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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 3, 2005



| ̈ | 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 jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification 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:

None



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

Common Stock, par value $.01 per share



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES x NO ̈



Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Resolution S-K is not contained herein, and will not be contained to the best of the registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K: x



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



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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 National Market on December 31, 2004 of $8.62 per share, was $72,265,987. Solely for purposes of this computation, shares held by all officers, directors and 10% or more beneficial owners of the registrant have been excluded. Such exclusion
should not be deemed a determination or an admission that such officers, directors or 10% or more beneficial owners are, in fact, affiliates of the registrant.



Number of shares of Common Stock, $.01 par value, outstanding at September 1, 2005: 13,047,235.



DOCUMENTS INCORPORATED BY REFERENCE



Certain portions of the Companys definitive proxy statement to be used
in connection with its 2005 Annual Meeting of Stockholders and to be filed within 120 days of July 3, 2005 are incorporated by reference into Part III, Items 10-14, of this report on Form 10-K.



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



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FORM 10-K INDEX



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  | PART I                                                                                |  |     
|        |  |                                                                                       |  | Page
|Item 1  |  | Business                                                                              |  | 2   
|        |  |                                                                                      
|Item 2  |  | Properties                                                                            |  | 21  
|        |  |                                                                                      
|Item 3  |  | Legal Proceedings                                                                     |  | 21  
|        |  |                                                                                      
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 22  
|        |  |                                                                                      
|        |  | PART II                                                                               |  |     
|        |  |                                                                                      
|Item 5  |  | Market for the Registrants Common Stock and Related Stockholder Matters              |  | 22  
|        |  |                                                                                      
|Item 6  |  | Selected Financial Data                                                               |  | 23  
|        |  |                                                                                      
|Item 7  |  | Managements Discussion and Analysis of Results of Operations and Financial Condition |  | 24  
|        |  |                                                                                      
|Item 7A |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 42  
|        |  |                                                                                      
|Item 8  |  | Financial Statements and Supplementary Data                                           |  | 43  
|        |  |                                                                                      
|Item 9  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 43  
|        |  |                                                                                      
|Item 9A |  | Controls and Procedures                                                               |  | 43  
|        |  |                                                                                      
|        |  | PART III                                                                              |  |     
|        |  |                                                                                      
|Item 10 |  | Directors and Executive Officers of the Registrant                                    |  | 44  
|        |  |                                                                                      
|Item 11 |  | Executive Compensation                                                                |  | 45  
|        |  |                                                                                      
|Item 12 |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 45  
|        |  |                                                                                      
|Item 13 |  | Certain Relationships and Related Transactions                                        |  | 45  
|        |  |                                                                                      
|Item 14 |  | Independent Registered Public Accountant and Fees                                     |  | 45  
|        |  |                                                                                      
|        |  | PART IV                                                                               |  |     
|        |  |                                                                                      
|Item 15 |  | Exhibits and Financial Statement Schedules                                            |  | 46  



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FORWARD-LOOKING STATEMENTS



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



| | (1) | the ability to successfully develop and implement strategies to increase revenues and profitability;
| | --- | ----------------------------------------------------------------------------------------------------



| | (2) | the highly competitive nature of the casual dining restaurant industry;
| | --- | -----------------------------------------------------------------------



| | (3) | our ability to open and operate additional restaurants profitably;
| | --- | ------------------------------------------------------------------



| | (4) | our ability to raise capital in the future;
| | --- | -------------------------------------------



| | (5) | our ability to control restaurant operating costs, including commodity prices, energy and insurance costs;
| | --- | ----------------------------------------------------------------------------------------------------------



| | (6) | potential fluctuation in our quarterly operating results due to seasonality and other factors including the levels of pre-opening expenses for our new restaurants;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | the continued service of key management personnel;
| | --- | --------------------------------------------------



| | (8) | consumer perceptions of food safety;
| | --- | ------------------------------------



| | (9) | changes in consumer tastes and trends and general business and economic conditions;
| | --- | -----------------------------------------------------------------------------------



| | (10) | our ability to attract, motivate and retain qualified associates;
| | ---- | -----------------------------------------------------------------



| | (11) | labor shortages or increased labor charges;
| | ---- | -------------------------------------------



| | (12) | our ability to protect our name and logo and other proprietary information;
| | ---- | ---------------------------------------------------------------------------



| | (13) | the impact of litigation and assessments;
| | ---- | -----------------------------------------



| | (14) | 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;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (15) | the ability to fully utilize income tax operating loss and credit carryforwards;
| | ---- | --------------------------------------------------------------------------------



| | (16) | the inability to cancel unfavorable leases;
| | ---- | -------------------------------------------



| | (17) | the ability to repay or refinance our indebtedness;
| | ---- | ---------------------------------------------------



| | (18) | the ability to maintain effective internal controls; and
| | ---- | --------------------------------------------------------



| | (19) | the ability of our restaurants to cover their asset values and avoid asset impairment charges.
| | ---- | ----------------------------------------------------------------------------------------------



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



Unless otherwise provided in this Annual Report on Form 10-K, references to the Company, Champps,
we, us and our refer to Champps Entertainment, Inc. and our consolidated subsidiaries. Our fiscal years ended July 3, 2005, June 27, 2004 and June 29, 2003 are referred to as fiscal 2005, 2004 and 2003,
respectively. Fiscal 2005 contained 53 weeks while fiscal 2004 and 2003 each contained 52 weeks.



