing the Illinois and Minnesota markets. As a director of operations  market partner, Mr. Scanlan receives a base salary of $125,000 plus a monthly bonus equal to 3% of store operating cash flow for the stores in his region. The
amounts in the table above reflect Mr. Scanlans compensation during fiscal 2007 for all positions he held during that year.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | 2007 salary represents base salary and payment for vacation, holidays and sick days for 2007.
|--- | ---------------------------------------------------------------------------------------------



|(3) | Mr. Scanlans bonus represents payments to him as a director of operations  market partner as described above in footnote 1 of this table. As discussed under
Annual Performance-Based Incentive in the Compensation Discussion and Analysis above, no named executive officer earned an annual incentive bonus, or non-equity incentive plan award, in 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Amounts represent the compensation cost recognized by us during 2007 for financial statement reporting purposes with respect to the stock awards and option awards for each named
executive officer, computed in accordance with FAS#123R, disregarding any estimates of forfeitures relating to service-based vesting conditions. For a discussion of the assumptions used in calculating these amounts, see Note 11 of our fiscal 2007
audited financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) | Amounts in the All Other Compensation column consist of the following payments we paid to or on behalf of the named executive officers:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|                                                                       |  |      |  |                     |        |                      |   |                          |  |                                           |       |                     |   |           |  |   |       |  |   |       
|---------------------------------------------------------------------- |  | ---- |  | ------------------- | ------ | -------------------- | - | ------------------------ |  | ----------------------------------------- | ----- | ------------------- | - | --------- |  | - | ----- |  | - | ------
|Name and Principal Position                                            |  | Year |  | CarAllowance($) (a) |        | MealDiscounts($) (b) |   | InsurancePremiums($) (c) |  | CompanyContributionto 401(k)Plans
($) (d) |       | OfficeRental($) (e) |   | Total ($)
|Michael P. ODonnellChairman, Chief ExecutiveOfficer and President     |  | 2007 |  | $                   | 12,000 |                      | $ | 3,042                    |  | $                                         | 4,866 |                     | $ | 1,540     |  | $ | 6,360 |  | $ | 27,808
|David D. WomackExecutive Vice President andChief Financial Officer     |  | 2007 |  |                     | 6,000  |                      |   | 602                      |  |                                           | 1,855 |                     |   |          |  |   |      |  |   | 8,457 
|Donna L. DepoianVice President, GeneralCounsel and Secretary           |  | 2007 |  |                     | 6,000  |                      |   | 395                      |  |                                           | 1,113 |                     |   | 1,047     |  |   |      |  |   | 8,555 
|J. David MillerVice President ofConstruction and Design                |  | 2007 |  |                     | 6,000  |                      |   | 689                      |  |                                           | 1,159 |                     |   |          |  |   |      |  |   | 7,848 
|Richard ScanlanFormer Senior Vice Presidentand Chief Operating Officer |  | 2007 |  |                     | 9,600  |                      |   | 1,488                    |  |                                           | 1,178 |                     |   | 1,454     |  |   |      |  |   | 13,720



|(a) | All executives and certain other employees receive car allowances. See Employment Agreements above.
|--- | -----------------------------------------------------------------------------------------------------



|(b) | Meal discounts are provided to executives and valued above based on the estimated average cost of goods and labor. The amount reflects actual usage by the named executive officers
of the meal discounts during fiscal 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Life insurance, accidental death and dismemberment insurance, long-term disability insurance and short-term disability insurance is provided to all salaried and corporate employees
and is paid by the Company. Pursuant to his employment agreement, Mr. ODonnell is entitled to $1 million of life insurance and long-term disability coverage which is greater than the coverage provided to other salaried and corporate
employees. The values represented above are based on the premiums paid by the Company for each officers insurance.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | Represents our matching funds under our 401(k) plan for calendar 2006, paid in March 2007.
|--- | ------------------------------------------------------------------------------------------



|(e) | Represents the rental cost during fiscal 2007 of providing Mr. ODonnell with an office in Jacksonville, Florida.
|--- | -----------------------------------------------------------------------------------------------------------------



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Grants of Plan-Based Awards

As discussed previously, we have an annual performance-based incentive plan subject to the attainment of certain financial targets. We did not make any equity awards during fiscal 2007 to the named executive officers.
The following is information related to the annual incentive plan:



|                                                                       |  |           |  |                                                                |  |           |  |           
|---------------------------------------------------------------------- |  | --------- |  | -------------------------------------------------------------- |  | --------- |  | ----------
|                                                                       |  |           |  | Estimated Future Payouts UnderNon-Equity Incentive Plan Awards
|Name                                                                   |  | GrantDate |  | Threshold($)                                                   |  | Target($) |  | Maximum($)
|Michael P. ODonnellChairman, Chief ExecutiveOfficer and President     |  | 7/3/2006  |  |                                                               |  | 200,000   |  | 400,000   
|David D. WomackExecutive Vice President andChief Financial Officer     |  | 7/3/2006  |  |                                                               |  | 75,000    |  | 150,000   
|Donna L. DepoianVice President, GeneralCounsel and Secretary           |  | 7/3/2006  |  |                                                               |  | 44,880    |  | 89,760    
|J. David MillerVice President ofConstruction and Design                |  | 7/3/2006  |  |                                                               |  | 46,800    |  | 93,600    
|Richard ScanlanFormer Senior Vice Presidentand Chief Operating Officer |  | 7/3/2006  |  |                                                               |  | 60,000    |  | 120,000   



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Outstanding Equity Awards at 2007 Fiscal Year End



|                             |  |                                                                 |  |                                                                  |              |                        |  |                    |     |  |                                                       |  |                                                                 |    
|---------------------------- |  | --------------------------------------------------------------- |  | ---------------------------------------------------------------- | ------------ | ---------------------- |  | ------------------ | --- |  | ----------------------------------------------------- |  | --------------------------------------------------------------- | ---
|                             |  | Option Awards                                                   |  |                                                                  | Stock Awards |                       
|Name and Principal Position  |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Excercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable |              | OptionExercisePrice($) |  | OptionExerciseDate |     |  | Number ofShares orUnits ofStockThat HaveNot Vested(#) |  | MarketValueof Sharesor Unitsof StockThat HaveNot Vested ($)
(4) |    
|Michael P. ODonnell         |  | 6,000                                                           |  |                                                                 |              | 4.94                   |  | 6/13/2013          |     |  | 428,900                                               |  | 2,037,276                                                       | (2)
|Chairman, Chief Executive    |  | 10,000                                                          |  |                                                                 |              | 6.97                   |  | 9/15/2013          |     |  |                                                       |  |                                                                 |    
|Officer and President        |  | 10,000                                                          |  |                                                                 |              | 7.85                   |  | 8/5/2014           |     |  |                                                       |  |                                                                 |    
|David D. Womack              |  |                                                                |  |                                                                 |              |                       |  |                    |     |  | 81,333                                                |  | 386,332                                                         | (3)
|Executive Vice President and |  |                                                                 |  |                                                                  |              |                        |  |                    |     |  |                                                       |  |                                                                 |    
|Chief Financial Officer      |  |                                                                 |  |                                                                  |              |                        |  |                    |     |  |                                                       |  |                                                                 |    
|Donna L. Depoian             |  | 1,000                                                           |  |                                                                 |              | 6.31                   |  | 8/7/2007           |     |  |                                                      |  |                                                                |    
|Vice President, General      |  | 20,000                                                          |  |                                                                 |              | 6.50                   |  | 8/12/2008          |     |  |                                                       |  |                                                                 |    
|Counsel and Secretary        |  | 12,000                                                          |  |                                                                 |              | 5.75                   |  | 8/25/2010          |     |  |                                                       |  |                                                                 |    
|                             |  | 15,000                                                          |  |                                                                 |              | 7.50                   |  | 9/26/2011          |     |  |                                                       |  |                                                                 |    
|                             |  | 6,000                                                           |  |                                                                 |              | 4.94                   |  | 6/13/2013          |     |  |                                                       |  |                                                                 |    
|                             |  | 12,500                                                          |  |                                                                 |              | 6.97                   |  | 9/15/2013          |     |  |                                                       |  |                                                                 |    
|                             |  | 10,000                                                          |  | 5,000                                                            |              | 7.85                   |  | 8/5/2014           | (1) |  |                                                       |  |                                                                 |    
|J. David Miller              |  | 1,000                                                           |  |                                                                 |              | 6.31                   |  | 8/7/2007           |     |  |                                                      |  |                                                                |    
|Vice President of            |  | 5,000                                                           |  |                                                                 |              | 5.12                   |  | 9/2/2008           |     |  |                                                       |  |                                                                 |    
|Construction and Design      |  | 3,000                                                           |  |                                                                 |              | 4.00                   |  | 8/19/2009          |     |  |                                                       |  |                                                                 |    
|                             |  | 22,000                                                          |  |                                                                 |              | 4.00                   |  | 10/25/2009         |     |  |                                                       |  |                                                                 |    
|                             |  | 12,000                                                          |  |                                                                 |              | 5.75                   |  | 8/25/2010          |     |  |                                                       |  |                                                                 |    
|                             |  | 15,000                                                          |  |                                                                 |              | 7.50                   |  | 9/26/2011          |     |  |                                                       |  |                                                                 |    
|                             |  | 6,000                                                           |  |                                                                 |              | 4.94                   |  | 6/13/2013          |     |  |                                                       |  |                                                                 |    
|                             |  | 12,500                                                          |  |                                                                 |              | 6.97                   |  | 9/15/2013          |     |  |                                                       |  |                                                                 |    
|                             |  | 10,000                                                          |  | 5,000                                                            |              | 7.85                   |  | 8/5/2014           | (1) |  |                                                       |  |                                                                 |    



|(1) | These options vest 1/3rd on the first anniversary, 1/3rd on the second anniversary with the balance vesting on August 5, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------



|(2) | 42,890 shares of restricted stock units vest on March 2, 2008 or upon a change of control as discussed under Potential Payments Upon Termination or Change in Control
below. 386,010 shares of restricted stock units vest on March 2, 2012 or earlier upon satisfaction of certain average market price maintenance requirements and upon a change of control if certain market price targets are met. Specifically, one-half
of this restricted stock award vests over an eight quarter period if the market price appreciates 200% ($17.32) or more for a sixty consecutive day period prior to the second anniversary of the employment agreement. The remainder of the restricted
stock awared vests over an eight quarter period if the market price of the stock appreciates 300% ($ 25.98) or more for a sixty consecutive day period prior to the 3rd anniversary of the employment agreement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | 10,667 and 10,666 shares of restricted stock units vest on August 17, 2007 and August 17, 2008, respectively, or upon a change of control as discussed under Potential Payments
Upon Termination or Change in Control below. 60,000 shares of restricted stock units vest on August 17, 2012 or earlier upon satisfaction of certain average market price maintenance requirements and upon a change of control if certain market
price targets are met. The market price maintenance requirements for Mr. Womacks plan are consistent with the provisions as noted above in Mr. ODonnells restricted stock award arrangement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Based on the closing market price of our common stock on July 1, 2007, or $4.75.
|--- | --------------------------------------------------------------------------------



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Options Exercised and Stock Vested

The following table summarizes vesting of restricted stock awards for each named executive officer for the fiscal year ended July 1, 2007:



|                                                                   |  |                                      |  |                               
|------------------------------------------------------------------ |  | ------------------------------------ |  | ------------------------------
|                                                                   |  | Stock awards                        
|Name                                                               |  | Numberof SharesAcquiredon Vesting(#) |  | ValueRealizedon Vesting($) (1)
|Michael P. ODonnellChairman, Chief ExecutiveOfficer and President |  | 42,890                               |  | 248,333                       
|David D. WomackExecutive Vice President andChief Financial Officer |  | 10,667                               |  | 53,975                        
|Donna L. DepoianVice President, GeneralCounsel and Secretary       |  |                                     |  |                              
|J. David MillerVice President ofConstruction and Design            |  |                                     |  |                              



|(1) | Value realized is calculated based on the number of shares vesting multiplied by the closing market price of our common stock on the vesting date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

Potential Payments upon Termination or Change in Control

On July 3, 2007, we entered into a merger agreement to be acquired by F&H Acquisition Corp., the holding company for Fox & Hound Restaurant Group, for $5.60 per share in cash, or an aggregate purchase price of $74.8
million. If the deal is consummated, the change of control and most likely the termination provisions of the following employment agreements and stock option and incentive plans will be applicable to this transaction.

Employment Agreements

Michael P.
ODonnell.Our employment agreement with Mr. ODonnell provides that he is entitled to payment of certain compensation upon termination of his employment.

The employment agreement terminates automatically in the event of Mr. ODonnells death or in the event that he becomes disabled. In the
event Mr. ODonnells employment terminates on account of his death or disability, or as a result of the voluntary resignation of Mr. ODonnell, he (or his estate) is entitled to receive his base salary and accrued vacation
pay through the date of termination and any compensation previously deferred by Mr. ODonnell or due pursuant to any applicable welfare or benefit plans. He or his estate is also entitled to receive under such circumstances a pro rata
share of any annual incentive bonus for which he would have otherwise been eligible, determined on the basis of the number of days during which he was employed by us during the applicable fiscal year.



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Mr. ODonnells employment agreement further provides we may terminate his employment at
any time for cause, which is defined in the employment agreement to include, among other things: neglect in the performance of his duties, engaging in certain acts of misconduct that result in material damage to our business or
reputation, felonious acts, engaging in fraud against us or failure to follow lawful directives from the board of directors. In the event Mr. ODonnells employment is terminated for cause, he is entitled to receive his base salary,
any earned but unpaid bonus and benefits in accordance with our applicable policy and accrued vacation pay through the date of his termination.

We may also terminate Mr. ODonnells employment without cause or it may be terminated by Mr. ODonnell for good reason. If Mr. ODonnells employment with us is terminated by us without cause or by
Mr. ODonnell for good reason, then upon delivering a general release to us, Mr. ODonnell is entitled to receive a pro rata portion of the annual bonus Mr. ODonnell would have earned through the date of termination
and, for a period of up to 24 months, an amount equal to 1/12th of his base salary and target bonus. Mr. ODonnell is also entitled to receive continued medical coverage for up to two years. If Mr. ODonnell becomes employed by
another entity that is not our competitor prior to the end of the 24-month severance period, all remaining severance payments will be reduced by one-half throughout the remainder of the severance term. If Mr. ODonnell becomes employed by
our competitor prior to the end of the 24-month severance period, all remaining severance payments will immediately terminate.

In
addition, Mr. ODonnells employment agreement provides for the same payments payable upon a termination without cause described above to be made to him upon the occurrence of a change in control and his subsequent termination.
Specifically, payments are to be made in the event that a change in control occurs and Mr. ODonnells employment as chief executive officer or chairman is voluntarily terminated within the 30-day period immediately following the
first anniversary of the one year following such change in control. The definition of change in control includes a majority of the individuals who serve in the same class of directors cease for any reason to constitute at least a majority of that
class of directors. Good reason is generally defined as:



| |  |  | the assignment of any duties or responsibilities inconsistent in any material respect with the scope of the duties or responsibilities associated with
Mr. ODonnells title or position, as set forth and described in his employment agreement;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (i) a material reduction in his duties or responsibilities or (ii) a material change in his reporting rights or obligations, each as set forth and described in
his employment agreement;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | his removal from the offices or positions provided for in his employment agreement;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | a decrease in his base salary or target bonus by us, or he is not provided benefits under our employee benefit or health or welfare plans or our programs that are
comparable to those provided to our other senior executives;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we fail to pay Mr. ODonnells compensation or to provide for his benefits when due; or
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | we fail to allow Mr. ODonnell to perform his services in Florida whenever commercially reasonable to do so and provide office space in Florida.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

In addition, a total of 42,890 shares subject to restricted stock units held by Mr. ODonnell will vest upon a
change of control as defined above.



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Mr. ODonnells employment agreement also provides that in the event any payment or
distribution to him is deemed to be subject to an excise tax, he will receive an additional payment (a gross-up payment) equal to the excise tax.

In connection with the execution of the merger agreement mentioned above and at F&Hs request, Mr. ODonnell agreed to enter into a consulting arrangement with F&H to provide transitional
services to F&H for approximately three months following the merger. In exchange, F&H will continue making full severance payments (consistent with Mr. ODonnells current employment agreement) for a period of twelve months
following the completion of the merger, irrespective of whether or not Mr. ODonnell accepts substitute full-time employment during such time. Such payments will terminate if Mr. ODonnell becomes employed or affiliated (as an
owner, director, consultant or similar capacity) by a competitor of F&H. After the initial twelve-month period, the provisions in Mr. O'Donnell's existing employment agreement will apply, which means that if Mr. ODonnell becomes
employed by a non-competitor, the remaining severance payments to which he is entitled will be reduced by half.

David D.
Womack.Our employment agreement with Mr. Womack, requires Mr. Womack be paid severance under certain circumstances, following execution of a general release by Mr. Womack. If Mr. Womacks employment is
terminated by us without cause, he is entitled to receive severance compensation equal to his salary paid monthly for a period of twelve months. Mr. Womacks employment agreement defines cause to include, among
other things: engaging in certain acts of misconduct (including violation of our polices), commission of a felony or misdemeanor involving dishonesty, theft of our property, violation of any term of his agreement, or any other of our policy,
procedure or guideline. Cause also includes engaging in any of the following forms of misconduct: commission of any felony or of any misdemeanor involving dishonesty or moral turpitude; theft or misuse of our property or time; use of
alcohol on our premises or appearing on such premises while intoxicated, other than in connection with a Company-sponsored social event; illegal use of any controlled substance; illegal gambling on our premises; discriminatory or harassing behavior,
whether or not illegal under federal, state or local law; willful misconduct; or falsifying any document or making any false or misleading statement relating to his employment with us.