PART I



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



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, 2005, we owned and operated 53 restaurants in 19 states
and had 12 additional restaurants operating under franchise or license agreements in five states under the names Champps Americana, Champps Restaurant and Champps Restaurant and Bar. Overall, we operate and franchise in a total of 23 states. Our
menu is comprised of items primarily made from scratch on the premises. We typically include a large selection of appetizers as well as main plate salads, high-end sandwiches, specialty burgers and wraps and entrée selections, along with
additional regularly changing specials. We are currently engaged in improving our menu as discussed below. 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 $13.59 in fiscal 2005, excluding alcoholic beverages.



Our current restaurants range in size from approximately 7,000 to nearly 12,100 square feet and seat 207 to 360 guests. During fiscal 2005, the average
unit sales of our restaurants opened for the entire 12 months was approximately $4.4 million based on a 52-week year. Our average unit sales are higher than most 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.



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We opened four restaurants in fiscal 2005. We expect to open between two and four restaurants in fiscal
2006. We have increased the number of company-owned restaurants from 18 in fiscal 1999 to 52 restaurants in fiscal 2005, representing a compounded annual growth rate of 19.3%.



Our financial results for fiscal 2005 included:



| |  |  | Growth of consolidated revenues by 5.6% to $218.4 million reflective of the extra operating week in fiscal 2005, full-year inclusion of seven restaurants opened in fiscal 2004 and
the partial year sales of four restaurants opened in fiscal 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A loss before income taxes of $2.0 million was recorded in fiscal 2005 compared to income before income taxes of $5.0 million in the prior fiscal year. Included in fiscal
2005s results was an asset impairment charge of $6.6 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A net loss of $0.2 million, or $0.02 diluted loss per share, was reported in fiscal 2005 compared to net income of $4.3 million, or $0.33 diluted income per share, in fiscal 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For fiscal 2005, operating cash flow totaled $19.8 million and outstanding debt balances were reduced by $4.1 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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. As a result of a recent change in our executive leadership, we have
refined our strategies to achieve these objectives as outlined below.



On March 2, 2005, Michael P. ODonnell was appointed our new Chief Executive Officer, President and Chairman of the Board. Mr. ODonnell has identified key strategic initiatives in an effort to improve the negative trends in our
comparable sales and improve our long-term profitability. The initiatives include the following:



| |  |  | Streamlining our menu and adding improved value to price items to our offerings. Our goal is to simplify the current menu by removing approximately 30 percent of the items and renew
the focus on introducing popular menu items favored by our customers. The new menu should allow for better execution, increased quality of our items and ultimately, greater guest satisfaction. Menu items are being tested in three of our locations
and will be rolled out across the country throughout fiscal 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recertifying and training at every level of our organization. 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 service to our customers. We have completed our first wave of training with our regional directors and restaurant general managers and expect the remainder of
the retraining to be completed during the first half of fiscal 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increasing customer traffic in our bars. Our goal is to attract new customers to our bars by improving service levels, ingredient quality and drink presentation. We hope to reverse
the trend of alcohol sales decreasing as an overall percentage of revenues by year end 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Implementing a more aggressive and performance based bonus plan for our restaurant management. We intend to provide our restaurant managers greater performance based compensation
and an increased sense of ownership through this program. Targets will be related to operating cash flows. We implemented an early version of this plan at the start of fiscal 2006. The final plan is expected to be rolled out no later than the end of
2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improving our site selection process. We are upgrading our site selection process to include more rigorous evaluation of the success factors for new site development. We are
currently testing a multi-factor software model aimed at testing potential business locations outside of the mall-based locations traditionally used by the company. Longer-term, this model will also be critical in helping us develop a smaller new
prototype currently under consideration, but not yet contemplated for rollout in fiscal 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop a franchise network to extend future growth opportunities. We expect to hire a senior franchise development executive during the first half of fiscal year 2006 and begin the
planning for a robust franchise network by year-end. We believe franchise development will only become an integral part of Champps long-term growth strategy once each of the above objectives is completed and the negative trends in same store
sales are reversed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The implementation of these
initiatives will probably not have an immediate impact on our profitability. Although some of the initiatives can be implemented relatively quickly, such as a new bonus plan, others may take longer to implement, such as the streamlining of our menu
and developing a franchise network. Ultimately we expect to improve our profitability due to the implementation of these initiatives; however, we may incur additional expenses and capital expenditures in the near term to achieve our long-term
objectives.



Growth strategy



We slowed our restaurant growth in fiscal 2005, opening only four new
restaurants compared to seven new restaurants in each of the prior two fiscal years. We plan to open only two, but possibly up to four, new restaurants in fiscal 2006. 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. Once we have implemented the strategies outlined above and improved our sales trends, we plan to increase the pace of our restaurant expansion.



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 recently 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 consultants analytical process, we intend to decrease the risk associated with opening new restaurants. 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 consulting firm will also identify new markets where we should
concentrate our site selection efforts based upon local demographics and competitive factors.



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As mentioned previously, we plan to pursue opening more franchised Champps locations. However, we do not
believe that this will occur to any significant degree until many of our other initiatives are completed. A new franchised Champps restaurant opened in Des Moines, Iowa in August 2004 and a licensed/joint venture Champps operation is expected to
open in the Dallas/Fort Worth, Texas airport terminal in September or October 2005. Although we have no obligation to do so, in the future we may seek to acquire some or all of our 12 franchised restaurants from our franchisees. This may require
additional capital.



Day-part allocation



We believe our ability to serve our guest 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 2005 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 71.5% and 28.5%, respectively. In fiscal 2005, our bar area generated approximately 17.6% of our total restaurant sales, 62.4% of which are generated from 4:00 p.m. to 10:00 p.m., signifying our strong
after work and happy hour business. Champps merchandise and other sales totaled $287,000 and were only 0.1% of overall sales in fiscal 2005.



Sales By Day Part - Fiscal 2005



|                 |  |            |   |  |                         |   |  |                                  |  
|---------------- |  | ---------- | - |  | ----------------------- | - |  | -------------------------------- | -
|                 |  | Food Sales |   |  | AlcoholicBeverage Sales |   |  | Food and AlcoholicBeverage Sales |  
|Lunch            |  |            |   |  |                         |   |  |                                  |  
|Open to 4:00 PM  |  | 41.0       | % |  | 15.6                    | % |  | 33.9                             | %
|After Work       |  |            |   |  |                         |   |  |                                  |  
|4:00 to 7:00 PM  |  | 29.4       | % |  | 36.4                    | % |  | 31.3                             | %
|Dinner           |  |            |   |  |                         |   |  |                                  |  
|7:00 to 10:00 PM |  | 26.6       | % |  | 37.4                    | % |  | 29.7                             | %
|Late Night       |  |            |   |  |                         |   |  |                                  |  
|10:00 to close   |  | 3.0        | % |  | 10.6                    | % |  | 5.1                              | %
|                 |  |            |   |  |                         |   |  |                                  |  
|                 |  | 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 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, all of which provide our guests with multiple settings to choose from. Our display kitchens are presented behind a
floor-to-ceiling glass wall to provide a focal point for the dining room. We use a variety of directional lighting and chandeliers to create a warm environment in our dining rooms and bar area.



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



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.



We are developing a smaller, 6,500 to 7,500 square foot restaurant prototype for future use. We anticipate that this smaller prototype will be used to
fill in existing company owned markets where a larger restaurant does not provide the required economic return. This smaller restaurant can also be used in new second tier markets and as a model for our franchising program.



Menu



Historically, we have offered our guests a comprehensive selection of approximately 90 items, primarily made on the premises
from scratch, which typically includes a selection of 16 appetizers, 10 main plate salads, 26 premium sandwiches, specialty burgers and wraps and 25 entrée selections. We also feature five to eight specials that change regularly, allowing us
to continually refine our menu offerings and keep our selections fresh for our frequent visitors. We believe that the broad range of our menu provides multiple dining options during each of our day-parts.



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



The food items on our current menu range from $5.45 to $13.45 for appetizers, $7.95 to $13.95 for burgers and sandwiches,
and $7.95 to $19.95 for dinner salads and entrees. For fiscal 2005, our average guest check in our dining room was approximately $13.59, excluding alcoholic beverages. Our sophisticated, full service bar offers approximately 19 selections of wine,
most of which are available by the glass, 18 draft and bottled domestic and imported beers, as well as premium liquor and specialty drinks. Sales of alcoholic beverages represented approximately 28.5% of total food and beverage sales during fiscal
2005.



We are currently testing a new menu at three of our
restaurants. The new menu consists of approximately 60 items. This menu has removed the majority of the Asian influenced items and upgraded the recipes and production techniques of the other items to provide our customers a best of breed
experience. For example, our new hamburger is made with certified Angus beef and is topped with chopped iceberg lettuce, a tomato slice, Bermuda onion, crinkly cut dill pickles and served on a fresh sesame seed bun. The hamburger is cooked on a flat
top grill to seal-in the flavors. By downsizing our menu to 60 items, we anticipate simplifying our kitchen operation and subsequently improving the quality of the menu items served. Ultimately, by improving the quality of our menu, we anticipate
that revenues will increase as our customers increase the frequency of their visits. We anticipate that we will begin to roll out the most successful new items from our test menu, as evidenced by our customer feedback, to our other restaurants in
the first half of fiscal 2006.



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 assistant general manager and up to three
management assistants. We invest substantial time in training and testing of our kitchen associates to adhere to our strict standards and preparation guidelines to maintain our quality control. 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 associates regarding safe handling practices of all perishable 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 insertions in the menus. 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 1.5% of total restaurant sales.



On occasion we
engage in paid advertising for individual restaurant locations including newspaper and radio advertisements and have tested direct mail to area office buildings and email blasts. 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.



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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. We also have recently started an initiative to encourage local service industry
employees to frequent Champps.