Mr. Womack is also entitled to such severance payments upon a change of control if such change of control immediately results in his loss of
employment. Mr. Womacks employment agreement defines change of control as (i) the acquisition, directly or indirectly, by any person within any twelve-month period of more than 50% of our outstanding common stock or
(ii) consummation of a merger, consolidation or other business combination of us with any other person if we are not the surviving entity after such consummation, or (iii) a plan of complete liquidation of us or an agreement for the sale
or disposition by us of all or substantially all of our assets.

In addition, a total of 21,333 shares subject to restricted stock units
held by Mr. Womack will vest upon a change of control as defined above.

J. David Miller.Our employment agreement
with Mr. Miller requires Mr. Miller be paid severance, following execution of a general release by Mr. Miller. If Mr. Millers employment is terminated by us without cause, he is entitled to receive severance
compensation equal to his salary paid monthly for a period of four months. Mr. Millers employment agreement defines cause identical to the definition in Mr. Womacks agreement outlined above.

Mr. Miller is also entitled to such payments upon a change of control if such change of control immediately results in his loss of employment.
Mr. Millers employment agreement defines change of control identical to the definition in Mr. Womacks agreement outlined above.



72



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Donna L. Depoian. Our employment agreement with Ms. Depoian provides that in the event we
terminate Ms. Depoians employment without cause, or if Ms. Depoian terminates her employment for good reason, we will pay Ms. Depoian an amount equal to Ms. Depoians current cash compensation
for one year, or if her termination is in conjunction with a change of control, the amount would be paid as a lump sum. In addition, in the event of a sale transaction, Ms. Depoian is entitled to receive an amount equal to one time her then
current annual base salary, but will not receive such amount if she is paid severance as a result of a change of control.

Ms. Depoians employment agreement defines cause as (1) her theft from or fraud upon us; (2) her conviction of a felony; (3) her willful violation of the terms and conditions of the agreement;
(4) her willful disregard or neglect in the duties she is required to perform for us; or (5) her willful and demonstrated unwillingness to prosecute and perform such duties to the extent deemed reasonably necessary and advisable, which
duties encompass the duties reasonably required of a general counsel of a restaurant company. In addition, Ms. Depoians employment agreement provides that if her employment is terminated within twelve months after a change of
control, she is entitled to receive a payment equal to her cash compensation for one year in a lump sum and all unexercised options held by her will vest as of the date of termination and the period for exercising such options shall be
extended to the expiration date of such options.

A change of control is generally defined to include the following events: any
person becomes the beneficial owner, directly or indirectly, of our securities representing 50% or more of either our combined voting power of the then outstanding securities having the right to vote in an election of the our board of directors or
the then outstanding shares of our capital stock; or persons who, as of the date of the agreement, constitute our Board of Directors (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board, provided
that any person becoming a director subsequent to such date whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors will be considered an Incumbent Director.

Equity Plans

In addition to the provisions
included in the named executive officers employment and restricted stock agreements discussed above, our 2005 Stock Incentive Plan also provides for acceleration of vesting upon a change in control.

Under our 2005 Stock Incentive Plan, upon a Corporation Transaction (unless awards are assumed or replaced by a buyer), our board of
directors may provide for (i) the vesting of all outstanding shares of restricted stock and stock units (and the delivery of shares subject to stock units) with a 15-day period which to exercise the vested option; or (ii) all awards of
options and restricted stock will be cancelled and the holders are entitled to receive cash or securities having a value of the restricted stock or options. A Corporate Transaction is defined as (i) our dissolution or liquidation,
or our merger, consolidation, or reorganization with one or more other entities in which we are not the surviving entity, (ii) a sale of substantially all of our assets, or (iii) any transaction (including without limitation a merger or
reorganization in which we are the surviving entity) which results in any person or entity owning 50% or more of our stock.



73



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The following table presents the amount of compensation payable to each of Messrs. ODonnell,
Womack, and Miller and Ms. Depoian if the triggering termination event had occurred on the last day of our most recently completed fiscal year, July 1, 2007. The table only includes incremental payments or benefits to the officers and thus
does not include amounts otherwise due, such as base salary through the termination date and accrued vacation.



|                                                     |  |                                                          |  |                                                             |           |                                                             |   |                      |  |       |   |            |   |                  |  |   |   |  |   |        
|---------------------------------------------------- |  | -------------------------------------------------------- |  | ----------------------------------------------------------- | --------- | ----------------------------------------------------------- | - | -------------------- |  | ----- | - | ---------- | - | ---------------- |  | - | - |  | - | -------
|Name and Principal Position                          |  | Benefit                                                  |  | BeforeChange inControlTerminationw/o Causeor forGood Reason |           | After Changein ControlTerminationw/o Causeor forGood Reason |   | VoluntaryTermination |  | Death |   | Disability |   | Changein Control
|Michael P. ODonnell                                 |  | Severance (1)                                            |  | $                                                           | 1,300,000 |                                                             | $ | 1,300,000            |  | $     |  |            | $ |                 |  | $ |  |  | $ |       
|Chairman, Chief Executive                            |  | Health benefits (2)                                      |  |                                                             | 37,870    |                                                             |   | 37,870               |  |       |  |            |   |                 |  |   |  |  |   |       
|Officer and President                                |  | Restricted stock and stock unit vesting acceleration (3) |  |                                                             |          |                                                             |   |                     |  |       |  |            |   |                 |  |   |  |  |   | 203,728
|                                                     |  | Total value:                                             |  |                                                             | 1,337,870 |                                                             |   | 1,337,870            |  |       |  |            |   |                 |  |   |  |  |   | 203,728
|David D. Womack                                      |  | Severance (4)                                            |  |                                                             | 250,000   |                                                             |   | 250,000              |  |       |  |            |   |                 |  |   |  |  |   |       
|Executive Vice President and Chief Financial Officer |  | Restricted stock and stock unit vesting acceleration (5) |  |                                                             |          |                                                             |   |                     |  |       |  |            |   |                 |  |   |  |  |   | 101,332
|                                                     |  | Total value:                                             |  |                                                             | 250,000   |                                                             |   | 250,000              |  |       |  |            |   |                 |  |   |  |  |   | 101,332
|Donna L. Depoian                                     |  | Severance (6)                                            |  |                                                             | 149,600   |                                                             |   | 149,600              |  |       |  |            |   |                 |  |   |  |  |   |       
|Vice President, General                              |  | Change of control (7)                                    |  |                                                             |           |                                                             |   |                      |  |       |   |            |   |                  |  |   |   |  |   | 149,600
|Counsel and Secretary                                |  | Stock option vesting acceleration (8)                    |  |                                                             |          |                                                             |   |                     |  |       |  |            |   |                 |  |   |  |  |   |       
|                                                     |  | Total value:                                             |  |                                                             | 149,600   |                                                             |   | 149,600              |  |       |  |            |   |                 |  |   |  |  |   | 149,600
|J. David Miller                                      |  | Severance (9)                                            |  |                                                             | 52,000    |                                                             |   | 52,000               |  |       |  |            |   |                 |  |   |  |  |   |       
|Vice President of Construction and Design            |  | Stock option vestingacceleration (8)                     |  |                                                             |          |                                                             |   |                     |  |       |  |            |   |                 |  |   |  |  |   |       
|                                                     |  | Total value:                                             |  |                                                             | 52,000    |                                                             |   | 52,000               |  |       |  |            |   |                 |  |   |  |  |   |       



|(1) | Amount based on Mr. ODonnells 2007 base salary, or $450,000, and target bonus for 2007 of $200,000. Mr. ODonnells severance would be paid over the
ensuing 24 months. If he became employed by a non-competitor during the second 12-month period following termination, his severance would be reduced by 1/2 over the remainder of the severance term. If he became employed by a competitor during the
24-month period, all remaining severance would immediately terminate.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Amount represents the COBRA cost for an additional 24 months.
|--- | -------------------------------------------------------------



|(3) | Certain of Mr. ODonnells unvested restricted stock would vest as a result of a change of control. As of July 1, 2007, such unvested restricted shares totaled
42,890 and are valued in the above table using the fiscal 2007 year-end common stock share price of $4.75.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Payable over the ensuing 12 months and applicable only to termination without cause including termination from a change of control.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



|(5) | Certain of Mr. Womacks unvested restricted stock would vest as a result of a change of control. As of July 1, 2007, such unvested restricted shares totaled 21,333
and are valued in the above table using the fiscal 2007 year-end common stock share price of $4.75.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Payable over ensuing 12 months or on a lump-sum basis if termination occurs within 12 months following a change of control.
|--- | ---------------------------------------------------------------------------------------------------------------------------



|(7) | Upon a change of control, Ms. Depoian would be paid a lump-sum payment equal to her current annual base salary.
|--- | ---------------------------------------------------------------------------------------------------------------



|(8) | Certain of Ms. Depoians and Mr. Millers unvested stock options totaling 5,000 shares each would vest as a result of a change of control. Such options at
July 1, 2007 had no value as the exercise price of $7.85 per share exceeded the fiscal 2007 year-end stock price of $4.75.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) | Payable over the ensuing four months and applicable only to termination without cause including termination from a change of control.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



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Director Compensation

The following table sets forth a summary of the compensation we paid to our non-employee directors in fiscal year 2007:



|                        |  |      |  |                                  |        |                    |   |                      |  |          |     |  |   |        
|----------------------- |  | ---- |  | -------------------------------- | ------ | ------------------ | - | -------------------- |  | -------- | --- |  | - | -------
|Name                    |  | Year |  | Fees Earnedor Paidin Cash($) (1) |        | StockAwards($) (2) |   | MealDiscounts($) (3) |  | Total($)
|Stephen F. Edwards (4)  |  | 2007 |  | $                                | 51,500 |                    | $ | 60,000               |  | $        |    |  | $ | 111,500
|James Goodwin (4)       |  | 2007 |  |                                  | 46,000 |                    |   | 60,000               |  |          |    |  |   | 106,000
|Ian Hamilton (4)        |  | 2007 |  |                                  | 47,500 |                    |   | 60,000               |  |          |    |  |   | 107,500
|Karl S. Okamoto (4)     |  | 2007 |  |                                  | 1,500  |                    |   | 60,000               |  |          | 866 |  |   | 62,366 
|Charles G. Phillips (4) |  | 2007 |  |                                  | 44,500 |                    |   | 60,000               |  |          |    |  |   | 104,500



|(1) | Each non-employee director is entitled to receive $1,500 for each standing committee meeting attended. In addition, a special committee was formed on October 4, 2006 to
evaluate and coordinate our potential sale process. The special committee consisted of Messrs. Edwards, Phillips, Goodwin and Hamilton. Each member of the special committee was paid $40,000 with the exception of Mr. Edwards, who was paid
$50,000 as chair of the special committee.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Amounts represent the compensation cost recognized by us during 2007 for each of the directors, computed in accordance with FAS#123R, other than disregarding any assumptions due to
service-based vesting conditions. For a discussion of the assumptions relating to these valuations, see Note 11 of our 2007 audited financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Each non-employee director is entitled to receive complementary food and beverages at our restaurants.
|--- | ------------------------------------------------------------------------------------------------------



|(4) | Prior to fiscal 2006, our directors were annually awarded non-qualified stock option awards that generally vested over a one-year period. In fiscal 2006 and 2007, our directors were
awarded restricted stock award grants. The following is a listing of the aggregate number of unvested stock awards outstanding for each non-employee director as of July 1, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                            |  |                                
|--------------------------- |  | -------------------------------
|Name and Principal Position |  | AggregateStockAwardsOutstanding
|Stephen F. Edwards          |  | 9,091                          
|James Goodwin               |  | 9,091                          
|Ian Hamilton                |  | 9,091                          
|Karl S. Okamoto             |  | 9,091                          
|Charles G. Phillips         |  | 9,091                          



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##### Table of Contents

Annual Retainers

Our directors do not receive any cash annual retainers. Instead, annually for the last two years they have been awarded restricted stock. Directors may elect to defer restricted stock awarded under our Deferred
Compensation Plan and accordingly receive restricted stock units.

Meeting Fees

Our directors do not receive meeting fees for board meetings. However, each member of the audit committee, compensation committee and the nominating and
governance committee receives $1,500 for each committee meeting attended in person or telephonically. We also reimburse the directors for reasonable costs incurred by them in traveling to and attending board and committee meetings.

Indemnification of Directors

We have entered
into agreements to indemnify our directors and executive officers. Under these agreements, we are obligated to indemnify our directors and officers to the fullest extent permitted under the Delaware General Corporation Law for expenses, including
attorneys fees, judgments, fines and settlement amounts incurred by them in any action or proceeding arising out of their services as a director or officer. We believe that these agreements are necessary in attracting and retaining qualified
directors and officers.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------

Equity Compensation Plan Information

The following table provides certain information with respect
to all of the companys equity compensation plans in effect as of July 1, 2007.



|                                                       |  |                                                                                          |  |                                                                          |  |                                                                                                                                       |    
|------------------------------------------------------ |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------- | ---
|Plan Category                                          |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and
rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |  | Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a)) |    
|                                                       |  | (a)                                                                                      |  | (b)                                                                      |  | (c)                                                                                                                                   |    
|Equity compensation plans approved by security holders |  | 647,858                                                                                  |  | 6.89                                                                     |  | 613,154                                                                                                                               | (1)
|Equity compensation plans not approved by stockholders |  |                                                                                         |  |                                                                         |  |                                                                                                                                      |    
|                                                       |  |                                                                                          |  |                                                                          |  |                                                                                                                                       |    
|Total                                                  |  | 647,858                                                                                  |  |                                                                         |  | 613,154                                                                                                                               |    
|                                                       |  |                                                                                          |  |                                                                          |  |                                                                                                                                       |    



|(1) | Includes 400,000 shares authorized for issuance under the Employee Stock Purchase Plan under which 299,817 shares have been issued and 2,919 shares were subject to purchase as of
July 1, 2007. In addition, the Company has 535,890 shares available for grant under the 2005 Stock Incentive Plan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Security Ownership of Certain Beneficial Owners and Management

The following table shows the amount of common stock of Champps beneficially owned as of September 1, 2007 based on 13,097,368 shares of common stock
outstanding on such date by:



| |  |  | each director;
| | - |  | --------------



| |  |  | the chief executive officer and the three executive officers of Champps, each of whose compensation exceeded $100,000 during the fiscal year ended July 1,
2007;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all directors and executive officers of Champps as a group; and
| | - |  | ---------------------------------------------------------------



| |  |  | each person known by Champps to beneficially own more than 5% of our outstanding common stock based upon our review of documents filed by them with the SEC and/or
information available on www.nasdaq.net with respect to the ownership of our shares of common stock based on 13-F filings for ownership, which reflect beneficial ownership as of the dates set forth therein.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Unless otherwise indicated, the address for each person or entity below is c/o Champps Entertainment, Inc., 10375 Park Meadows Drive, Suite 560,
Littleton, Colorado 80124.

Beneficial ownership of common stock includes shares that are individually or jointly owned, as well as shares
of which the individual has sole or shared investment or voting authority. Beneficial ownership of common stock also includes shares that could be purchased by the exercise of options, warrants or notes at or within 60 days of September 1,
2007. The amounts set forth in the table as beneficially owned include shares owned, if any, by spouses and relatives living in the same home, as to which beneficial ownership may be disclaimed as set forth in the notes following the table.



|                                                                 |  |                           |  |         |  
|---------------------------------------------------------------- |  | ------------------------- |  | ------- | -
|                                                                 |  | Shares Beneficially Owned | 
|Name and Address of Beneficial Owner                             |  | Number                    |  | Percent |  
|Directors and Executive Officers                                 |  |                           |  |         |  
|Stephen F. Edwards (1)                                           |  | 54,196                    |  | *       |  
|James Goodwin (2)                                                |  | 66,696                    |  | *       |  
|Ian Hamilton (3)                                                 |  | 44,196                    |  | *       |  
|Michael P. ODonnell (4)                                         |  | 540,680                   |  | 4.0     | %
|Karl Okamoto (5)                                                 |  | 28,196                    |  | *       |  
|Charles G. Phillips (6)                                          |  | 44,196                    |  | *       |  
|Donna L. Depoian (7)                                             |  | 82,190                    |  | *       |  
|J. David Miller (8)                                              |  | 95,741                    |  | *       |  
|David D. Womack (9)                                              |  | 92,458                    |  | *       |  
|Other Stockholders                                               |  |                           |  |         |  
|Atticus Capital, LLC (10)                                        |  | 4,453,833                 |  | 33.1    | %
|T. Rowe Price Associates, Inc. (11)                              |  | 1,640,744                 |  | 12.1    | %
|Dimensional Fund Advisors, Inc. (12)                             |  | 1,097,126                 |  | 8.4     | %
|Franklin Advisory Services, LLC (13)                             |  | 920,000                   |  | 7.0     | %
|Loeb Partners Corp (14)                                          |  | 883,562                   |  | 6.7     | %
|                                                                 |  |                           |  |         |  
|All directors and executive officers as a group (9 persons) (15) |  | 1,048,549                 |  | 7.4     | %

---

|* | Less than 1% of the outstanding shares of our common stock.
|- | -----------------------------------------------------------