Operations



Restaurant management. As of September 1, 2005, we had six directors
of operations or regional vice presidents who oversee approximately nine restaurants each and who supervise the general managers at each restaurant in their area. The directors of operations or regional vice presidents report to our chief operating
officer. 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 associates and service.We believe that our uncompromising service is one of our differentiating factors. Our service is based on a team concept to ensure that guests are made to feel that any
associate can help them and that they are never left unattended. To maintain these high standards, we seek to hire and train personnel who believe in our philosophy and are passionate about guest service. We strive to personalize the dining
experiences of our guests by instilling both high standards and a sense of urgency among our associates. All associates meet with their managers at two daily pre-shift motivational and informational meetings in which service standards, restaurant
promotions, specials and quality control are reviewed. We frequently reward individual and restaurant achievement through several recognition programs intended to build and maintain associate morale. For example, our Pin Program rewards
and recognizes the efforts of associates with pins that are worn proudly on uniforms to publicly acknowledge their commitment to guest service.



Training.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. In addition, we have begun a recertification program to insure that all of our existing management employees have the necessary
skill set to be effective in all of the areas under their responsibility. As of September 1, 2005, we have recertified each of our directors of operations or regional vice presidents and our general managers. We intend to begin the recertification
process for our other restaurant managers beginning in the second quarter of fiscal 2006.



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.



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We provide all new associates 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 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 undergoes an intensive five-day hands-on training program for their respective positions, which includes a review of our safety procedures.
The training encompasses classroom instruction, on-the-job training programs for each position, and testing of the new associates progress at pre-determined stages within the training schedule.



When we open a new restaurant, we provide an extensive and varied level of
training to associates in each position to ensure the smooth and efficient operation of the restaurant from the first day it opens to the public. We believe this training helps provide our guests with a quality dining experience from opening day on.
Our training programs enable us to promote existing associates and managers as new restaurants open.



Restaurant franchise and licensing agreements



As of September 1, 2005, we had 12 franchised or licensed restaurants that began operations between 1991 and 2004. A new franchised location opened in Des Moines, Iowa in August 2004 and a new licensed/joint venture
restaurant is expected to open in the Dallas/Fort Worth, Texas airport terminal in the second quarter of fiscal 2006. The franchises in Duluth, Minnesota and Charlotte, North Carolina were closed by franchisees in July 2002 and July 2004,
respectively. Seven of our current franchised restaurants are located in the Minneapolis, Minnesota area. We also have one franchised restaurant in Des Moines, Iowa, Sioux City, South Dakota, Omaha, Nebraska, and two in Milwaukee, Wisconsin. We have
a total of six franchisees, of which three own nine of the 12 franchised or licensed restaurants.



Our revenue from current franchisee agreements represented approximately 0.3% of our revenue in fiscal 2005. Each franchisee is responsible for all direct
costs involved in the construction and maintenance of their restaurants. We provide menu development and marketing support on a limited basis. Franchisees are required to provide periodic financial reports and annual financial statements to our
corporate office for performance measurement and fee calculations. 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 a pre-negotiated price. We also periodically enter into selective short-term agreements for the products we use most extensively. This helps us to consistently
maintain our product costs. We believe that all essential food and beverage products are available from several qualified suppliers at competitive prices should an alternative source be required.



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



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 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 associates. 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.



Associates



As of September 1, 2005, we had approximately 6,400 associates on the Champps team, approximately 365 of which were
restaurant management and field support personnel and 46 whom worked at our corporate headquarters. We do not have any collective bargaining agreements. We consider our associate relations to be good.



History



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



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Casual Dining Ventures and changed its name to Champps Entertainment, Inc. Today, we operate with a single brand, Champps.



Operating locations



We lease all but one of our restaurants. The initial term of our leases for our restaurants expire at varying times
commencing in 2009. Nearly all of our leases are for fifteen to twenty year terms with renewal options extending our leases from five to twenty additional years.



The following table sets forth our company-operated and franchised restaurants at July 3, 2005.