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##### Table of Contents

|(1) | Includes 36,000 shares of common stock issuable on the exercise of stock options and 18,196 shares of restricted stock.
Excludes shares which may be deemed to be beneficially owned by Atticus Capital, L.L.C. as described below. The address for Mr. Edwards is c/o Atticus Capital, L.L.C., 152 West 57thStreet, 45thFloor, New York, New York 10019.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes 46,000 shares of common stock issuable on the exercise of stock options held by the Gordon Tang Goodwin Trust
of which Mr. Goodwin is a trustee and 18,196 shares of restricted stock. Mr. Goodwin disclaims beneficial ownership of shares owned by this trust. The address for Mr. Goodwin is c/o Half Moon LLC, 39 East 79thStreet, New York, New York 10021.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes 26,000 shares of common stock issuable on the exercise of stock options and 18,196 shares of restricted stock shares. The address for Mr. Hamilton is 333 S. State
Street, Suite V-154, Lake Oswego, Oregon 79034.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes 26,000 shares of common stock issuable on the exercise of stock options and 514,680 shares of restricted stock. The address for Mr. ODonnell is 10375 Park
Meadows Drive, Suite 560, Littleton, Colorado 80124.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Includes 10,000 shares of common stock issuable on the exercise of stock options and 18,196 shares of restricted stock shares. The address for Mr. Okamoto is 1007 E. Abington
Avenue, Wyndmoor, Pennsylvania 19038.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Includes 26,000 shares of common stock issuable on the exercise of stock options and 18,196 shares of restricted stock. The address for Mr. Phillips is c/o Prentice Capital
Management, LP, 900 Third Avenue, New York, New York 10022.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Includes 80,500 shares of common stock issuable upon the exercise of stock options held by Ms. Depoian.
|--- | -------------------------------------------------------------------------------------------------------



|(8) | Includes 90,500 shares of common stock issuable upon the exercise of stock options held by Mr. Miller.
|--- | ------------------------------------------------------------------------------------------------------



|(9) | Includes 92,000 shares of restricted stock held by Mr. Womack.
|--- | --------------------------------------------------------------



|(10) | Includes (a) 4,102,052 shares of common stock, (b) 281,425 shares issuable upon conversion of the 5.5%
convertible subordinated notes due 2007 in the aggregate principal amount of $3,000,000 (assuming conversion at the initial conversion price of $10.66 per share) and (c) 70,356 shares issuable upon exercise of the warrants (assuming conversion
at the initial conversion price of $11.10 per share) both issued by Champps in December 2002 to Atticus Capital, L.L.C., which were subsequently transferred to certain funds managed by Atticus Capital, L.L.C. Atticus Capital, L.L.C., together with
certain of its affiliated entities, act as advisors for various investment funds and managed accounts. Mr. Timothy R. Barakett is the chairman, chief executive officer and managing member of Atticus Capital, L.L.C. Based on his
relationship with Atticus Capital, L.L.C. and the affiliate entities, Mr. Barakett is deemed to be the beneficial owner of such shares. The address for Mr. Barakett and Atticus Capital, L.L.C. is 152 West 57thStreet, 45thFloor, New York, New York 10019.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(11) | Includes 375,235 shares issuable upon conversion of $4,000,000 principal amount of convertible subordinated notes and 93,809 warrants to purchase common stock purchased from Champps
in December 2002. The securities are owned by various individual and institutional investors including T. Rowe Price Small-Cap Value Fund, Inc. (which owns a majority of the shares included herein), which T. Rowe Price Associates, Inc. (Price
Associates) serves as investment adviser with power to direct investments and/or sole power to vote the securities. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates expressly disclaims beneficial ownership of such securities. The address for T. Rowe Price Associates is 100 East Pratt St., Baltimore, Maryland 21202.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) | The address for Dimensional Fund Advisors, Inc is 1299 Ocean Avenue, 11thFloor, Santa Monica, California 90401.
|---- | ---------------------------------------------------------------------------------------------------------------



|(13) | Franklin Advisory Services, LLC may be deemed to be a beneficial owner of 920,000 shares of common stock held by
Franklin Resources, Inc. Charles B. Johnson and Rupert H. Johnson each may be deemed to be beneficial owners of securities held by Franklin Resources, Inc. Each disclaims beneficial ownership of any of the 920,000 shares of common stock held by
Franklin Resources, Inc. The address for Franklin Advisory Services, LLC is 901 Mariners Island Blvd., 6thFloor, San Mateo, California 94404.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(14) | The address for Loeb Partners, Corp. is 61 Broadway, Suite 2450, New York, New York 10006.
|---- | ------------------------------------------------------------------------------------------



|(15) | The number of shares beneficially owned by all directors and executive officers as a group includes 341,000 shares of common stock issuable upon the exercise of outstanding stock
options and 697,660 shares of restricted stock.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Change in Control

Proposed Merger

On July 3, 2007, we entered into the Merger Agreement with F&H and Merger Sub,
pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation.

Under the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Company common stock (other than any
shares held in treasury by the Company and any shares as to which the holder has properly demanded appraisal of his or her shares under Delaware law) will be converted into the right to receive $5.60 in cash, or $74.8 million in total, without
interest. Following completion of the Merger, we will be a wholly-owned subsidiary of F&H. F&H is the parent company of Fox & Hound Restaurant Group, a pub-themed concept with 88 units in operation. F&H is owned by two private equity
fund sponsors, Newcastle Partners, L.P. and Steel Partners II L.P., and the senior management of F&H.

Stockholders are scheduled to
vote on the approval and adoption of the Merger Agreement at a special meeting of stockholders called for that purpose which will be held on September 28, 2007, and if the Merger is approved, it is currently anticipated that the Merger will be
completed on October 1, 2007. Completion of the Merger is subject to the satisfaction of certain other customary closing conditions as set forth in the Merger Agreement, including the absence of certain changes and the obtaining of certain third
party consents. The Merger is not subject to any financing condition.



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Additional information about the Merger and the Merger Agreement is contained in our proxy statement
dated August 28, 2007, copies of which have been filed with the SEC and mailed to our stockholders.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

Interests of our Directors and Executive Officers in the Proposed Merger

As discussed in Item 12 above under Change in
Control  Proposed Merger, it is contemplated that a merger will occur on October 1, 2007. In conjunction with this proposed merger, directors and executive officers, have interest in the transaction as discussed below.



| |  |  | Each outstanding option to purchase shares of our common stock held by a director or executive officer whether vested or unvested, will be canceled and converted
into the right to receive a cash payment equal to the excess (if any) of the $5.60 per share cash merger consideration over the exercise price per share of the option, multiplied by the number of shares subject to the option, without interest and
less any applicable withholding taxes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | each holder under our Deferred Compensation Plan, will be entitled to $5.60 per each notional share held under such holders account; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | each award of restricted stock held by an executive officer or director which has vested or will vest as a result of the change in control will be converted into
the right to receive $5.60 per share in cash, less any applicable withholding taxes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We estimate that the amounts that
will be payable to each named officer in settlement of stock options, restricted stock and other equity-based awards as follows: Mr. ODonnell, $725,000, and Mr. Womack $182,000. We estimate the aggregate that will be payable to all
directors and executive officers in settlement of stock options, restricted stock, and other equity based awards (other than that held by Mr. ODonnell and Mr. Womack) to be approximately $622,000. In addition, Messrs. ODonnell,
Womack and Miller and Ms. Depoian could also receive severance as a result of a change of control. See Item 11. Executive Compensation.

Indemnification Agreements

Champps has entered into indemnification agreements with certain members of the board, pursuant
to which Champps has agreed to advance expenses and indemnify such persons against certain liabilities incurred in connection with their services to Champps. In the event of a proceeding brought against an indemnified person by or on behalf of
Champps, that person shall not be entitled to indemnification if he or she is adjudged to be liable to Champps, or if applicable law prohibits such indemnification; provided, however, that, if applicable law so permits, indemnification shall
nevertheless be made by Champps in such event if, and only to the extent, determined by the Court of Chancery of the State of Delaware, or another court in which such proceeding is brought or is pending.



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Review, Approval or Ratification of Transactions with Related Parties

The board of directors has recognized that transactions between the Company and certain related persons present a heightened risk of conflicts of
interest. In order to ensure that the Company acts in the best interest of its stockholders, the Board has delegated the review and approval of related party transactions to the audit committee. Any related party transaction required to be disclosed
in accordance with applicable SEC regulations must be reviewed and approved by the audit committee. No such transactions were required to be reviewed by the audit committee during the fiscal year.

Independence of Directors

The board of directors
consists of six persons, a majority of whom are independent. The board of directors has determined that each of Charles Phillips, Karl Okamoto, Stephen Edwards, James Goodwin and Ian Hamilton qualify as independent directors as defined
in Rule 4200(a)(15) of the NASD.



|Item 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------

KPMG LLP
served as our independent auditors for the 2007 fiscal year. Ratification of the selection of KPMG LLP by our stockholders is not required by law, regulation or Nasdaq rules.

We incurred or are expected to incur the following fees to our auditors, KPMG LLP, for the fiscal years ended July 1, 2007 and July 2, 2006:



|            |  |            |         |                   |   |          |  |                |   |       |   |   |  |   |        
|----------- |  | ---------- | ------- | ----------------- | - | -------- |  | -------------- | - | ----- | - | - |  | - | -------
|Fiscal Year |  | Audit Fees |         | Audit RelatedFees |   | Tax Fees |  | All Other Fees |   | Total
|2007        |  | $          | 504,190 |                   | $ |         |  | $              |  |       | $ |  |  | $ | 504,190
|2006        |  |            | 485,000 |                   |   |         |  |                |  |       |   |  |  |   | 485,000

Fiscal year 2007 and 2006 audit fees consisted of audit and quarterly reviews of the consolidated
financial statements for the fiscal years ended July 1, 2007 and July 2, 2006, respectively, or services normally provided by our accountants in connection with statutory and regulatory filings. Included in the services provided by our
accountant were compliance with Section 404 of the Sarbanes-Oxley Act. All services performed by the principal accountant were performed by full-time employees of KPMG LLP.

Audit Committee Pre-approval of Fees

The audit committee meets with the independent auditors prior
to the audit to discuss the planning and staffing of the audit and to approve the proposed fee for the audit and any required special services. The audit committee is notified in advance of and pre-approves, any proposed engagement of the
independent auditor to provide non-audit services to Champps. The audit committee adopted a pre-approval policy for services by its independent accountant to comply with Securities and Exchange Commission Release No. 33-8183A pursuant to which
all services provided by the principal auditor are pre-approved by the chairman of the audit committee. The audit committee pre-approved all services performed by the principal accountants for fiscal year 2007 in accordance with the pre-approval
policy.



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PART IV



|Item 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------



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



|1. | Financial Statements:
|-- | ---------------------

Managements Report on
Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets  As of July 1, 2007, and July 2, 2006

Consolidated Statements of Operations  Fiscal years ended July 1, 2007, July 2, 2006, and July 3, 2005

Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income  Fiscal years ended July 1, 2007, July 2, 2006
and July 3, 2005

Consolidated Statements of Cash Flows  Fiscal years ended July 1, 2007, July 2, 2006 and
July 3, 2005

Notes to Consolidated Financial Statements for the fiscal years ended July 1, 2007, July 2, 2006 and
July 3, 2005



|2. | Financial Statement Schedules:
|-- | ------------------------------

Not applicable.



|3. | Exhibits:
|-- | ---------

The exhibits listed in the accompanying
Exhibit Index are filed as part of this Annual Report on Form 10-K and incorporated herein by reference.



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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/ Michael P. ODonnell                                       |  |  |  |  |  | Date: September 6, 2007
|                            |  | Michael P. ODonnell                                           |  |  |  |  |  |                        
|                            |  | Chairman, President and Chief Executive Officer                |  |  |  |  |  |                        
|                            |  |                                                                |  | 
|By:                         |  | /s/ David D. Womack                                            |  |  |  |  |  | Date: September 6, 2007
|                            |  | David D. Womack                                                |  |  |  |  |  |                        
|                            |  | Executive Vice President, Chief Financial Officerand Treasurer |  |  |  |  |  |                        
|                            |  | (Principal Financial and Accounting Officer)                   |  |  |  |  |  |                        

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                              |  |  |  |                        
|                                                                                                             |  | 
|/s/ Michael P. O Donnell Michael
P. ODonnell, Chairman of the Board, President and Chief Executive Officer |  |  |  | Date: September 6, 2007
|                                                                                                             |  | 
|/s/ David D. Womack David D. Womack,
Executive Vice President, Chief Financial Officer and Treasurer         |  |  |  | Date: September 6, 2007
|                                                                                                             |  | 
|/s/ Stephen F. Edwards Stephen F.
Edwards, Director                                                          |  |  |  | Date: September 6, 2007
|                                                                                                             |  | 
|/s/ James Goodwin James Goodwin,
Director                                                                    |  |  |  | Date: September 6, 2007
|                                                                                                             |  | 
|/s/ Ian Hamilton Ian Hamilton, Director                                                                      |  |  |  | Date: September 6, 2007
|                                                                                                             |  | 
|/s/ Karl Okamoto Karl Okamoto, Director                                                                      |  |  |  | Date: September 6, 2007
|                                                                                                             |  | 
|/s/ Charles G. Phillips Charles G.
Phillips, Director                                                        |  |  |  | Date: September 6, 2007



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                                            
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | TITLE                                                                                                                                                                                                                                                                                                                                                      
|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           |  | Certificate of Ownership and Merger between Champps Entertainment, Inc. and Unique Casual Restaurants, Inc., dated July 26, 1999, incorporated herein by reference to the Companys Annual
Report on Form 10-K for the year ended June 30, 2002.                                                                                                           
|              | 
|2.5           |  | Agreement and Plan of Merger among F&H Acquisition Corp., Last Call Acquisition Corp. and Champps Entertainment, Inc. dated as of July 3, 2007, incorporated herein by reference to the
Companys Current Report on Form 8-K of Champps Entertainment, Inc. dated July 6, 2007.                                                                            
|              | 
|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 Bylaws 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.                                                                          



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|       |  |                                                                                                                                                                                                                                                                                                                                                           
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|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   |  | 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.                                                                                        
|       | 
|10.8   |  | 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.                                                                                                           
|       | 
|10.9*  |  | 2003 Stock Option and Incentive Plan, incorporated herein by reference to the Companys definitive proxy statement filed April 29, 2003.                                                                                                                                                                                                                  
|       | 
|10.10  |  | 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.                                                                                                        
|       | 
|10.11  |  | 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.
|       | 
|10.12* |  | Employment Agreement including forms of restricted stock agreements and release, dated March 2, 2005, by and between Champps Entertainment, Inc. and Michael P. ODonnell, incorporated
herein by reference to the Companys Current Report on Form 8-K dated March 2, 2005.                                                                              
|       | 
|10.13* |  | Employment Agreement, dated August 17, 2005, by and between Champps Entertainment, Inc. and David Womack, incorporated herein by reference to the Companys Current Report on Form 8-K dated
August 17, 2005.                                                                                                                                             



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|       |  |                                                                                                                                                                                                                                                                                                                                                                
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.14* |  | Champps Entertainment, Inc. Deferred Compensation Plan Effective September 28, 2005 incorporated herein by reference to the Quarterly Report on Form 10-Q of Champps Entertainment, Inc. for
the quarter ended October 2, 2005.                                                                                                                                
|       | 
|10.15  |  | First Amendment to 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 November 29, 2005 incorporated herein by reference to the Current Report on Form 8-K of Champps Entertainment, Inc. dated December 2, 2005.
|       | 
|10.16* |  | Champps Entertainment, Inc. 2005 Stock Incentive Plan incorporated by reference to the Registrants Definitive Proxy Statement (File No. 000-22639) filed on October 25,
2005.                                                                                                                                                                                 
|       | 
|10.17  |  | Second Amendment to 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 June 13, 2006 incorporated herein by reference to the Current Report on Form 8-K of Champps Entertainment, Inc. dated June 16, 2006.      
|       | 
|10.18  |  | Third Amendment to 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 August 14, 2006 incorporated herein by reference to the Current Report on Form 8-K of Champps Entertainment, Inc. dated August 17, 2006.   
|       | 
|10.19  |  | Fourth Amendment to 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 October 5, 2006 incorporated herein by reference to the Current Report on Form 8-K of Champps Entertainment, Inc. dated October 9, 2006.  
|       | 
|10.20* |  | Amendment effective January 1, 2007 to the Employment Agreement dated August 17, 2005 between Champps Entertainment, Inc. and David Womack, incorporated herein by reference to the Companys
Current Report on Form 8-K of Champps Entertainment, Inc. dated December 12, 2006.                                                                               
|       | 
|21.1** |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                   
|       | 
|23.1** |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                           
|       | 
|31.1** |  | Certification by Michael P. ODonnell pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                               
|       | 
|31.2** |  | Certification by David D. Womack pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                    
|       | 
|32.1** |  | Certification by Michael P. ODonnell 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 David D. Womack 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.                                                                                                                                                                                   



|* | Identifies each management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------------



|** | Filed herewith.
|-- | ---------------



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Managements Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended). The Companys internal control over financial reporting is designed to provide reasonable assurance to the Companys management and Board of Directors regarding the preparation and fair
presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management including our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of the Companys internal control over financial reporting as of July 1, 2007. In making this
assessment, our management used the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that, as
of July 1, 2007, the Companys internal control over financial reporting was effective based on these criteria.

The Companys independent
registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included herein.



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Shareholders

Champps
Entertainment, Inc.:

We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over
Financial Reporting, that Champps Entertainment, Inc. (the Company) maintained effective internal control over financial reporting as of July 1, 2007, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that Champps Entertainment, Inc. maintained effective internal control over financial reporting as of
July 1, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by COSO. Also, in our opinion, Champps Entertainment, Inc. maintained, in all material respects,
effective internal control over financial reporting as of July 1, 2007, based on criteria established in Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Champps Entertainment, Inc. as of July 1, 2007 and
July 2, 2006, and the related consolidated statements of operations, changes in shareholders equity and comprehensive income, and cash flows for each of the fiscal years in the three-year period ended July 1, 2007, and our report
dated September 6, 2007 expressed an unqualified opinion on those consolidated financial statements.



|                 
|-----------------
|                 
|KPMG LLP         
|                 
|Denver, Colorado 
|September 6, 2007



F-2



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Champps Entertainment, Inc.:

We have audited the accompanying consolidated balance sheets of Champps Entertainment, Inc. (the Company) and subsidiaries as of July 1, 2007 and
July 2, 2006, 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 July 1, 2007. 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 July 1, 2007 and July 2, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended July 1, 2007, in conformity with U.S. generally accepted accounting
principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of
Champps Entertainment, Inc.s internal control over financial reporting as of July 1, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated September 6, 2007 expressed an unqualified opinion on managements assessment of and the effective operation of internal control over financial reporting.



|                 
|-----------------
|                 
|KPMG LLP         
|                 
|Denver, Colorado 
|September 6, 2007



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##### Table of Contents

CHAMPPS ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

As of July 1, 2007 and July 2, 2006

(In thousands, except share data)



|                                                                                                                                                              |  |             |         |   |             |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                              |  | July 1,2007 |         |   | July 2,2006 |  
|ASSETS                                                                                                                                                        |  |             |         |   |             |   |         |  
|Current assets:                                                                                                                                               |  |             |         |   |             |   |         |  
|Cash and cash equivalents                                                                                                                                     |  | $           | 19,378  |   |             | $ | 9,449   |  
|Accounts receivable, net                                                                                                                                      |  |             | 2,175   |   |             |   | 2,208   |  
|Inventories                                                                                                                                                   |  |             | 4,470   |   |             |   | 4,461   |  
|Prepaid expenses and other current assets (Note 2)                                                                                                            |  |             | 2,467   |   |             |   | 2,871   |  
|Assets held for sale (Note 14)                                                                                                                                |  |             |        |   |             |   | 2,670   |  
|Deferred tax assets (Note 8)                                                                                                                                  |  |             | 2,053   |   |             |   | 3,210   |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Total current assets                                                                                                                                          |  |             | 30,543  |   |             |   | 24,869  |  
|Property and equipment, net (Note 3)                                                                                                                          |  |             | 67,498  |   |             |   | 75,076  |  
|Goodwill                                                                                                                                                      |  |             | 5,069   |   |             |   | 5,069   |  
|Deferred tax assets (Note 8)                                                                                                                                  |  |             | 24,948  |   |             |   | 29,533  |  
|Other assets, net (Note 4)                                                                                                                                    |  |             | 1,666   |   |             |   | 2,155   |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Total assets                                                                                                                                                  |  | $           | 129,724 |   |             | $ | 136,702 |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                          |  |             |         |   |             |   |         |  
|Current liabilities:                                                                                                                                          |  |             |         |   |             |   |         |  
|Accounts payable                                                                                                                                              |  | $           | 3,732   |   |             | $ | 3,793   |  
|Accrued expenses (Note 5)                                                                                                                                     |  |             | 8,883   |   |             |   | 9,584   |  
|Current portion of long-term debt (Note 7)                                                                                                                    |  |             | 14,908  |   |             |   |        |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Total current liabilities                                                                                                                                     |  |             | 27,523  |   |             |   | 13,377  |  
|Long-term debt, net of current portion (Note 7)                                                                                                               |  |             |        |   |             |   | 14,707  |  
|Other long-term liabilities (Note 5)                                                                                                                          |  |             | 32,799  |   |             |   | 31,890  |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Total liabilities                                                                                                                                             |  |             | 60,322  |   |             |   | 59,974  |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Commitments and contingencies (Note 9)                                                                                                                        |  |             |         |   |             |   |         |  
|Shareholders equity (Notes 10 and 11):                                                                                                                       |  |             |         |   |             |   |         |  
|Common stock ($.01 par value per share; authorized 30,000,000 shares; 13,285,929 and 13,258,151 shares issued at July 1, 2007 and
July 2, 2006, respectively) |  |             | 133     |   |             |   | 133     |  
|Additional paid-in capital                                                                                                                                    |  |             | 92,391  |   |             |   | 91,264  |  
|Accumulated deficit                                                                                                                                           |  |             | (21,816 | ) |             |   | (13,966 | )
|Treasury stock, at cost (191,480 and 91,480 shares at July 1, 2007 and July 2, 2006, respectively)                                                            |  |             | (1,306  | ) |             |   | (703    | )
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Total shareholders equity                                                                                                                                    |  |             | 69,402  |   |             |   | 76,728  |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  
|Total liabilities and shareholders equity                                                                                                                    |  | $           | 129,724 |   |             | $ | 136,702 |  
|                                                                                                                                                              |  |             |         |   |             |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHAMPPS ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Years Ended July 1,
2007, July 2, 2006 and July 3, 2005

(In thousands, except per share data)



|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|---------------------------------------------------------- |  | ----------------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | -
|                                                           |  | Fiscal Year Ended |        
|                                                           |  | July 1,2007       |         |   | July 2,2006 |   |         | July 3,2005 | 
|Revenue                                                    |  |                   |         |   |             |   |         |             |  |   |         |  
|Sales                                                      |  | $                 | 197,389 |   |             | $ | 206,387 |             |  | $ | 210,048 |  
|Franchising and royalty, net                               |  |                   | 680     |   |             |   | 643     |             |  |   | 621     |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Total revenue                                              |  |                   | 198,069 |   |             |   | 207,030 |             |  |   | 210,669 |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Costs and expenses                                         |  |                   |         |   |             |   |         |             |  |   |         |  
|Cost of sales and operating expenses                       |  |                   | 173,343 |   |             |   | 176,961 |             |  |   | 178,486 |  
|General and administrative expenses                        |  |                   | 13,085  |   |             |   | 14,735  |             |  |   | 13,889  |  
|Depreciation and amortization                              |  |                   | 10,356  |   |             |   | 10,859  |             |  |   | 10,494  |  
|Severance                                                  |  |                   | (136    | ) |             |   | 110     |             |  |   | 655     |  
|Asset impairment charges and restaurant closings/disposals |  |                   | 530     |   |             |   | 2,136   |             |  |   | 2,015   |  
|Potential company sale expense                             |  |                   | 666     |   |             |   |        |             |  |   |        |  
|Other expense (income)                                     |  |                   | 324     |   |             |   | 474     |             |  |   | (90     | )
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Income (loss) from operations                              |  |                   | (99     | ) |             |   | 1,755   |             |  |   | 5,220   |  
|Other expense:                                             |  |                   |         |   |             |   |         |             |  |   |         |  
|Interest expense, net                                      |  |                   | 751     |   |             |   | 1,127   |             |  |   | 1,444   |  
|Expense (income) related to predecessor companies          |  |                   | 12      |   |             |   | (5      | )           |  |   | 358     |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Income (loss) from continuing operations, before tax       |  |                   | (862    | ) |             |   | 633     |             |  |   | 3,418   |  
|Income tax expense (benefit)                               |  |                   | 6,648   |   |             |   | (901    | )           |  |   | 367     |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Income (loss) from continuing operations                   |  |                   | (7,510  | ) |             |   | 1,534   |             |  |   | 3,051   |  
|Loss on discontinued operations, net of tax                |  |                   | 340     |   |             |   | 3,092   |             |  |   | 3,300   |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Net loss                                                   |  | $                 | (7,850  | ) |             | $ | (1,558  | )           |  | $ | (249    | )
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|                                                           |  |                   |        
|Income (loss) from continuing operations                   |  | $                 | (0.57   | ) |             | $ | 0.12    |             |  | $ | 0.24    |  
|Loss from discontinued operations                          |  |                   | (0.03   | ) |             |   | (0.24   | )           |  |   | (0.26   | )
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Basic loss per share:                                      |  | $                 | (0.60   | ) |             | $ | (0.12   | )           |  | $ | (0.02   | )
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Income (loss) from continuing operations                   |  | $                 | (0.57   | ) |             | $ | 0.12    |             |  | $ | 0.23    |  
|Loss from discontinued operations                          |  |                   | (0.03   | ) |             |   | (0.24   | )           |  |   | (0.25   | )
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Diluted loss per share:                                    |  | $                 | (0.60   | ) |             | $ | (0.12   | )           |  | $ | (0.02   | )
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Basic weighted average common shares outstanding           |  |                   | 13,102  |   |             |   | 13,151  |             |  |   | 12,887  |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  
|Diluted weighted average common shares outstanding         |  |                   | 13,102  |   |             |   | 13,213  |             |  |   | 13,118  |  
|                                                           |  |                   |         |   |             |   |         |             |  |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHAMPPS ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

AND

COMPREHENSIVE INCOME

Fiscal Years Ended July 1, 2007, July 2, 2006 and July 3, 2005

(In thousands, except share data)



|                                                                                                         |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ------------ |  | ----------------- | --- | ------- | - | ------- | ------------------------- | - | ------- | -------------- |  | ------ | ------------------ | ------ |  | ------- | ------ | - | ------ | - |  | - | ------ | -
|                                                                                                         |  | Common Stock |  | AdditionalPaid-in |     | Accum.  |   |         | Accum. OtherComprehensive |   |         | Treasury Stock |  |        | TotalShareholders |       
|                                                                                                         |  | Shares       |  | Amount            |     | Capital |   | Deficit |                           |   | Income  |                |  | Shares |                    | Amount |  |         | Equity |  
|Balance as of June 27, 2004                                                                              |  | 12,813,665   |  | $                 | 128 |         | $ | 86,815  |                           | $ | (12,159 | )              |  | $      | 224                |        |  |        |        | $ |       |   |  | $ | 75,008 |  
|Net loss                                                                                                 |  |             |  |                   |    |         |   |        |                           |   | (249    | )              |  |        |                   |        |  |        |        |   |       |   |  |   | (249   | )
|Reclassification adjustment for the gain on sale of securities realized in net income, net of tax of $55 |  |             |  |                   |    |         |   |        |                           |   |        |                |  |        | (224               | )      |  |        |        |   |       |   |  |   | (224   | )
|                                                                                                         |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   |        |  
|Total comprehensive income                                                                               |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   | (473   | )
|Common shares issued                                                                                     |  | 222,656      |  |                   | 2   |         |   | 1,323   |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 1,325  |  
|Income tax benefit of stock options exercised                                                            |  |             |  |                   |    |         |   | 201     |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 201    |  
|                                                                                                         |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   |        |  
|Balance as of July 3, 2005                                                                               |  | 13,036,321   |  |                   | 130 |         |   | 88,339  |                           |   | (12,408 | )              |  |        |                   |        |  |        |        |   |       |   |  |   | 76,061 |  
|Net loss                                                                                                 |  |             |  |                   |    |         |   |        |                           |   | (1,558  | )              |  |        |                   |        |  |        |        |   |       |   |  |   | (1,558 | )
|Common shares issued                                                                                     |  | 221,830      |  |                   | 3   |         |   | 1,253   |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 1,256  |  
|Repurchase of common shares (Note 10)                                                                    |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  | 91,480  |        |   | (703   | ) |  |   | (703   | )
|Income tax benefit of stock options exercised                                                            |  |             |  |                   |    |         |   | 132     |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 132    |  
|Stock-based compensation                                                                                 |  |             |  |                   |    |         |   | 879     |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 879    |  
|Compensation liability reclassification                                                                  |  |             |  |                   |    |         |   | 661     |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 661    |  
|                                                                                                         |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   |        |  
|Balance as of July 2, 2006                                                                               |  | 13,258,151   |  |                   | 133 |         |   | 91,264  |                           |   | (13,966 | )              |  |        |                   |        |  | 91,480  |        |   | (703   | ) |  |   | 76,728 |  
|Net loss                                                                                                 |  |             |  |                   |    |         |   |        |                           |   | (7,850  | )              |  |        |                   |        |  |        |        |   |       |   |  |   | (7,850 | )
|Common shares issued                                                                                     |  | 27,778       |  |                   |    |         |   | 144     |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 144    |  
|Repurchase of common shares (Note 10)                                                                    |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  | 100,000 |        |   | (603   | ) |  |   | (603   | )
|Income tax benefit of stock options exercised                                                            |  |             |  |                   |    |         |   | 2       |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 2      |  
|Stock-based compensation                                                                                 |  |             |  |                   |    |         |   | 981     |                           |   |        |                |  |        |                   |        |  |        |        |   |       |   |  |   | 981    |  
|                                                                                                         |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   |        |  
|Balance as of July 1, 2007                                                                               |  | 13,285,929   |  | $                 | 133 |         | $ | 92,391  |                           | $ | (21,816 | )              |  | $      |                   |        |  | 191,480 |        | $ | (1,306 | ) |  | $ | 69,402 |  
|                                                                                                         |  |              |  |                   |     |         |   |         |                           |   |         |                |  |        |                    |        |  |         |        |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHAMPPS ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Years Ended July 1,
2007, July 2, 2006 and July 3, 2005

(In thousands)



|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ------- | -
|                                                                                  |  | Fiscal Year Ended |       
|                                                                                  |  | July 1,2007       |        |   | July 2,2006 |   |        | July 3,2005 | 
|Cash flows from operating activities:                                             |  |                   |        |   |             |   |        |             |  |   |         |  
|Net loss                                                                          |  | $                 | (7,850 | ) |             | $ | (1,558 | )           |  | $ | (249    | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                   |        |   |             |   |        |             |  |   |         |  
|Depreciation and amortization                                                     |  |                   | 10,681 |   |             |   | 11,408 |             |  |   | 11,363  |  
|Amortization of notes payable discount                                            |  |                   | 201    |   |             |   | 201    |             |  |   | 201     |  
|Asset impairment charges                                                          |  |                   | 792    |   |             |   | 4,271  |             |  |   | 6,567   |  
|Loss on disposal of assets                                                        |  |                   | 361    |   |             |   | 420    |             |  |   | 212     |  
|Loss on assets held for sale                                                      |  |                   |       |   |             |   | 553    |             |  |   |        |  
|Gain on sale of investments                                                       |  |                   |       |   |             |   |       |             |  |   | (279    | )
|Stock-based compensation                                                          |  |                   | 981    |   |             |   | 879    |             |  |   |        |  
|Deferred income tax expense (benefit)                                             |  |                   | 5,742  |   |             |   | (3,569 | )           |  |   | (2,747  | )
|Changes in assets and liabilities:                                                |  |                   |        |   |             |   |        |             |  |   |         |  
|Accounts receivable                                                               |  |                   | 33     |   |             |   | 78     |             |  |   | 376     |  
|Inventories                                                                       |  |                   | (9     | ) |             |   | 6      |             |  |   | (73     | )
|Prepaid expenses and other current assets                                         |  |                   | 404    |   |             |   | 333    |             |  |   | (1,422  | )
|Accounts payable                                                                  |  |                   | (61    | ) |             |   | (979   | )           |  |   | 457     |  
|Accrued expenses                                                                  |  |                   | (701   | ) |             |   | 493    |             |  |   | 1,247   |  
|Other assets                                                                      |  |                   | 404    |   |             |   | 303    |             |  |   | 9       |  
|Other long-term liabilities                                                       |  |                   | 909    |   |             |   | (984   | )           |  |   | 1,007   |  
|Proceeds from tenant improvement allowances                                       |  |                   |       |   |             |   | 1,969  |             |  |   | 2,965   |  
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Net cash provided by operating activities                                         |  |                   | 11,887 |   |             |   | 13,824 |             |  |   | 19,634  |  
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Cash flows from investing activities:                                             |  |                   |        |   |             |   |        |             |  |   |         |  
|Purchase of property and equipment                                                |  |                   | (4,131 | ) |             |   | (4,465 | )           |  |   | (15,928 | )
|Proceeds from disposal of assets                                                  |  |                   | 7      |   |             |   | 7      |             |  |   | 35      |  
|Proceeds from assets held for sale                                                |  |                   | 2,623  |   |             |   | (3,161 | )           |  |   |        |  
|Restricted cash                                                                   |  |                   |       |   |             |   |       |             |  |   | 101     |  
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Net cash used in investing activities                                             |  |                   | (1,501 | ) |             |   | (7,619 | )           |  |   | (15,792 | )
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Cash flows from financing activities:                                             |  |                   |        |   |             |   |        |             |  |   |         |  
|Proceeds from issuance of common stock                                            |  |                   | 144    |   |             |   | 1,256  |             |  |   | 1,325   |  
|Income tax benefit of stock options exercised                                     |  |                   | 2      |   |             |   | 132    |             |  |   | 201     |  
|Repurchase of common stock                                                        |  |                   | (603   | ) |             |   | (703   | )           |  |   |        |  
|Repayment of long-term debt                                                       |  |                   |       |   |             |   | (143   | )           |  |   | (19,115 | )
|Proceeds from long-term debt                                                      |  |                   |       |   |             |   |       |             |  |   | 15,000  |  
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |                   | (457   | ) |             |   | 542    |             |  |   | (2,589  | )
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Net change in cash and cash equivalents                                           |  |                   | 9,929  |   |             |   | 6,747  |             |  |   | 1,253   |  
|Cash and cash equivalents, beginning of period                                    |  |                   | 9,449  |   |             |   | 2,702  |             |  |   | 1,449   |  
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                 | 19,378 |   |             | $ | 9,449  |             |  | $ | 2,702   |  
|                                                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Supplemental disclosures of cash flow information:                                |  |                   |        |   |             |   |        |             |  |   |         |  
|Cash paid during the period for:                                                  |  |                   |        |   |             |   |        |             |  |   |         |  
|Interest, net of amount capitalized                                               |  | $                 | 983    |   |             | $ | 941    |             |  | $ | 935     |  
|Income taxes, net of refunds                                                      |  |                   | 192    |   |             |   | 1,024  |             |  |   | 679     |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHAMPPS ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended July 1,
2007, July 2, 2006 and July 3, 2005



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Background

Champps Entertainment, Inc. (the Company or Champps), is a Delaware corporation formed on May 27, 1997 in
connection with the spin-off of DAKA International, Inc. (DAKA International or DAKA). At July 1, 2007, the Company operated one business segment. The Companys principal business activity is to own, operate and
franchise/license Champps casual dining restaurants that serve customers in upscale restaurant settings in 21 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 Champps and its consolidated subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation.

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 July 1, 2007, July 2, 2006 and July 3, 2005, are referred to as fiscal 2007, 2006 and 2005, respectively. Fiscal 2005 consisted of 53 weeks and fiscal
2007 and fiscal 2006 each consisted of 52 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 sale of Fuddruckers, Inc. (Fuddruckers) in 1998. Actual results could differ from those estimates.