|                                   |  |                  |  |                                
|---------------------------------- |  | ---------------- |  | -------------------------------
|Company Owned Restaurant Locations |  |                  |  | Franchised Restaurant Locations
|Total 52                           |  |                  |  | Total 12                       
|                                   |  |                 
|ARIZONA                            |  | MINNESOTA        |  | IOWA                           
|                                   |  |                 
|Phoenix                            |  | Eden Prairie     |  | Des Moines                     
|                                   |  |                 
|CALIFORNIA                         |  | Minnetonka       |  | MINNESOTA                      
|                                   |  |                 
|Irvine                             |  | Richfield        |  | Burnsville                     
|                                   |  |                 
|COLORADO                           |  | NEW JERSEY       |  | Maple Grove                    
|                                   |  |                 
|Colorado Springs                   |  | Edison           |  | Maplewood                      
|                                   |  |                 
|Denver                             |  | Marlton          |  | Minneapolis                    
|                                   |  |                 
|Littleton                          |  | NEW YORK         |  | New Brighton                   
|                                   |  |                 
|DELAWARE                           |  | Rochester        |  | St. Paul                       
|                                   |  |                 
|Wilmington                         |  | NORTH CAROLINA   |  | Woodbury                       
|                                   |  |                 
|FLORIDA                            |  | Durham           |  | NEBRASKA                       
|                                   |  |                 
|Ft. Lauderdale                     |  | Raleigh          |  | Omaha                          
|                                   |  |                 
|Tampa                              |  | OHIO             |  | SOUTH DAKOTA                   
|                                   |  |                 
|GEORGIA                            |  | Cincinatti       |  | Sioux Falls                    
|                                   |  |                 
|Alpharetta                         |  | Columbus (3)     |  | WISCONSIN                      
|                                   |  |                 
|ILLINOIS                           |  | Dayton           |  | Milwaukee                      
|                                   |  |                 
|Lincolnshire                       |  | Lyndhurst        |  | Brookfield                     
|                                   |  |                 
|Lombard                            |  | Valleyview       |  |                                
|                                   |  |                 
|Orland Park                        |  | West Chester     |  |                                
|                                   |  |                 
|Schaumburg                         |  | Westlake         |  |                                
|                                   |  |                 
|Skokie                             |  | PENNSYLVANIA     |  |                                
|                                   |  |                 
|INDIANA                            |  | King of Prussia  |  |                                
|                                   |  |                 
|Indianapolis (2)                   |  | Philadelphia (2) |  |                                
|                                   |  |                 
|LOUISIANA                          |  | TEXAS            |  |                                
|                                   |  |                 
|Baton Rouge                        |  | Addison          |  |                                
|                                   |  |                 
|MARYLAND                           |  | Houston (3)      |  |                                
|                                   |  |                 
|Columbia                           |  | Las Colinas      |  |                                
|                                   |  |                 
|MICHIGAN                           |  | San Antonio      |  |                                
|                                   |  |                 
|Lansing                            |  | VIRGINIA         |  |                                
|                                   |  |                 
|Livonia                            |  | Arlington        |  |                                
|                                   |  |                 
|Troy                               |  | Fairfax          |  |                                
|                                   |  |                 
|Utica                              |  | Reston           |  |                                
|                                   |  |                 
|                                   |  | Richmond         |  |                                



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Our existing company-operated restaurants average approximately 9,200 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 290 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. We are in the process of designing a new smaller prototype of approximately 6,500 to 7,500
conditioned square feet.



Restaurants to open



On July 25, 2005, we opened a new restaurant in Toledo, Ohio. In the second
quarter of fiscal 2006, a new licensed/joint venture restaurant is expected to open in the Dallas/Fort Worth, Texas Airport. In the third quarter of fiscal 2006, we expect to open a new restaurant in Princeton, New Jersey. We anticipate opening up
to two additional restaurants in the remainder of fiscal 2006.



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 2005, the maximum fee was equal to the lesser of $333,000 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 ours, or a
franchisees, operation in that location.



In addition,
our restaurants are subject to dram shop statutes in certain states, which generally give a person injured by an intoxicated person the right to recover damages from the establishment that has illegally overserved alcoholic beverages to
the intoxicated person. We carry liquor liability coverage in the amount of $1.0 million per occurrence subject to an aggregate annual policy limit of $5.0 million, with a $0.35 million deductible per occurrence.



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



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



Risk factors related to our business



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 intend to introduce a new, streamlined menu and a new bar program to reinvigorate that portion of our business, among other
limitations. 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 and smaller restaurant size, 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 3, 2005, we owned and operated 52 restaurants,
four of which were opened within the preceding 12-month period. The results achieved by these restaurants may not be indicative of longer-term performance or the potential market acceptance of restaurants in other locations. We cannot assure you
that any new restaurant we open will have similar operating results to those of prior restaurants. We anticipate that our new restaurants will take at least several months to reach our long term profitability levels due to inefficiencies typically
associated with new restaurants.



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



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



The success of our restaurants depends a 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 where our restaurants are located, or economic conditions surrounding those neighborhoods, could result in reduced sales in those locations.



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



Our ability to
expand our operations through the opening of new restaurants is important to our future financial success. Since fiscal 1997 through fiscal 2005, we have expanded our operations from 12 company-owned restaurants in nine states to 52 company-owned
restaurants in 19 states. We expect to open an additional two to four restaurants in fiscal 2006. 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;
| | - |  | --------------------------------------------------------------------



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



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



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



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



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



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 will adversely affect our business and financial condition



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



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



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



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



| |  |  | 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 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 in accordance with our growth strategy



Changes in our operating plans, acceleration of our expansion plans through
internal growth or acquisitions, lower than anticipated sales, increased expenses or other events may cause us to seek additional debt or equity financing on an accelerated basis. Additional financing may not be available on acceptable terms, or at
all, and our failure to raise capital when needed could negatively impact our growth and other plans, as well as our financial condition and results of operations. Additional debt financing, if available, may involve significant cash payment
obligations and covenants or financial ratios that restrict our ability to operate or grow our business. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital
Resources.



Our franchisees could take actions that could harm our
business



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



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



Our profitability depends in part on our ability to anticipate and react to
changes in food costs. We rely on SYSCO Corporation, a national distributor, as the primary supplier of our food. Any increase in distribution prices or failure of SYSCO to perform could cause our food costs to increase. There also could be a
significant short-term disruption in our supply chain if SYSCO failed to meet our distribution requirements or our relationship was terminated. Further, various factors beyond our control, including adverse weather conditions, governmental
regulation, production, availability and seasonality may affect our food costs or cause a disruption in our supply. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and
menu prices, and a failure to do so could materially and adversely affect our operating results.