Segment Reporting

As of July 1,
2007, the Company operated 49 restaurants in the upscale casual market as operating segments. We believe our operating segments aggregate into one reporting segment. The Chief Executive Officer, who is responsible for the Companys operations,
reviews and evaluates both core and non-core business activities and results, and determines financial and management resource allocations and investments for all business activities. The restaurants operate entirely in the United States and provide
similar products to similar customers. The restaurants generally possess similar pricing structures resulting in the potential for similar long-term expected financial performance characteristics. Revenues are almost exclusively from the sale of
food and beverages.



F-8



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##### Table of Contents

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.

Accounts Receivable

Accounts receivable consist largely of credit card receivables representing three to four days of credit card sales net of related fees 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 three 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 smallwares
and supplies which are stated at current cost. 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):



|                         |  |             |       |             |   |      
|------------------------ |  | ----------- | ----- | ----------- | - | -----
|                         |  | July 1,2007 |       | July 2,2006
|Food and liquor products |  | $           | 1,413 |             | $ | 1,506
|Smallwares and supplies  |  |             | 3,057 |             |   | 2,955
|                         |  |             |       |             |   |      
|                         |  | $           | 4,470 |             | $ | 4,461
|                         |  |             |       |             |   |      



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##### Table of Contents

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.

The Company also capitalizes interest as part of its new restaurant construction. Capitalized interest 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 borrowings of the Company during the assets construction period, unless the interest expense is directly related to the construction project.

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 according to the Companys depreciation policies.

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 follows an asset retirement policy whereby any assets that are replaced are retired. In fiscal years 2007, 2006, and 2005, the Company
capitalized $3.8 million, $3.8 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 2007, 2006
and 2005, the Company recorded repair and maintenance expense of $4.0 million, $4.2 million and $3.9 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).



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##### Table of Contents

Property and Equipment

Property and equipment are stated at cost. 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 depreciated over the shorter of their lease term, contract term or the assets estimated useful life. Useful lives range from 15 to 27 years for buildings, 3 to 27 years for leasehold improvements, 5 to 7 years for
restaurant equipment, 3 years for software and 3 to 5 years for computers and audio-visual equipment.

Other Assets

Other assets predominantly consist of deposits related to long-term leases and utilities, deferred financing fees, liquor licenses and leasehold rights.
Deferred financing fees are amortized to interest expense over the life of the related loan. Liquor licenses and leasehold rights are amortized using the straight-line method over a similar term of the related restaurant lease used to depreciate our
assets and calculate straight-line deferred rent.

Investments in Associated Companies, at Equity

The Company originally invested $0.2 million for an 8.0% joint venture interest in a licensed airport restaurant venture. The Company accounts for this
investment in accordance with the equity method of accounting interpreted by the American Institute of Certified Public Accountants Accounting Principle Board (APB) Opinion No. 18 (APB No. 18), The Equity
Method of Accounting for Investments in Common Stock and American Institute of Certified Public Accountants Statement of Position 78-9 (SOP 78-9). APB No. 18 and SOP 78-9 requires an investor to record the initial investment
at cost and adjust the carrying value of the investment to recognize the investors share of earnings or loss after the date of acquisition.

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 indications of 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. Additionally, per
policy, the Company considers four consecutive quarters of negative cash flow or losses to be an indication that an individual restaurant may be impaired and utilizes either market value, if available, or a present value computation in determining
fair value. The present value computation utilizes a single set of estimated cash flows and a single interest rate that is commensurate with the risk of the operation.



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##### Table of Contents

The Company evaluates impairment of goodwill and other intangible assets in accordance with SFAS
No. 142 Goodwill and Other Intangible Assets (SFAS No. 142). Under the provisions of SFAS No. 142, the Company is required to assess goodwill impairment at least annually by means of a fair value-based test.
The Company performs this assessment at its fiscal year end. The determination of fair value requires the Company to make certain assumptions and estimates relative to the two restaurants for which its goodwill is attributed 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, actuarial estimates 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 and SFAS No. 98, both entitled Accounting for Leases, as
well as other subsequent amendments and authoritative literature. The Company uses the same lease term for all of the following: determining capital versus operating lease classifications, calculating straight-line rent expense, depreciation of
leasehold improvements and amortization of tenant improvement allowances. The lease term is a minimum of the non-cancelable period but may include option periods if the Company would incur an economic penalty associated with the cancellation of the
lease.

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 realized any gains or incurred any losses in connection with its sale/leaseback transactions.



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##### Table of Contents

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. The Company also includes future rent increases where the future increases include escalation clauses based on the lesser of a specified percentage increase of the change in an index that includes a
leverage factor. These future estimated rent expenses are used to calculate straight-line rent expense. 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. The lease term used to calculate straight-line deferred rent and lease incentive amortization is a minimum of the non-cancelable period but
may include option periods if the Company would incur an economic penalty associated with the cancellation of the lease.

Revenue Recognition

Revenue from restaurant sales is recognized when food and beverage products are sold. The Company presents its revenues on a net
basis which excludes sales and other taxes that are imposed on and concurrent with individual revenue-producing transactions between the Company and its customers.

Revenues from our gift cards are recognized upon redemption or the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines there is no legal obligation to
remit the value of the unredeemed gift cards to the relevant jurisdictions. The Company determines the gift card breakage rate based upon historical redemption patterns. Based on historical information, the likelihood of a gift card remaining
unredeemed can be determined 36 months after gift card issuance. At that time, the Company recognizes breakage income for those cards for which the likelihood of redemption is deemed to be remote. Gift card breakage income is included in other
expense (income) in the consolidated statements of operations. Until redemption of the gift cards, outstanding balances on such cards are included in 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 $680,000, $643,000 and $621,000 during fiscal years 2007, 2006 and 2005, 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 years 2007, 2006 or 2005.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses were $3.4 million, $2.6 million and $2.8
million in fiscal years 2007, 2006 and 2005, respectively.



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##### Table of Contents

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 expense, starting January 2, 2006, also includes rental costs under operating leases incurred during a construction period. Pre-opening expenses were $0.0 million, $0.2 million and $1.3 million in fiscal
years 2007, 2006 and 2005, respectively.

Employee Partner Cash Flow Bonus Program

In fiscal 2006, the Company started inviting certain of its general managers and area operating directors (together partners) to enter into
seven-year employment agreements and also enter into an agreement to purchase an interest in their restaurants monthly cash flows (cash flow bonus interest) for the duration of the agreement to facilitate the development,
leadership and operation of its restaurants. As of July 1, 2007, 21 of the Companys general managers and five of the Companys directors of operations had executed such agreements. Under the agreement, the partner is required to
make a capital contribution in exchange for their percentage in the restaurant or region the partner manages and the Company has the option to purchase their cash flow bonus interest after a seven-year period at a predetermined cash flow multiple.
Part of the partners capital contribution may be financed over a two-year period. The cash flow bonus interest purchased by each partner is five percent of restaurant cash flow for general manager partners and three percent for area partners.
The Company estimates future purchases of the cash flow bonus interests using current information on restaurant performance to calculate and record an accrued buyout liability in the line item Other long-term liabilities in the
Consolidated Balance Sheets. Expenses associated with recording the buyout liability are included in the line Other (income) expense, net in the Consolidated Statements of Operations. In the period the Company completes the buyout, an
adjustment will be recorded to recognize any remaining expense associated with the purchase and reduce the related accrued buyout liability.

Monthly cash flow bonus payments made to general manager partners pursuant to these programs are included in the line item Labor costs, and payments which are made to area partners pursuant to these programs are included in the
line item General and administrative expense in the Consolidated Statements of Operations.

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 are recorded as deferred tax assets. To the extent the likelihood of realizing a benefit of the deferred tax asset is not more likely
than not, a valuation allowance is recorded. The FICA tip credit is a general business income tax credit claimed by the Company for employer social security taxes paid on employee tips exceeding the amount treated as wages for minimum wage purposes.
To the extent that the FICA tip credit is claimed, a business deduction for the FICA tax is not received for the FICA tax which is subject to the federal income tax credit. Any unused FICA tip credit may be carried back two years and forward
20 years.



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##### Table of Contents

Accounting for Stock-Based Compensation

Effective July 4, 2006 (beginning of fiscal 2006), the Company adopted the provisions of SFAS No. 123 (Revised), Share-Based
Payment. Prior to that time, the Company had chosen to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Under APB Opinion No. 25, no compensation expense was recognized for stock options issued to employees because the grant price equaled or was above the market price on the date of grant for options issued by the Company.

Had compensation expense for our stock option grants and employee stock purchases 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, our net income (loss) and income (loss) per share for fiscal year 2005 would have been as set forth below. The amounts for each of the
fiscal period presented below have been adjusted to correct stock-based employee compensation expense associated with the pro forma effect of accounting for stock-based compensation previously disclosed. The corrected pro forma stock-based employee
compensation costs decreased from previously disclosed amounts as a result of certain adjustments made for mathematical and accounting inaccuracies.



|                                                                                                                                            |  |             |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----- | -
|                                                                                                                                            |  | July 3,2005 |      
|Net loss, as reported                                                                                                                       |  | $           | (249  | )
|Add: Stock-based employee compensation 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 |  |             | (595  | )
|                                                                                                                                            |  |             |       |  
|Pro forma net loss                                                                                                                          |  | $           | (844  | )
|                                                                                                                                            |  |             |       |  
|Loss per share:                                                                                                                             |  |             |       |  
|Basic loss per share - as reported                                                                                                          |  | $           | (0.02 | )
|Basic loss per share - pro forma                                                                                                            |  |             | (0.07 | )
|Diluted loss per share - as reported                                                                                                        |  | $           | (0.02 | )
|Diluted loss per share - pro forma                                                                                                          |  |             | (0.07 | )

The fair value of each stock option granted in fiscal year 2005 under the Companys stock
option plans was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of the stock purchased through the purchase plan was estimated based upon the actual discount extended plus the value of the options
associated with the shares during the quarter.



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##### Table of Contents

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



|     |  |                                |   |  |                      |  |            |   |  |                |  
|---- |  | ------------------------------ | - |  | -------------------- |  | ---------- | - |  | -------------- | -
|     |  | Weighted AverageRisk Free Rate |   |  | Average ExpectedLife |  | Volatility |   |  | Dividend Yield |  
|2005 |  | 2.71                           | % |  | 2.8 Years            |  | 97.0       | % |  | 0.00           | %

The pro forma expense associated with the employee stock purchase plan was $75,000 for the year
ending July 3, 2005. The associated shares purchased under the purchase plan were 27,177 for the year ending July 3, 2005. The following key assumptions were used to value the stock purchased under the purchase plan for each year:



|     |  |                                 |  |                       |  |                     |  |                        
|---- |  | ------------------------------- |  | --------------------- |  | ------------------- |  | -----------------------
|     |  | Weighted Average Risk Free Rate |  | Average Expected Life |  | Expected Volatility |  | Expected Dividend Yield
|2005 |  | 1.09%-2.76%                     |  | .25 Years             |  | 19.8%-39.6%         |  | 0.00%                  

The Company recognized the pro forma fair value compensation cost on a straight-line basis over
the requisite service period.

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 fiscal 2005 was comprised of reclassification adjustment related to unrealized investment gains on available
for sale securities which were sold in fiscal 2005.

Reclassifications

As described in Note 14, Loss from Discontinued Operations, Net of Tax, and Assets Held for Sale, we have reclassified four closed restaurants financial results as discontinued operations for all periods
presented.

Future Application of Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 defines the threshold for recognizing the benefits of tax-return positions
in the financial statements as more-likely-than-not to be sustained by the taxing authority, while earlier authoritative literature provided no specific guidance. FIN 48 is effective as of the beginning of the first fiscal year beginning
after December 15, 2006. While it is still considering the implications of the statement, the Company does not believe the adoption of FIN 48 will have a material impact on its consolidated financial statements in fiscal 2008.



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##### Table of Contents

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS
157). SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement applies under other accounting pronouncements that
currently require or permit fair value measurements and is effective as of the beginning of the first fiscal year beginning after November 15, 2007. While we are still considering the implications of the pronouncement, the Company does not
believe the adoption of SFAS 157 will have a material impact on its consolidated financial statements in fiscal 2009.

In February 2007,
the Financial Accounting Standards Boards (FASB) issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (SFAS 159). SFAS 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and
early application is allowed under certain circumstances. The Company has not yet determined the impact this interpretation will have on its financial position in fiscal 2009.



|2. | Prepaid Expenses and Other Current Assets
|-- | -----------------------------------------

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



|                                                   |  |             |       |             |   |      
|-------------------------------------------------- |  | ----------- | ----- | ----------- | - | -----
|                                                   |  | July 1,2007 |       | July 2,2006
|Prepaid rents, real estate taxes and related costs |  | $           | 1,584 |             | $ | 1,594
|Prepaid insurance                                  |  |             | 159   |             |   | 312  
|Prepaid licenses and permits                       |  |             | 214   |             |   | 211  
|Prepaid contracts and other                        |  |             | 510   |             |   | 754  
|                                                   |  |             |       |             |   |      
|                                                   |  | $           | 2,467 |             | $ | 2,871
|                                                   |  |             |       |             |   |      



|3. | Property and Equipment
|-- | ----------------------

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



|                                          |  |             |         |   |             |   |         |  
|----------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------- | -
|                                          |  | July 1,2007 |         |   | July 2,2006 |  
|Land                                      |  | $           | 2,923   |   |             | $ | 2,923   |  
|Buildings and leasehold improvements      |  |             | 79,299  |   |             |   | 78,492  |  
|Software                                  |  |             | 1,336   |   |             |   | 1,327   |  
|Equipment                                 |  |             | 47,684  |   |             |   | 47,599  |  
|Construction in progress                  |  |             | 202     |   |             |   | 377     |  
|                                          |  |             |         |   |             |   |         |  
|                                          |  |             | 131,444 |   |             |   | 130,718 |  
|Accumulated depreciation and amortization |  |             | (63,946 | ) |             |   | (55,642 | )
|                                          |  |             |         |   |             |   |         |  
|                                          |  | $           | 67,498  |   |             | $ | 75,076  |  
|                                          |  |             |         |   |             |   |         |  

General and administrative expense on the consolidated statement of operations included $289,000,
$297,000 and $351,000 of depreciation and amortization expense for the years ended July 1, 2007, July 2, 2006 and July 3, 2005, respectively.

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 (Note 7).



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##### Table of Contents

|4. | Other Assets, Net
|-- | -----------------

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



|                              |  |             |       |             |   |      
|----------------------------- |  | ----------- | ----- | ----------- | - | -----
|                              |  | July 1,2007 |       | July 2,2006
|Deferred financing costs      |  | $           | 234   |             | $ | 585  
|Liquor licenses               |  |             | 649   |             |   | 728  
|Long-term deposits            |  |             | 97    |             |   | 98   
|Leasehold rights              |  |             | 547   |             |   | 582  
|Equity investment in licensee |  |             | 129   |             |   | 141  
|Other                         |  |             | 10    |             |   | 21   
|                              |  |             |       |             |   |      
|                              |  | $           | 1,666 |             | $ | 2,155
|                              |  |             |       |             |   |      

Accumulated amortization for other assets, net totaled $1,960,000 and $1,610,000 at July 1,
2007 and July 2, 2006, respectively.

The equity investment in licensee reflects the Companys cash investment and its share of
profits and losses through July 1, 2007 in a Champps licensed location at the Dallas/Fort Worth, Texas airport in which the Company has an eight percent equity interest.



|5. | Accrued Expenses and Other Long-Term Liabilities
|-- | ------------------------------------------------

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



|                                                |  |             |       |             |   |      
|----------------------------------------------- |  | ----------- | ----- | ----------- | - | -----
|                                                |  | July 1,2007 |       | July 2,2006
|Salaries, wages, and related benefits           |  | $           | 2,899 |             | $ | 3,066
|Accrued taxes, predominantly sales and property |  |             | 2,396 |             |   | 2,542
|Accrued insurance                               |  |             | 832   |             |   | 1,159
|Accrued severance                               |  |             |      |             |   | 136  
|Accrued utilities                               |  |             | 436   |             |   | 428  
|Gift card/certificate liability                 |  |             | 1,323 |             |   | 1,184
|Lease termination                               |  |             | 206   |             |   | 220  
|Other                                           |  |             | 791   |             |   | 849  
|                                                |  |             |       |             |   |      
|                                                |  | $           | 8,883 |             | $ | 9,584
|                                                |  |             |       |             |   |      

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



|                              |  |             |        |             |   |       
|----------------------------- |  | ----------- | ------ | ----------- | - | ------
|                              |  | July 1,2007 |        | July 2,2006
|Tenant improvement allowances |  | $           | 17,923 |             | $ | 19,814
|Deferred rents                |  |             | 11,665 |             |   | 10,688
|Accrued insurance             |  |             | 812    |             |   | 884   
|Partnership buyout            |  |             | 1,854  |             |   | 417   
|Lease termination             |  |             | 495    |             |   | 87    
|Other                         |  |             | 50     |             |   |      
|                              |  |             |        |             |   |       
|                              |  | $           | 32,799 |             | $ | 31,890
|                              |  |             |        |             |   |       



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##### Table of Contents

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.

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 its corporate office space and almost all of its restaurant facilities. 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.

Future minimum lease
payments pursuant to leases with non-cancelable lease terms, excluding option periods, at July 1, 2007 were as follows (in 000s):



|                                    |  |                  |        
|----------------------------------- |  | ---------------- | -------
|Fiscal Years Ending                 |  | Operating Leases
|2008                                |  | $                | 15,831 
|2009                                |  |                  | 16,064 
|2010                                |  |                  | 15,786 
|2011                                |  |                  | 14,884 
|2012                                |  |                  | 14,650 
|Thereafter                          |  |                  | 98,749 
|                                    |  |                  |        
|Total future minimum lease payments |  | $                | 175,964
|                                    |  |                  |        

Total rent expense in fiscal years 2007, 2006 and 2005 were $15,120,000, $15,591,000 and
$14,760,000, respectively. Contingent rentals included in rent expense for fiscal years 2007, 2006 and 2005 were $106,000, $336,000 and $392,000, respectively.