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



Our continued success depends, in part, upon the popularity of the menu items served in the Champps environment and our dining style. 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. 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 fee and repair and maintenance costs. All of 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 whom could
materially harm our business



Our future success
significantly depends on the continued service and performance of our executive officers and key associates, such as regional directors of operation, restaurant general managers and kitchen managers. Competition for these key associates is intense.
The loss of the services of members of our senior management and key associates 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 affect on our business



We are subject to complaints or allegations from current
and former or prospective associates from time to time. In addition, we are subject to complaints or litigation from guests alleging discrimination, illness, injury or other food quality, health or operational concerns. We may be adversely affected
by publicity resulting from such allegations, regardless of whether such allegations are valid, whether we are liable, or whether such allegations involve one of our franchisees or licensees. A lawsuit or claim could result in an adverse decision or
result that could have a material adverse affect on our business.



We are also subject to state dram shop laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that 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
and its subsidiary, Daka, Inc. (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, the Company 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. 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 associates that could adversely affect our operations and our ability to expand and develop our restaurants



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



For fiscal 2005, approximately 28.5% of our restaurant food
and beverage sales was attributable to the sale of alcoholic beverages, and we believe our ability to serve these beverages is an important factor in attracting guests. Alcoholic beverage control regulations require each of our restaurants to apply
to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays.



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Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time, which could include sales to minors or intoxicated
persons. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants. The failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurants
operations.



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



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



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



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 3, 2005, we had federal net operating loss (NOL) carryforwards of approximately $45.0 million and FICA tax credit carryforwards of
approximately $7.8 million. The federal NOLs expire at various times through 2023 and the FICA tip tax credits expire at various times through 2025. Also as of July 3, 2005, we had certain state net operating loss carryforwards totaling $11.5
million expiring at various dates through 2024. While we expect to fully utilize all of the federal carryforwards and almost all of the state carryforwards to reduce our income tax liabilities, future income may not be sufficient for full
utilization of the carryforwards.



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 2005 and 2004, our relative sales were highest in our second
quarter (October through December), followed by our third quarter (January through March), then by our fourth quarter (April through June). Our first quarter (July through September) recorded the lowest relative sales for those years. Factors
influencing sales variability in addition to those noted above include the frequency and popularity, or lack thereof, of sporting events, holidays (including which day of the week the holiday occurs) and weather.



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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 10 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. While we have yet to do so, if we close a restaurant, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of rent for the balance of the lease term.
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. At any time on or after December 15, 2005, we may redeem some or all of
the notes at par plus accrued and unpaid interest. All of the notes can be converted, at our option, into shares of common stock at the then effective conversion price if the closing price of the common stock exceeds 150% of the then effective
conversion price for any 15 out of 20 consecutive trading days at any time before December 2006. There are no assurances that the convertible debt holders will convert their debt into shares prior to December 2007, nor are there any assurances that
the stock price will rise, allowing us to convert the debt. If the debt is not converted it may be necessary for us to seek additional financing when this debt matures. 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.



Our 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, beginning with this Annual Report on Form 10-K,
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.



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If certain of our restaurants fail to perform to a level sufficient to cover their asset value, we may be forced if
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 four of our underperforming restaurants, we recorded an impairment charge of
$6.6 million during our third quarter ended April 3, 2005. During the quarter ended April 3, 2005, three additional restaurants located in Irvine, California, Skokie, Illinois and Richmond, Virginia were also reviewed for impairment. At this time,
we have not recorded an impairment charge related to these restaurants because management believes certain changes can be made to improve the future prospects of those restaurants. We determined 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 additional assets of these or other restaurants.



|Item 2. | Properties.
|------- | -----------



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



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



In connection with the spin-off of DAKA in late 1997, we assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc. Under our
Post-Closing Covenant Agreement with DAKA, we are responsible for handling the defense of these claims, including the appeals.



On or about June 24, 2004, we filed suit in U.S. District Court for the District of Massachusetts against AIG and National Union Fire Insurance Company of
Pittsburgh, PA (National Union) based on the defendants failure to release Champps from further liability under our prior insurance policies in place from 1994 through 1997 and for wrongfully withholding a $526,000 irrevocable
standby letter of credit and a surety bond posted in the amount of $526,254. On August 9, 2004, National Union filed a motion to compel arbitration against Champps in U.S. District Court for the Southern District of New York based on an Indemnity
Agreement containing an arbitration clause. By Order dated December 13, 2004 the New York District Court granted the Motion to Compel Arbitration as to National Union only. The matter involving National Union is currently pending arbitration in New
York. See Note 8  Litigation for an additional description of the AIG litigation, which description is incorporated herein by reference.



On March 24, 2005 Champps filed its Notice of Voluntary Dismissal in the Federal District Court for the District of Massachusetts and on March 25, 2005
Champps filed suit in Trial Court of the Commonwealth of Massachusetts naming AIG as defendant based on AIGs 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 matter against AIG has been stayed by the Trial Court in the Commonwealth of Massachusetts pending the outcome of the arbitration proceedings. We do not believe that
the outcome of the case will have a material adverse effect on the Companys financial condition.