The location scheduled to open during fiscal year 2008 is not included in the minimum lease payment schedule above because the project had not commenced as of the end of fiscal year 2007. Lease obligations at this
location average approximately $160,000 per year for fifteen years.



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##### Table of Contents

|7. | Long-term Debt
|-- | --------------

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



|                                             |  |                                        |  |             |        |              |   |              |  |                     |        |          |                              |  |           
|-------------------------------------------- |  | -------------------------------------- |  | ----------- | ------ | ------------ | - | ------------ |  | ------------------- | ------ | -------- | ---------------------------- |  | ----------
|Lender                                       |  | Interest rate                          |  | Face amount |        | July 1, 2007 |   | July 2, 2006 |  | Nature ofcollateral |        | Maturity
|Convertible Subordinated                     |  | 5.50%                                  |  | $           | 15,000 |              | $ | 14,908       |  | $                   | 14,707 |          | Unsecured                    |  | Dec.,     
|Notes                                        |  |                                        |  |             |        |              |   |              |  |                     |        |          |                              |  | 2007      
|LaSalle Bank N.A. - Revolving Line of Credit |  | Prime - Prime +.50% or LIBOR+ 1.8-3.0% |  |             | 25,000 |              |   |             |  |                     |       |          | All personaland realproperty |  | Sept.,2010
|                                             |  |                                        |  |             |        |              |   |              |  |                     |        |          |                              |  |           
|                                             |  |                                        |  |             |        |              | $ | 14,908       |  | $                   | 14,707 |          |                              |  |           
|                                             |  |                                        |  |             |        |              |   |              |  |                     |        |          |                              |  |           
|Less current portion                         |  |                                        |  |             |        |              |   | 14,908       |  |                     |       |          |                              |  |           
|                                             |  |                                        |  |             |        |              |   |              |  |                     |        |          |                              |  |           
|Debt, net of current portion                 |  |                                        |  |             |        |              | $ |             |  | $                   | 14,707 |          |                              |  |           
|                                             |  |                                        |  |             |        |              |   |              |  |                     |        |          |                              |  |           

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.

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.

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.

The Company has a $25,000,000 senior secured credit facility with LaSalle Bank that expires in September 2010. The facility provides up to $7,000,000 for the issuance of letters of credit. The facility provides for a $10,000,000 one-time
increase in the aggregate commitment amount if requested by the Company between September 30, 2007 and December 31, 2007 and approved by the lenders. The facility is secured by a blanket lien on all personal and real property of the
Company. Borrowings under the facility bear interest at variable rates depending on a total funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization prior to pre-opening expenses, as defined) ratio and range from the
prime rate to prime plus 0.5 percent or, if elected, LIBOR plus 1.8 to 3.0 percent. The Company originally paid an up-front fee of $188,000 and is required to pay an annual unused commitment fee of between 0.375 percent to 0.5 percent.



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The facility also requires the Company to maintain a minimum fixed charge coverage ratio and may not
exceed certain thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios. As of July 1, 2007, we were in compliance with all debt covenants and financial ratios contained in the facility. Additionally, the facility
limits the opening of new restaurants to a maximum of eight in any fiscal year and also sets limits on the amount of dividends and/or stock repurchases that can be made by the Company to $2,000,000 per fiscal year if the total senior debt to EBITDA
ratio is equal to or more than 1.00 to 1.00. As of July 1, 2007, the Company had a senior debt to EBITDA ratio of 0.30 to 1.00. Also, the Company must maintain a margin of at least 0.25 to 1.00 with each of its financial covenants in order to
declare dividends or acquire stock through share repurchases. As of July 1, 2007, the Company had no outstanding borrowings and had placed letters of credit of $2,847,000 under this facility. The available balance for borrowing under this
facility as of July 1, 2007 was $22,153,000.

In fiscal years 2006 and 2005, the Company repaid certain debt totaling approximately
$103,000 and $1,000,000, respectively, before scheduled maturity.

The Company incurred interest expense of $1,557,000, $1,553,000 and
$1,717,000 in fiscal years 2007, 2006 and 2005, respectively. Of these amounts, $9,000, $29,000 and $146,000 were capitalized in each respective year. Interest income totaled $797,000, $397,000 and $127,000 in fiscal years 2007, 2006 and 2005,
respectively.



|8. | Income Taxes
|-- | ------------

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



|                                                  |  |             |        |   |             |   |        |  
|------------------------------------------------- |  | ----------- | ------ | - | ----------- | - | ------ | -
|                                                  |  | July 1,2007 |        |   | July 2,2006 |  
|Deferred tax assets:                              |  |             |        |   |             |   |        |  
|Net operating loss carryforwards                  |  | $           | 12,839 |   |             | $ | 14,229 |  
|Alternative minimum tax carryforwards             |  |             | 473    |   |             |   | 324    |  
|Deferred rent                                     |  |             | 11,500 |   |             |   | 11,809 |  
|FICA tip tax credits                              |  |             | 12,474 |   |             |   | 10,217 |  
|Accrued expenses                                  |  |             | 1,354  |   |             |   | 1,258  |  
|Stock-based compensation                          |  |             | 923    |   |             |   | 557    |  
|Other                                             |  |             | 176    |   |             |   | 368    |  
|                                                  |  |             |        |   |             |   |        |  
|Total deferred tax assets                         |  |             | 39,739 |   |             |   | 38,762 |  
|                                                  |  |             |        |   |             |   |        |  
|Less valuation allowance                          |  |             | (8,108 | ) |             |   |       |  
|                                                  |  |             |        |   |             |   |        |  
|Net deferred tax assets after valuation allowance |  | $           | 31,631 |   |             | $ | 38,762 |  
|                                                  |  |             |        |   |             |   |        |  
|Deferred tax liabilities:                         |  |             |        |   |             |   |        |  
|Property and equipment                            |  | $           | (3,745 | ) |             | $ | (5,275 | )
|Goodwill                                          |  |             | (885   | ) |             |   | (744   | )
|                                                  |  |             |        |   |             |   |        |  
|Total deferred tax liabilities                    |  | $           | (4,630 | ) |             | $ | (6,019 | )
|                                                  |  |             |        |   |             |   |        |  
|Net deferred tax assets                           |  | $           | 27,001 |   |             | $ | 32,743 |  
|                                                  |  |             |        |   |             |   |        |  
|Current portion                                   |  | $           | 2,053  |   |             | $ | 3,210  |  
|Long-term                                         |  |             | 24,948 |   |             |   | 29,533 |  



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The components of income tax expense (benefit) were as follows (in 000s):



|                             |  |                   |       |   |             |   |        |             |  |   |        |  
|---------------------------- |  | ----------------- | ----- | - | ----------- | - | ------ | ----------- |  | - | ------ | -
|                             |  | Fiscal Year Ended |      
|                             |  | July 1,2007       |       |   | July 2,2006 |   |        | July 3,2005 | 
|Tax expense (benefit):       |  |                   |       |   |             |   |        |             |  |   |        |  
|Continuing operations        |  | $                 | 6,648 |   |             | $ | (901   | )           |  | $ | 367    |  
|Discontinued operations      |  |                   | (223  | ) |             |   | (2,019 | )           |  |   | (2,147 | )
|                             |  |                   |       |   |             |   |        |             |  |   |        |  
|Income tax expense (benefit) |  | $                 | 6,425 |   |             | $ | (2,920 | )           |  | $ | (1,780 | )
|                             |  |                   |       |   |             |   |        |             |  |   |        |  

The income tax expense (benefit) was comprised of the following (in 000s):



|                                |  |                   |       |   |             |   |        |              |  |   |       |  
|------------------------------- |  | ----------------- | ----- | - | ----------- | - | ------ | ------------ |  | - | ----- | -
|                                |  | Fiscal Year Ended |      
|                                |  | July 1,2007       |       |   | July 2,2006 |   |        | July 3, 2005 | 
|Current tax expense (benefit):  |  |                   |       |   |             |   |        |              |  |   |       |  
|Federal                         |  | $                 | 274   |   |             | $ | 986    |              |  | $ | 544   |  
|State                           |  |                   | 550   |   |             |   | 615    |              |  |   | 776   |  
|                                |  |                   |       |   |             |   |        |              |  |   |       |  
|                                |  |                   | 824   |   |             |   | 1,601  |              |  |   | 1,320 |  
|                                |  |                   |       |   |             |   |        |              |  |   |       |  
|Deferred tax expense (benefit): |  |                   |       |   |             |   |        |              |  |   |       |  
|Federal                         |  |                   | 5,953 |   |             |   | (2,269 | )            |  |   | (801  | )
|State                           |  |                   | (129  | ) |             |   | (233   | )            |  |   | (152  | )
|                                |  |                   |       |   |             |   |        |              |  |   |       |  
|                                |  |                   | 5,824 |   |             |   | (2,502 | )            |  |   | (953  | )
|                                |  |                   |       |   |             |   |        |              |  |   |       |  
|Income tax expense (benefit)    |  | $                 | 6,648 |   |             | $ | (901   | )            |  | $ | 367   |  
|                                |  |                   |       |   |             |   |        |              |  |   |       |  

The following is a reconciliation of income taxes at the federal statutory rate of 35% to the
Companys income tax expense (benefit) (in 000s):



|                                                                    |  |                   |        |   |             |   |        |             |  |   |        |  
|------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ------ | -
|                                                                    |  | Fiscal Year Ended |       
|                                                                    |  | July 1,2007       |        |   | July 2,2006 |   |        | July 3,2005 | 
|Income tax provision computed at statutory federal income tax rates |  | $                 | (301   | ) |             | $ | 222    |             |  | $ | 1,196  |  
|FICA tip tax credit                                                 |  |                   | (1,467 | ) |             |   | (1,549 | )           |  |   | (1,485 | )
|Non-deductible costs                                                |  |                   | 33     |   |             |   | 65     |             |  |   | 37     |  
|Increase (decrease) in the valuation allowance                      |  |                   | 8,108  |   |             |   | (93    | )           |  |   | 93     |  
|State income tax provision, net of federal benefit                  |  |                   | 329    |   |             |   | 400    |             |  |   | 427    |  
|Changes in state tax laws                                           |  |                   |       |   |             |   |       |             |  |   | 103    |  
|Expired net operating loss carryforward                             |  |                   |       |   |             |   | 54     |             |  |   |       |  
|Other, net                                                          |  |                   | (54    | ) |             |   |       |             |  |   | (4     | )
|                                                                    |  |                   |        |   |             |   |        |             |  |   |        |  
|Income tax expense (benefit)                                        |  | $                 | 6,648  |   |             | $ | (901   | )           |  | $ | 367    |  
|                                                                    |  |                   |        |   |             |   |        |             |  |   |        |  

All income from continuing operations and related income tax expense was attributable to domestic
operations.



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The following table details the loss and credit carryforwards with the applicable year of expiration (in
000s):



|             |  |                              |        |                                       |   |                                      |  |   |      
|------------ |  | ---------------------------- | ------ | ------------------------------------- | - | ------------------------------------ |  | - | -----
|YearExpiring |  | FICA TipCreditsCarryforwards |        | FederalNet OperatingLossCarryforwards |   | StateNet Operating LossCarryforwards
|2019         |  |                              |       |                                       |   | 30,316                               |  |   |     
|2020         |  |                              |       |                                       |   | 3,672                                |  |   | 4,133
|2021         |  |                              | 827    |                                       |   |                                     |  |   | 678  
|2022         |  |                              | 1,124  |                                       |   |                                     |  |   |     
|2023         |  |                              | 1,549  |                                       |   | 2,105                                |  |   |     
|2024         |  |                              | 2,049  |                                       |   |                                     |  |   | 218  
|2025         |  |                              | 2,284  |                                       |   |                                     |  |   |     
|2026         |  |                              | 2,384  |                                       |   |                                     |  |   |     
|2027         |  |                              | 2,257  |                                       |   |                                     |  |   |     
|             |  |                              |        |                                       |   |                                      |  |   |      
|             |  | $                            | 12,474 |                                       | $ | 36,093                               |  | $ | 5,029
|             |  |                              |        |                                       |   |                                      |  |   |      

In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. During fiscal 2007, the Company recorded $8.1 million of
deferred income tax expense to provide a valuation allowance against a portion of its FICA tip tax credit carryforwards. The valuation allowance was recorded because the Company believes the full realization of such credits is not more likely than
not based on the current trends of earnings. The valuation allowance reflects the belief that the FICA tax expense is more likely than not to be used as a tax deduction instead of a tax credit. Consistent with that belief, it is anticipated that tax
provisions for the immediate future will continue to reflect FICA tax expense as a deduction as opposed to a credit.

At July 1, 2007,
management determined that to fully realize the deferred tax asset, the Company will need to generate average annual future taxable income of approximately $3.3 million prior to the expiration of the net operating loss carryforwards and FICA tip tax
credit carryforwards through 2027. Taxable income for the year ended July 1, 2007 was $3.8 million. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at July 1, 2007. The amount of the deferred tax
asset considered realizable could be further reduced in the near term if estimates of future taxable income during the carryforward periods are not realized. During the year ended July 3, 2005, the Company concluded that $103,000 of long-term
deferred tax assets should be written-off as a result of an Ohio tax law change.



|9. | Commitments and Contingencies
|-- | -----------------------------

Letters of Credit

The Company had outstanding letters of credit of $2,847,000 as of July 1, 2007 primarily to guarantee its performance pursuant to certain
insurance contracts. The letters of credit are irrevocable and have one-year renewable terms.



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Indemnifications and Representations Related to Predecessor Companies

In fiscal 1997 in connection with the corporate restructuring of DAKA, DAKA spun-off its food service business. The remaining corporation continued to own
Champps, Fuddruckers and several other restaurant companies and renamed itself Unique Casual Restaurants, Inc. Fuddruckers was sold in 1998 and the other restaurant businesses were either sold or closed during 1998 or 1999, leaving Champps as the
only owned and operating restaurant group. Through a merger, the name of the Company was then changed to Champps Entertainment, Inc. As a result of these transactions, the Company remains responsible for liabilities of DAKA preceding its spin-off,
as well as certain indemnification obligations assumed by the Company in connection with the sale of Fuddruckers. Certain matters arising in connection with these obligations are discussed in this section under the headings, Accrued Insurance
Costs, and Litigation. Although the Company has incurred certain expenses in connection with these obligations and retained liabilities in the past, based upon the circumstances known to us, the Company believes additional claims
under these obligations and retained liabilities are unlikely to have a material effect on the Companys financial position or results of operations.

Fuddruckers Representations and Indemnity

The agreement whereby Fuddruckers was sold contains various representations and
warranties by the Company, certain of 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 ($43,000,000), the Company may 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 2006 and 2007, 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.

Accrued Insurance Costs

The Company is self-insured
for certain losses related to workers compensation, general liability and medical 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 our estimates of the aggregate liability for uninsured claims incurred using certain assumptions that are based upon historical experience. Actual amounts required to settle such 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 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 transaction from DAKA, the Company is liable for all claims made subsequent to the effective date of the spin-off, including claims
related to associates of DAKA not continuing with the Company after the spin-off, provided the claims relate to events occurring prior to the effective date of the spin-off. The Company believes that any claims related to its obligations resulting
from the spin-off, including those listed under Litigation in this Note, are adequately accrued and are unlikely to have a material effect on the Companys financial position or results of operations.



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##### Table of Contents

Litigation

From time to time, lawsuits are filed against the Company in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current employees, and others related to issues common to the restaurant
industry. A number of such claims may exist at any given time. The Company is currently not a party to any litigation that management believes is likely to have a material adverse effect on the Companys consolidated financial position or
results of operations.

In connection with the spin-off of DAKA in late 1997, the Company assumed certain contingent liabilities of DAKA
and its subsidiaries (see sections entitled Indemnifications and Representations Related to Predecessor Companies and Accrued Insurance Costs in this Note) including liabilities of DAKAs insurance coverage provided by
American International Group, Inc. (AIG) or its subsidiaries for the 1994 through 1997 policy periods. DAKAs insurance coverage included Large Deductible workers compensation policies that contained a Final
Premium section, which set forth AIGs obligations to determine the Final Premium once the policy period ends. While the insurance policies were in place, surety bonds were purchased as collateral for the policies. Champps
eventually replaced the surety bond with an irrevocable standby letter of credit for the payment of claims under the insurance policies; however AIG has not released the surety bond or the letter of credit. Champps maintains that it has satisfied
its obligations under the insurance policies, and that AIG has accepted final payment from Champps as evidenced by a letter agreement between Champps and AIG. AIG asserts that the policies were with National Union Fire Insurance Company of
Pittsburgh, PA (National Union), a subsidiary of AIG, and that the letter agreement is not valid. National Union contends that it is owed more than $2 million by Champps. Champps intends to vigorously defend its position in this matter.

In June 2004, Champps filed suit against AIG and National Union in the United States District Court for the District of Massachusetts
based on the defendants failure to release Champps from further liability under the insurance policies and for wrongfully withholding a $526,000 irrevocable standby letter of credit and a surety bond posted in the amount of $526,254 (the
Federal Court Action). In August 2004, National Union filed a Petition to Compel Arbitration in the United States District Court for the Southern District of New York. In December 2004, the Court granted National Unions Petition to
Compel Arbitration (the National Union Arbitration).

In February 2005, Champps filed an Amended Complaint in the Federal Court
Action, in which it named only AIG as a defendant. In March 2005, Champps withdrew its Amended Complaint in the Federal Court Action, and filed suit against AIG in state court in Massachusetts (the State Court Action). In July 2005, the
Court granted AIGs motion to stay the State Court Action pending resolution of the National Union Arbitration in New York.

The
National Union Arbitration is in its preliminary phase, and the Company intends to vigorously defend any claims of further liability. The Company has not yet conducted discovery on AIGs liability assertions.