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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 the Company to a vote of shareholders, through solicitation or proxies or otherwise, during the fourth quarter of the
fiscal year for which this report is filed.



PART II



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



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



|                      |  |      |      |     |   |     
|--------------------- |  | ---- | ---- | --- | - | ----
|                      |  | High |      | Low
|Fiscal 2005           |  |      |      |     |   |     
|First Fiscal Quarter  |  | $    | 9.15 |     | $ | 6.39
|Second Fiscal Quarter |  |      | 8.92 |     |   | 7.37
|Third Fiscal Quarter  |  |      | 9.80 |     |   | 8.11
|Fourth Fiscal Quarter |  |      | 9.04 |     |   | 6.40
|                      |  |     
|Fiscal 2004           |  |      |      |     |   |     
|First Fiscal Quarter  |  |      | 7.60 |     |   | 4.50
|Second Fiscal Quarter |  |      | 8.10 |     |   | 5.80
|Third Fiscal Quarter  |  |      | 9.47 |     |   | 7.01
|Fourth Fiscal Quarter |  |      | 9.98 |     |   | 8.10



On September 1, 2005,
there were approximately 1,754 holders of record of the Companys common stock. On September 1, 2005, the closing price of the Companys common stock was $7.77 per share.



We have never declared or paid dividends on our common stock. We have not ruled out the possibility of paying dividends or
repurchasing 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. Also, the
Companys credit arrangements restrict the amount of dividend payments or capital stock repurchases to a maximum amount of $7.5 million over a three-year period beginning March 2004. Moreover, certain financial covenant ratios under the credit
facilities require a minimum amount of tangible net worth, as defined in the related agreements.



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|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 3, 2005, June 27, 2004, June 29, 2003, June 30, 2002 and July 1, 2001 and the statements of operations data for each of the five fiscal years in the period ended July 3, 2005 presented below are derived from our audited consolidated financial
statements.



Certain amounts have been reclassified for earlier
periods to conform to the fiscal 2005 presentation. The reclassifications have no impact on net income or income per share.



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



|                                                                       |  |                                       |         |   |              |   |              |  |              |         |  |             |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------ | - | ------------ |  | ------------ | ------- |  | ----------- | ------- | - |  | - | ------- | -
|                                                                       |  | As of and for the Fiscal Years Ended  |        
|                                                                       |  | July 3,2005 (a)                       |         |   | June 27,2004 |   | June 29,2003 |  | June 30,2002 |         |  | July 1,2001 |        
|                                                                       |  | (in thousands, except per share data) |        
|Statements of Operations Data                                          |  |                                       |         |   |              |   |              |  |              |         |  |             |         |   |  |   |         |  
|Total revenue                                                          |  | $                                     | 218,356 |   |              | $ | 206,940      |  | $            | 177,136 |  | $           | 155,421 |   |  | $ | 130,596 |  
|Severance                                                              |  |                                       | 655     |   |              |   |             |  |              |        |  |             |        |   |  |   |        |  
|Asset impairment charges                                               |  |                                       | 6,567   |   |              |   |             |  |              |        |  |             |        |   |  |   |        |  
|Expenses related to predecessor companies                              |  |                                       | 358     |   |              |   | 1,171        |  |              | 282     |  |             | 305     |   |  |   | 534     |  
|Debt extinguishment costs                                              |  |                                       |        |   |              |   | 587          |  |              | 290     |  |             |        |   |  |   |        |  
|                                                                       |  |                                       |         |   |             
|Income (loss) from continuing operations                               |  |                                       | (2,029  | ) |              |   | 4,996        |  |              | 2,911   |  |             | 4,528   |   |  |   | 4,912   |  
|Loss on discontinued operations                                        |  |                                       |        |   |              |   |             |  |              |        |  |             | (153    | ) |  |   | (77     | )
|Net income (loss) (b)                                                  |  |                                       | (249    | ) |              |   | 4,272        |  |              | 18,066  |  |             | 4,166   |   |  |   | 12,728  |  
|                                                                       |  |                                       |         |   |             
|Basic income (loss) per share from continuing operations               |  |                                       | (0.02   | ) |              |   | 0.33         |  |              | 1.44    |  |             | 0.35    |   |  |   | 1.08    |  
|                                                                       |  |                                       |         |   |             
|Diluted income (loss) per share from continuing operations             |  |                                       | (0.02   | ) |              |   | 0.33         |  |              | 1.35    |  |             | 0.33    |   |  |   | 1.04    |  
|Basic weighted average shares                                          |  |                                       | 12,887  |   |              |   | 12,793       |  |              | 12,536  |  |             | 12,104  |   |  |   | 11,871  |  
|                                                                       |  |                                       |         |   |             
|Diluted weighted average shares                                        |  |                                       | 12,887  |   |              |   | 13,000       |  |              | 13,683  |  |             | 12,864  |   |  |   | 12,363  |  
|                                                                       |  |                                       |         |   |             
|Balance Sheet Data                                                     |  |                                       |         |   |              |   |              |  |              |         |  |             |         |   |  |   |         |  
|Total assets                                                           |  | $                                     | 137,311 |   |              | $ | 133,749      |  | $            | 135,922 |  | $           | 95,646  |   |  | $ | 82,137  |  
|Long-term debt and capital lease obligations including current portion |  |                                       | 14,649  |   |              |   | 18,563       |  |              | 28,550  |  |             | 21,835  |   |  |   | 17,093  |  
|Total shareholders equity                                             |  |                                       | 76,061  |   |              |   | 75,008       |  |              | 69,934  |  |             | 47,171  |   |  |   | 41,800  |  