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The Company may also be required to assume other liabilities of DAKA in connection with the spin-off and
may be required to indemnify Fuddruckers in connection with future breaches of our representations and warranties that survived the closing of DAKAs sale of its Fuddruckers restaurant chain. These indemnifications are discussed further
in this Note under the heading Indemnifications and Representations Related to Predecessor Companies and Fuddruckers Representations and Indemnity. Based upon the circumstances known to the Company at this time, and the
length of time that has elapsed since the spin-off of DAKA and the sale of Fuddruckers, the Company believes any additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Companys
financial position or results of operations.

Tax Contingencies

From time-to-time, the Company and its predecessors have been party to various assessments of taxes, penalties and interest from federal, state and local agencies. Tax reserves are accrued based upon our estimates of
the ultimate settlement of the contingencies. Actual amounts required to settle those obligations may exceed the Companys estimates.

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



|                         |  |                        |        |  
|------------------------ |  | ---------------------- | ------ | -
|                         |  | PredecessorObligations |       
|Balance at June 27, 2004 |  | $                      | 1,015  |  
|Expense recognition      |  |                        | 358    |  
|Payments                 |  |                        | (1,373 | )
|                         |  |                        |        |  
|Balance at July 3, 2005  |  | $                      |       |  
|                         |  |                        |        |  

During fiscal 2005, the Company recognized additional liabilities of $358,000 related primarily to
adjustments to the liabilities for the McCrae vs. Daka litigation for court awarded additional attorney fees to the plaintiffs attorneys related to the appeal of this matter.

Proposed Merger

On July 3, 2007, we entered into the Merger Agreement with F&H and Merger Sub,
pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation.

Under the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Company common stock (other than any
shares held in treasury by the Company and any shares as to which the holder has properly demanded appraisal of his or her shares under Delaware law) will be converted into the right to receive $5.60 in cash, or $74.8 million in total, without
interest. Following completion of the Merger, we will be a wholly-owned subsidiary of F&H. F&H is the parent company of Fox & Hound Restaurant Group, a pub-themed concept with 88 units in operation. F&H is owned by two private equity
fund sponsors, Newcastle Partners, L.P. and Steel Partners II L.P., and the senior management of F&H.

Stockholders are scheduled to
vote on the approval and adoption of the Merger Agreement at a special meeting of stockholders called for that purpose which will be held on September 28, 2007, and if the Merger is approved, it is currently anticipated that the Merger will be
completed on October 1, 2007. Completion of the Merger is subject to the satisfaction of certain other customary closing conditions as set forth in the Merger Agreement, including the absence of certain changes and the obtaining of certain third
party consents. The Merger is not subject to any financing condition.



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On July 13, 2007, a purported stockholder class action complaint was filed against us, our
directors, and F&H Acquisition Corp. in the District Court of Douglas County, Colorado. The amended complaint alleges, among other things, that the named defendants breached their fiduciary duties or aided and abetted in the breach of those
fiduciary duties in connection with the proposed acquisition of the Company by F&H Acquisition Corp. by failing to maximize stockholder value and by failing to disclose certain material information relating to the sale process leading up to the
Merger. Among other things, the complaint seeks to enjoin completion of the Merger. We believe that the claims asserted are without merit and all of the defendants intend to defend the suit vigorously. The absence of an injunction prohibiting the
consummation of the Merger is a condition to the completion of the Merger.



|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 13,094,449 and 13,166,671 shares were issued and outstanding as of July 1, 2007 and July 2, 2006, respectively. The Company also has
5.0 million shares of authorized preferred stock, none of which is issued.

In January 2006, the Companys Board of Directors
approved a plan to use up to $5 million to repurchase its common stock from time to time over the next two years. Through July 1, 2007, 191,480 shares of common stock for $1,306,000 were purchased under this plan. Purchases under the program
may be made in the open market or in private transactions. Purchases under the program will depend, among other factors, on the prevailing stock price, market conditions, alternative investment opportunities and are expected to be funded primarily
with available cash balances and operating cash flow. There is no minimum or maximum number of shares to be repurchased under the program. The repurchased shares will be held in treasury and used for issuance under our equity incentive plans.

The Companys credit arrangements, as amended, set limits on the amount of dividends and/or stock repurchases that can be made by the
Company to $2,000,000 per fiscal year if the total senior debt to EBITDA ratio is equal to or more than 1.00 to 1.00. As of July 1, 2007, the Company had a senior debt to EBITDA ratio of 0.30 to 1.00. Also, the Company must maintain a margin of
at least 0.25 to 1.00 with each of its financial covenants in order to declare dividends or acquire stock through share repurchases.

The
Company has 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. 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.



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##### Table of Contents

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



|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ----------------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ------ | -
|                                                                                                       |  | Fiscal Year Ended |       
|                                                                                                       |  | July 1,2007       |        |   | July 2,2006 |   |        | July 3,2005 | 
|Basic income (loss) per share:                                                                         |  |                   |        |   |             |   |        |             |  |   |        |  
|Income (loss) from continued operations                                                                |  | $                 | (7,510 | ) |             | $ | 1,534  |             |  | $ | 3,051  |  
|Loss from discontinued operations                                                                      |  |                   | (340   | ) |             |   | (3,092 | )           |  |   | (3,300 | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net loss                                                                                               |  |                   | (7,850 | ) |             |   | (1,558 | )           |  |   | (249   | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Weighted average shares outstanding                                                                    |  |                   | 13,102 |   |             |   | 13,151 |             |  |   | 12,887 |  
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net income (loss) per share - basic                                                                    |  |                   |        |   |             |   |        |             |  |   |        |  
|Continuing operations income (loss) per share - basic                                                  |  | $                 | (0.57  | ) |             | $ | 0.12   |             |  | $ | 0.24   |  
|Discontinued operations loss per share - basic                                                         |  |                   | (0.03  | ) |             |   | (0.24  | )           |  |   | (0.26  | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net loss per share - basic                                                                             |  |                   | (0.60  | ) |             |   | (0.12  | )           |  |   | (0.02  | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Diluted income (loss) per share:                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Income (loss) from continued operations                                                                |  | $                 | (7,510 | ) |             | $ | 1,534  |             |  | $ | 3,051  |  
|Loss from discontinued operations                                                                      |  |                   | (340   | ) |             |   | (3,092 | )           |  |   | (3,300 | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net loss                                                                                               |  |                   | (7,850 | ) |             |   | (1,558 | )           |  |   | (249   | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Plus income impact of assumed conversion of 5.5% convertible subordinated notes                        |  |                   | (c     | ) |             |   | (c     | )           |  |   | (c     | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net loss plus assumed conversions                                                                      |  |                   | (7,850 | ) |             |   | (1,558 | )           |  |   | (249   | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Weighted average shares outstanding                                                                    |  |                   | 13,102 |   |             |   | 13,151 |             |  |   | 12,887 |  
|Net effect of dilutive stock options based on the treasury stock method using average market price (a) |  |                   |       |   |             |   | 62     |             |  |   | 231    |  
|Net effect of dilutive warrants based on the treasury stock method using average market price          |  |                   | (b     | ) |             |   | (b     | )           |  |   | (b     | )
|Assumed conversion of 5.5% convertible subordinated notes                                              |  |                   | (c     | ) |             |   | (c     | )           |  |   | (c     | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Total shares outstanding for computation of per share earnings                                         |  |                   | 13,102 |   |             |   | 13,213 |             |  |   | 13,118 |  
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net income (loss) per share - diluted                                                                  |  |                   |        |   |             |   |        |             |  |   |        |  
|Continuing operations income per share - diluted                                                       |  | $                 | (0.57  | ) |             | $ | 0.12   |             |  | $ | 0.23   |  
|Discontinued operations loss per share - diluted                                                       |  |                   | (0.03  | ) |             |   | (0.24  | )           |  |   | (0.25  | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  
|Net loss per share - diluted                                                                           |  |                   | (0.60  | ) |             |   | (0.12  | )           |  |   | (0.02  | )
|                                                                                                       |  |                   |        |   |             |   |        |             |  |   |        |  



|(a) | For the years ended July 1, 2007, July 2, 2006, and July 3, 2005, 529,923, 340,140, and 1,109,568 of 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 assumed conversion of warrants into 386,961 common shares was anti-dilutive.
|--- | --------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

|11. | Stock Options, Restricted Stock Awards and Employee Benefit Plans
|--- | -----------------------------------------------------------------

The Company currently sponsors certain stock-based compensation plans as described below. Effective July 4, 2005 (beginning of fiscal 2006), the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 (Revised), Share-Based Payment. Under the fair value recognition provisions of SFAS No. 123(R), stock-based compensation is measured at the grant date based on the value of the awards and is
recognized as expense over the requisite service period (usually the vesting period). The Company selected the modified prospective method of adoption described in SFAS No. 123(R). The fair values of the stock awards recognized under SFAS
No. 123(R) are determined based on each separately vesting portion of the awards, however, the total compensation expense is recognized on a straight-line basis over the vesting period.

In accordance with the provisions of SFAS No. 123(R), total stock-based compensation expense in the amounts of $981,000 and $879,000 were recorded
in fiscal 2007 and fiscal 2006, respectively. In addition, $330,000 and $331,000 of compensation costs related to awards with cash equivalency features subject to shareholder approval were recorded in fiscal 2006 and fiscal 2005, respectively. The
total stock-based compensation expenses were recorded in general and administrative expense. The total income tax benefit recognized in the consolidated statement of operations for the share-based arrangements for fiscal 2007 and 2006 was $367,000
and $432,000, respectively.

Prior to fiscal 2006, the Company accounted 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. Under APB Opinion No. 25, no compensation expense was recognized for stock
options issued to employees because the grant price equaled or was above the market price on the date of grant for options issued by the Company.

Stock
Incentive Plans

In December 2005, the 2005 Stock Incentive Plan was approved by the Companys stockholders. The number of shares
of common stock reserved for issuance under the 2005 Stock Incentive Plan is equal to the sum of 500,000 shares of common stock, plus any shares of common stock available for grant (including shares which become available due to forfeitures of
outstanding options or other awards) under the Companys 1997 Stock Option and Incentive Plan and the Companys 2003 Stock Option and Incentive Plan. No additional grants will be made under the 1997 or 2003 plans. As of July 1, 2007,
535,890 shares remain available for grant under the 2005 Stock Incentive Plan.

Stock Options

Stock options have been granted with exercise prices at or above the market price on the date of grant. The granted options have vested generally over one
year for non-employee directors and ratably over three years for officers and employees. The granted options generally have ten year contractual terms.



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##### Table of Contents

The following summarizes stock option activity for the last three fiscal years.



|                             |  |                  |   |  |                              |      |                                     |      |                                                  |     |                                 |   |   
|---------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | ----------------------------------- | ---- | ------------------------------------------------ | --- | ------------------------------- | - | --
|                             |  | Number ofOptions |   |  | WeightedAverageExercisePrice |      | WeightedAverageGrant DateFair Value |      | WeightedAverageRemainingContractual
Term (Years) |     | AggregateIntrinsicValue (000s)
|Outstanding at June 27, 2004 |  | 1,036,788        |   |  | $                            | 6.24 |                                     |      |                                                  |     |                                 |   |   
|Granted                      |  | 420,700          |   |  |                              | 7.85 |                                     | 3.09 |                                                  |     |                                 |   |   
|Exercised                    |  | (195,200         | ) |  |                              | 5.78 |                                     |      |                                                  |     |                                 |   |   
|Forfeited                    |  | (152,720         | ) |  |                              | 7.14 |                                     |      |                                                  |     |                                 |   |   
|                             |  |                  |   |  |                              |      |                                     |      |                                                  |     |                                 |   |   
|Outstanding at July 3, 2005  |  | 1,109,568        |   |  | $                            | 6.81 |                                     |      |                                                  |     |                                 |   |   
|Granted                      |  | 10,000           |   |  |                              | 6.88 |                                     | 3.40 |                                                  |     |                                 |   |   
|Exercised                    |  | (194,346         | ) |  |                              | 5.63 |                                     |      |                                                  |     |                                 |   |   
|Forfeited                    |  | (242,425         | ) |  |                              | 7.53 |                                     |      |                                                  |     |                                 |   |   
|                             |  |                  |   |  |                              |      |                                     |      |                                                  |     |                                 |   |   
|Outstanding at July 2, 2006  |  | 682,797          |   |  | $                            | 6.89 |                                     |      |                                                  |     |                                 |   |   
|Granted                      |  |                 |   |  |                              |     |                                     |     |                                                  |     |                                 |   |   
|Exercised                    |  | (7,711           | ) |  |                              | 5.18 |                                     |      |                                                  |     |                                 |   |   
|Forfeited                    |  | (27,228          | ) |  |                              | 7.38 |                                     |      |                                                  |     |                                 |   |   
|                             |  |                  |   |  |                              |      |                                     |      |                                                  |     |                                 |   |   
|Outstanding at July 1, 2007  |  | 647,858          |   |  | $                            | 6.89 |                                     |      |                                                  | 5.5 |                                 | $ | 23
|                             |  |                  |   |  |                              |      |                                     |      |                                                  |     |                                 |   |   
|Exercisable at July 1, 2007  |  | 612,420          |   |  | $                            | 6.83 |                                     |      |                                                  | 5.4 |                                 | $ | 23
|                             |  |                  |   |  |                              |      |                                     |      |                                                  |     |                                 |   |   

The Company issued options to purchase 10,000 common shares to a non-employee director at an
exercise price of $6.88 in September 2005. These options vested immediately. The Company estimated that these options had a grant-date fair value of $34,000 using a Black-Scholes option-pricing model utilizing the following assumptions.



|                               |   |  |                      |  |                    |   |  |                        |  
|------------------------------ | - |  | -------------------- |  | ------------------ | - |  | ---------------------- | -
|Weighted AverageRisk Free Rate |   |  | Average ExpectedLife |  | ExpectedVolatility |   |  | ExpectedDividend Yield |  
|4.11                           | % |  | 5.0 Years            |  | 51.5               | % |  | 0.00                   | %

The risk free-rate was based on the U.S. Treasury yield curve in effect at the time of grant and
the average expected life was developed using a simplified method for plain vanilla options outlined in Securities and Exchange Commission Staff Accounting Bulletin No. 107. The expected volatility was based on the
historical volatility of the Companys stock for the past five years.

Cash received from options exercised under all share-based
payment arrangements for fiscal years 2007, 2006 and 2005 was $40,000, $1,093,000 and $1,129,000, respectively. While the Company has taken tax deductions for stock option exercises over the last three fiscal years, the related tax benefits have not
been realized because of the Companys net operating loss carryforwards. The total fair value of shares vested during fiscal years 2007, 2006 and 2005 was $775,000, $971,000 and $1,010,000, respectively.

No compensation expense related to previously granted stock option awards which are non-vested had yet to be recognized at July 1, 2007.

The total intrinsic value of options exercised was $5,000, $335,000 and $511,000 for fiscal years 2007, 2006 and 2005, respectively.



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##### Table of Contents

Restricted Stock Awards and Stock Units

The following summarizes restricted stock activity:



|                          |  |                 |   |  |                                     |     
|------------------------- |  | --------------- | - |  | ----------------------------------- | ----
|                          |  | Numberof Shares |   |  | WeightedAverageGrant DateFair Value
|Nonvested at July 3, 2005 |  |                |   |  | $                                   |    
|Granted                   |  | 754,205         |   |  |                                     | 6.59
|Vested                    |  | (42,890         | ) |  |                                     | 6.59
|Forfeited                 |  |                |   |  |                                     |    
|                          |  |                 |   |  |                                     |     
|Nonvested at July 2, 2006 |  | 711,315         |   |  | $                                   | 6.59
|                          |  |                 |   |  |                                     |     
|Granted                   |  | 45,455          |   |  |                                     | 6.60
|Vested                    |  | (99,082         | ) |  |                                     | 6.59
|Forfeited                 |  | (102,000        | ) |  |                                     | 6.59
|                          |  |                 |   |  |                                     |     
|Nonvested at July 1, 2007 |  | 555,688         |   |  | $                                   | 6.59
|                          |  |                 |   |  |                                     |     

The grant date fair value was determined to be the stock price of the common stock as of the date
of grant.

In March 2005, the Company entered into an employment agreement with Mr. Michael P. ODonnell, its then new Chief
Executive Officer, President and Chairman of the Board. As part of the agreement, 514,680 restricted shares of common stock were awarded to Mr. ODonnell. 128,670 shares of the restricted stock award vest ratably on an annual basis over a
three-year period. 386,010 shares of the restricted stock award vest on the seventh anniversary of the grant date or earlier as discussed below. These awards were subject to shareholder approval of the Companys issuance of additional equity
securities under the Companys benefit plans pursuant to which such shares are granted. If the shareholders of the Company had failed to approve the issuance of additional equity securities under the Companys benefit plans by the date any
portion of the restricted stock award would otherwise have vested, the Company would have been required to make a cash payment to Mr. ODonnell equal to the economic value of such vested shares. Accordingly, the value of these awards was
remeasured each period and a liability was recorded/adjusted to the fair value at each reporting date up until December 7, 2005, at which time the awards were approved by the shareholders. The total compensation cost of $330,000 was recorded
for these revalued awards in year ended July 2, 2006. The balance of the liability of $661,000 as of the date of shareholder approval of the awards was reclassified to shareholders equity.

Certain shares of the restricted stock may vest earlier upon a qualifying disability, death, retirement or change in control. The 386,010 share
restricted stock award includes a performance element that allows vesting to accelerate if certain Company common stock share price performance measures are met. Specifically, one-half of this restricted stock award vests over an eight quarter
period if the market price of the stock appreciates 200% ($17.32) or more for a sixty consecutive day period prior to the second anniversary of the employment agreement. The remainder of the restricted stock award vests over an eight quarter period
if the market price of the stock appreciates 300% ($25.98) or more for a sixty consecutive day period prior to the 3rd anniversary of the employment agreement.



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##### Table of Contents

In August 2005, the Company agreed to award its new Chief Operating Officer and Chief Financial Officer
shares of restricted stock subject to shareholder approval, which occurred December 7, 2005 with the approval of the 2005 Stock Incentive Plan. The new Chief Operating Officer, Mr. Richard Scanlan, was awarded 32,000 shares of restricted
common stock that vest over three years and 70,000 shares of restricted stock that vest after the seventh year of his employment or sooner upon satisfaction of certain market price maintenance requirements consistent with provisions as noted above
in Mr. ODonnells restricted stock award arrangement. The new Chief Financial Officer, Mr. David Womack, was awarded 32,000 shares of restricted stock that vest over three years and 60,000 shares of restricted stock that vest
after the seventh year of his employment or sooner upon satisfaction of certain market price maintenance requirements consistent with provisions as noted above in Mr. ODonnells restricted stock award arrangement. Through
December 6, 2005, the Company had not recorded any compensation expense related to Mr. Scanlan and Mr. Womacks restricted stock awards because the shareholder approval requirement was not considered a certainty and there was no
provision for cash settlement if shareholders did not approve the 2005 Stock Incentive Plan. The grant date fair value of the restricted stock awarded to Messrs. ODonnell, Scanlan and Womack totaled $4.7 million.

On August 16, 2006, the Company received the resignation, effective on that date, of Rich Scanlan, as the Companys chief operating officer
(COO) and vice president. Mr. Scanlan agreed to remain an employee of the Company in the capacity of director of operations overseeing the Illinois and Minnesota markets. As a part of Mr. Scanlans resignation, he agreed
to release all right, title and interest to any unvested restricted stock grants previously granted to him by the Company in connection with his former position as the Companys COO. The return of the unvested restricted stock totaling 102,000
shares by Mr. Scanlan was accounted for as a forfeiture and previously accrued compensation of $85,000 related to this unvested restricted stock was reversed during fiscal 2007. No future compensation expense will be recorded related to these
restricted stock awards.

On December 7, 2005, a total of 45,525 restricted shares of common stock that vest over a one year period
were awarded to independent members of the Companys Board of Directors. The grant date fair value of these awards totaled $0.3 million. Also on December 6, 2006, a total of 45,455 restricted shares of common stock that vest over a one
year period were awarded to independent members of the Companys Board of Directors. The grant date fair value of these awards totaled $0.3 million.

Compensation expense of $2,349,000 related to previously granted restricted stock awards outlined above which are non-vested had not yet been recognized at July 1, 2007. This compensation expense is expected to
be recognized over a weighted-average period of approximately 2.2 years.

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
July 1, 2007, 299,817 shares of common stock had been issued under the purchase plan. Under the purchase plan, eligible employees of the Company may participate in quarterly offerings of shares of common stock made by the Company. The
participating employees purchase shares of common stock at a 15 percent discount from the lower of fair value at the beginning or end of each quarterly offering period through payroll deductions. Expense of $38,000 and $68,000 was recorded under the
provisions of SFAS 123(R) for the 17,845 and 25,591 shares purchased under the purchase plan for fiscal years 2007 and 2006, respectively.

The Company values the purchase plan shares utilizing a look-back share option pricing methodology with a Black-Scholes option-pricing model framework. The following key assumptions were used to value the purchase plan shares.



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|     |  |                                |  |                      |  |                    |  |                       
|---- |  | ------------------------------ |  | -------------------- |  | ------------------ |  | ----------------------
|     |  | Weighted AverageRisk Free Rate |  | Average ExpectedLife |  | ExpectedVolatility |  | ExpectedDividend Yield
|2007 |  | 4.76%-4.96%                    |  | .25 Years            |  | 28.8%-39.5%        |  | 0.00%                 
|2006 |  | 3.15%-4.55%                    |  | .25 Years            |  | 27.1%-43.6%        |  | 0.00%                 

The risk free-rate was based on the U.S. Treasury yield curve in effect at the time of grant and
the average expected life was the life of the quarterly look-back option. The expected volatility was based on the historical volatility of the Companys stock for those quarters.

Employee Benefit Plan

The Company sponsors a 401(k) retirement plan enabling employees 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. For fiscal 2007, $23,000 was accrued for half of the Companys discretionary
contribution expected to be paid for calendar 2007. The Company's contribution to the plan for calendar 2006 and 2005 was $45,000 and $60,000, respectively.



|12. | Severance Expense
|--- | -----------------

In fiscal 2006, the Company
incurred severance expense totaling $110,000 for nine former employees, including its former chief financial officer.

Our former Chief
Executive Officer, President and Chairman of the Board had an amended employment agreement with the Company that entitled him to one year continuation of pay of $400,000 in the event of termination. On March 2, 2005, he entered into a
separation agreement with the Company. The separation agreement provided for an additional four months of salary after payments under the employment agreement would otherwise cease, payable at the discretion of the Board and are contingent upon his
completing certain obligations to the Company. The discretionary additional four months of severance were not paid and the related accrual was reversed in fiscal 2007.

On May 4, 2005, the Company entered into a separation agreement with our former Executive Vice President / Chief Operating Officer that entitled him to $100,000 of separation pay which was paid over the ensuing
26 weeks.



|13. | Asset Impairment Charges and Restaurant Closings/Disposals
|--- | ----------------------------------------------------------

In fiscal years 2007, 2006 and 2005, the Company recorded assets impairment charges of $316,000, $2,136,000 and $2,015,000, respectively, to write-down the carrying value of one restaurants assets in fiscal 2007, two restaurants
assets in fiscal 2006 and one restaurants assets in fiscal 2005 to fair value. The Company determined fair value of the impaired assets utilizing the net salvage value method. The impairments resulted from managements determination that
the restaurants future cash flow was not sufficient to cover its asset carrying value. The asset impairments were recorded as a reduction of cost. The Company would have recorded additional depreciation expense of $634,000 in fiscal year 2007,
$347,000 in fiscal year 2006, and $63,000 in fiscal year 2005 for the assets which were written down with the asset impairment charges.



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##### Table of Contents

|14. | Discontinued Operations, Net of Tax and Assets Held for Sale
|--- | ------------------------------------------------------------

The Company closed three restaurants in May 2006 and closed one restaurant in January 2007 whose financial results met the definition of a component of an entity. Operations and cash flows were clearly
distinguished and measured at the restaurant level and, when aggregated, the financial results of the closed restaurants were determined to be material to our consolidated financial statements. Loss from discontinued operations, net of tax,
consisted of the following (in 000s):



|                                              |  |                   |       |   |             |   |        |             |  |   |        |  
|--------------------------------------------- |  | ----------------- | ----- | - | ----------- | - | ------ | ----------- |  | - | ------ | -
|                                              |  | Fiscal Year Ended |      
|                                              |  | July 1,2007       |       |   | July 2,2006 |   |        | July 3,2005 | 
|Restaurant sales                              |  | $                 | 1,177 |   |             | $ | 8,663  |             |  | $ | 7,687  |  
|Restaurant costs                              |  |                   | 618   |   |             |   | 9,618  |             |  |   | 8,568  |  
|Asset impairment charges                      |  |                   |      |   |             |   | 2,135  |             |  |   | 4,552  |  
|Lease termination, closure costs and other    |  |                   | 1,122 |   |             |   | 2,021  |             |  |   | 14     |  
|                                              |  |                   |       |   |             |   |        |             |  |   |        |  
|Loss from discontinued operations             |  |                   | 563   |   |             |   | 5,111  |             |  |   | 5,447  |  
|Income tax benefit                            |  |                   | (223  | ) |             |   | (2,019 | )           |  |   | (2,147 | )
|                                              |  |                   |       |   |             |   |        |             |  |   |        |  
|Loss from discontinued operations, net of tax |  | $                 | 340   |   |             | $ | 3,092  |             |  | $ | 3,300  |  
|                                              |  |                   |       |   |             |   |        |             |  |   |        |  

As of July 1, 2007, the Company had exited two closed locations through lease termination
agreements at a cost of $1,599,000. In addition, in fiscal 2006, the Company had purchased a third closed location from the landlord for $3,161,000 and later in fiscal 2007 sold the location for $2,623,000, net.

The fourth closed location is expected to be disposed of through a sublease arrangement and a $307,000 lease termination liability was previously
recorded in fiscal 2006 based on original sublease estimates. The liability was increased to reflect the present value of the future minimum lease obligations offset by the sublease rental as is currently being contemplated under the sublease
scheduled to commence in September 2007. The following table displays the activity and balances relating to this lease termination liability (in 000s):



|                        |  |                           |      |  
|----------------------- |  | ------------------------- | ---- | -
|                        |  | LeaseTerminationLiability |     
|Balance at July 2, 2006 |  | $                         | 307  |  
|Expense recognition     |  |                           | 757  |  
|Payments                |  |                           | (363 | )
|                        |  |                           |      |  
|Balance at July 1, 2007 |  | $                         | 701  |  
|                        |  |                           |      |  



|15. | Fair Value of Financial Instruments
|--- | -----------------------------------

The estimated
fair value of financial instruments has been determined by the Company using available market information and valuation methodologies which it considers appropriate. 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.



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##### Table of Contents

Long-term debt  At July 1, 2007, the Company had $15.0 million, 5.5% subordinated convertible
notes outstanding with a carrying value of $14.9 million (Note 7). The Company estimates the fair value of the notes to be approximately $14.9 million. There is no active market for the notes. The Company estimated the fair value of the notes based
on an indicated market value provided by the investment banking firm which originally assisted the Company with the issuance of the notes.



|16. | Proposed Merger
|--- | ---------------

On July 3, 2007, the Company
entered into a merger agreement to be acquired by F&H Acquisition Corporation, for $5.60 per share in cash. The Companys Board of Directors unanimously approved the merger agreement and recommended that the Companys shareholders
adopt the agreement. Atticus Capital, the Companys largest stockholder, and certain of its affiliates have entered into a voting agreement under which these stockholders agreed to vote the approximately 30% of the outstanding Champps common
stock they own in favor of the merger.

The total purchase price, excluding available cash and assumed debt, is approximately $74.8
million. The transaction is expected to close October 1, 2007, and is subject to approval of the Companys shareholders and customary closing conditions. The transaction is not subject to a financing condition.

After the effective time of the proposed merger, the Company will continue its current operations, except that it will cease to be an independent public
company and its common stock will no longer be traded on the NASDAQ Global Select Market.

The merger agreement contains certain
termination rights. The merger agreement provides that in certain circumstances, upon termination, the Company may be required to pay a termination fee of $2,250,000 and reimburse out-of-pocket fees and expenses incurred with respect to the
transactions contemplated by the merger agreement, up to a maximum of $750,000.

Potential company sale costs of $666,000 were incurred for
the year ended July 1, 2007 and largely consist of legal and board of directors special committee costs associated with the potential sale of the Company associated with the above mentioned transaction and an earlier sale process.



|17. | Subsequent Events
|--- | -----------------

In August 2007, the Company
purchased the restaurant it operated in San Antonio, Texas from its landlord for $3.15 million and sold it to a new franchisee for $2.95 million. Coinciding with that transaction, the Company signed a development agreement with the new franchisee,
whereby for a period of time, they will have an exclusive right to build three new Champps restaurants in defined areas in the San Antonio and Austin, Texas markets. The Company had previously impaired the assets on this property in fiscal 2007. A
gain of approximately $0.2 million is expected to be recorded in the first quarter of fiscal 2008 from this transaction due to the write-off of the deferred rent associated with this location partially offset by the differential in the purchase and
sale price mentioned above.



F-35



---

##### Table of Contents

|18. | Quarterly Financial Data (Unaudited)
|--- | ------------------------------------

The
Companys quarterly results of operations for fiscal years 2007 and 2006 are summarized as follows (in 000s except per share data):



|                                                             |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|------------------------------------------------------------ |  | -------------- | ------ | - | ---------------- | - | ------ | ------------ |  | - | ----------- | - |  | ----------- | ------ | - |  | - | ------- | -
|                                                             |  | Quarter ended  |        |   | Year ended       |  
|                                                             |  | October 1,2006 |        |   | December 31,2006 |   |        | April 1,2007 |  |   | July 1,2007 |   |  | July 1,2007 |       
|Fiscal 2007 (a)                                              |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|Revenue                                                      |  | $              | 48,769 |   |                  | $ | 53,010 |              |  | $ | 49,228      |   |  | $           | 47,062 |   |  | $ | 198,069 |  
|Severance                                                    |  |                | (136   | ) |                  |   |       |              |  |   |            |   |  |             |       |   |  |   | (136    | )
|Asset impairment charges and restaurant closings / disposals |  |                |       |   |                  |   | 530    |              |  |   |            |   |  |             |       |   |  |   | 530     |  
|Potential company sale expenses                              |  |                |       |   |                  |   |       |              |  |   | 499         |   |  |             | 167    |   |  |   | 666     |  
|Expenses related to predecessor companies                    |  |                | 12     |   |                  |   |       |              |  |   |            |   |  |             |       |   |  |   | 12      |  
|Loss from continuing operations (b)                          |  |                | (177   | ) |                  |   | (6,284 | )            |  |   | (339        | ) |  |             | (710   | ) |  |   | (7,510  | )
|Loss (income) from discontinued operations, net of tax       |  |                | (135   | ) |                  |   | 229    |              |  |   | 232         |   |  |             | 14     |   |  |   | 340     |  
|Net loss (b)                                                 |  |                | (42    | ) |                  |   | (6,513 | )            |  |   | (571        | ) |  |             | (724   | ) |  |   | (7,850  | )
|Basic income (loss) per share:                               |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|Income (loss) from continuing operations                     |  |                | (0.01  | ) |                  |   | (0.48  | )            |  |   | (0.03       | ) |  |             | (0.05  | ) |  |   | (0.57   | )
|Loss from discontinued operations                            |  |                | 0.01   |   |                  |   | (0.02  | )            |  |   | (0.01       | ) |  |             | (0.01  | ) |  |   | (0.03   | )
|Net income (loss)                                            |  |                |       |   |                  |   | (0.50  | )            |  |   | (0.04       | ) |  |             | (0.06  | ) |  |   | (0.60   | )
|Diluted income (loss) per share:                             |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|Income (loss) from continuing operations                     |  |                | (0.01  | ) |                  |   | (0.48  | )            |  |   | (0.03       | ) |  |             | (0.05  | ) |  |   | (0.57   | )
|Loss from discontinued operations                            |  |                | 0.01   |   |                  |   | (0.02  | )            |  |   | (0.01       | ) |  |             | (0.01  | ) |  |   | (0.03   | )
|Net income (loss)                                            |  |                |       |   |                  |   | (0.50  | )            |  |   | (0.04       | ) |  |             | (0.06  | ) |  |   | (0.60   | )
|                                                             |  |               
|                                                             |  | Quarter ended  |        |   | Year ended       |  
|                                                             |  | October 2,2005 |        |   | January 1,2006   |   |        | April 2,2006 |  |   | July 2,2006 |   |  | July 2,2006 |       
|Fiscal 2006 (a)                                              |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|Revenue                                                      |  | $              | 50,884 |   |                  | $ | 55,102 |              |  | $ | 51,659      |   |  | $           | 49,385 |   |  | $ | 207,030 |  
|Pre-opening expenses                                         |  |                | 9      |   |                  |   | 70     |              |  |   | 78          |   |  |             | 26     |   |  |   | 183     |  
|Severance                                                    |  |                | 100    |   |                  |   | 5      |              |  |   | 5           |   |  |             |       |   |  |   | 110     |  
|Asset impairment charges and restaurant closings / disposals |  |                |       |   |                  |   |       |              |  |   | 2,136       |   |  |             |       |   |  |   | 2,136   |  
|Expenses related to predecessor companies                    |  |                | (3     | ) |                  |   |       |              |  |   | (2          | ) |  |             |       |   |  |   | (5      | )
|Income (loss) from continuing operations                     |  |                | 125    |   |                  |   | 2,633  |              |  |   | (524        | ) |  |             | (700   | ) |  |   | 1,534   |  
|Loss from discontinued operations, net of tax                |  |                | 331    |   |                  |   | 62     |              |  |   | 1,405       |   |  |             | 1,294  |   |  |   | 3,092   |  
|Net income (loss)                                            |  |                | (206   | ) |                  |   | 2,571  |              |  |   | (1,929      | ) |  |             | (1,994 | ) |  |   | (1,558  | )
|Basic income (loss) per share:                               |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|Income (loss) from continuing operations                     |  |                | 0.01   |   |                  |   | 0.20   |              |  |   | (0.04       | ) |  |             | (0.05  | ) |  |   | 0.12    |  
|Loss from discontinued operations                            |  |                | (0.03  | ) |                  |   |       |              |  |   | (0.11       | ) |  |             | (0.10  | ) |  |   | (0.24   | )
|Net income (loss)                                            |  |                | (0.02  | ) |                  |   | 0.20   |              |  |   | (0.15       | ) |  |             | (0.15  | ) |  |   | (0.12   | )
|Diluted income (loss) per share:                             |  |                |        |   |                  |   |        |              |  |   |             |   |  |             |        |   |  |   |         |  
|Income (loss) from continuing operations                     |  |                | 0.01   |   |                  |   | 0.19   |              |  |   | (0.04       | ) |  |             | (0.05  | ) |  |   | 0.12    |  
|Loss from discontinued operations                            |  |                | (0.03  | ) |                  |   |       |              |  |   | (0.11       | ) |  |             | (0.10  | ) |  |   | (0.24   | )
|Net income (loss)                                            |  |                | (0.02  | ) |                  |   | 0.19   |              |  |   | (0.15       | ) |  |             | (0.15  | ) |  |   | (0.12   | )



|(a) | Prior period quarterly results have been reclassified to reflect discontinued operations (Note 14).
|--- | ---------------------------------------------------------------------------------------------------



|(b) | In the second quarter of fiscal 2007 ended December 31, 2006, a $7.4 million deferred income tax expense was recorded to provide a valuation allowance against a portion of the
Companys FICA tip tax credit carryforwards (Note 8).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-36