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



|(b) | The fiscal years ending June 29, 2003 and July 1, 2001 had recorded income tax benefits of $15,155 and $7,893, respectively, 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 3, 2005, we owned and operated 52 and franchised 12 restaurants
under one of the following names: Champps Americana, Champps Restaurant or Champps Restaurant and Bar. We operate and franchise restaurants in 23 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 1999, we owned 18 restaurants. In fiscal years 2000 through 2002, we opened or
acquired 16 restaurants. We opened seven restaurants in each of our fiscal years 2003 and 2004. In fiscal 2005, we opened four additional locations. We expect to only open two to four new company-operated restaurants in fiscal 2006. We purposely
slowed our growth in fiscal 2005 and expect to have only the indicated modest growth in 2006 as we undertake certain initiatives outlined below aimed at improving our existing operations and redefining our growth plans and site selection criteria.



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 over the last three years averaging approximately 8,500 square feet. Also, we are in the process of developing a smaller prototype of
approximately 6,500 to 7,500 square feet. This smaller prototype should provide us a greater opportunity to construct additional restaurants because of the greater number of site options for this size restaurant. In addition, we should be able to
improve on our economic model as the cost to build these smaller restaurants will be lower than our existing prototype. Pre-opening expenses have historically averaged approximately $385,000 per restaurant.



Historically, our primary sources of liquidity for funding our operations and
expansion have been cash provided from operations, and standard restaurant financing methods, such as build-to-suit transactions, sale-leaseback transactions, mortgage facilities, notes payable, tenant improvement allowances and equipment financing.
Also, in 2003 we issued $15.0 million of 5.5% convertible subordinated notes and warrants and in 2004 we secured a three-year $25.0 million revolving bank credit facility giving us greater financial flexibility and future interest expense savings.
In that regard, certain of our higher interest rate notes payable and capital leases as well as certain operating leases were repaid in fiscal 2004 with excess cash and use of this bank facility, although we were subject to prepayment penalties and
a write-off of related debt issuance costs. In fiscal 2005, we prepaid an additional $1.0 million of debt which was not subject to any prepayment penalties and repaid all of our outstanding advances under our bank credit facility.



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An important indicator of performance within the restaurant industry is comparable sales or same store
sales. This indicator compares the revenue performance of our restaurants open for more than 15 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.



Our comparable sales trends have been negative for four consecutive quarters after being modestly positive the prior fiscal
year. We believe that certain economic and other external factors as discussed below may have contributed to the lower sales, as well as site selection and other operational factors. However, we believe the weakness in sales is not solely attributed
to such external factors.



Our sales are somewhat dependent
upon the timing and viewing of professional and college sporting events such as football, basketball and hockey, and to a lesser extent baseball. Work stoppages or lockouts of a professional league can have an adverse impact on our sales. The
National Hockey League (NHL) was in a lockout during its 2004/2005 season. We believe our annual sales were impacted between 0.4 to 0.5 percent as the result of the cancellation of the NHL season. This equates to an annual sales loss of
between $0.9 to $1.2 million.



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 believe this is due largely to certain underperforming sites selected over the past several years. We are in the process of implementing a new site selection process which will
incorporate an improved analytical evaluation which we believe will lead to more attractive restaurant results.



One of the other key factors we use in evaluating and understanding our restaurants and assessing our business is our store operating margins. We define
our store operating margin as restaurant sales less restaurant-level operating costs (product costs, labor costs, other operating expenses and occupancy). We review store operating margins both in hard dollar terms and as a percentage of restaurant
sales. Although we have been successful in lowering our product costs and labor costs over the past three years, other operating expenses and occupancy have increased as a percent of restaurant sales primarily due to the fixed expense nature of
these costs versus lower average unit sales volumes for our restaurants. Inflation coupled with negative comparable sales has also contributed to the percentage of sales decrease in operating margin.



On March 2, 2005, Michael P. ODonnell was appointed our new Chief
Executive Officer, President and Chairman of the Board. Mr. ODonnell has identified key strategic initiatives in an effort to improve these negative trends in our comparable sales and improve our long-term profitability. The initiatives
consist of:



| |  |  | Streamlining our menu and adding improved value to price items to our offerings. Our goal is to reduce approximately 30 percent of the items on the current menu and renew the focus
on introducing popular menu items favored by our customers. The new menu should allow for better execution, increased quality of our items and ultimately, greater guest satisfaction. Menu items are being tested in three of our locations and will be
rolled out across the country throughout fiscal 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Recertifying and training at every level of our organization. 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 service to our customers. We have completed our first wave of training with our regional directors and restaurant general managers and expect the remainder of
the retraining to be completed during the first half of 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increasing customer traffic in our bars. Our goal is to attract new customers to our bars by improving service levels, ingredient quality and drink presentation. We hope to reverse
the trend of alcohol sales decreasing as an overall percentage of revenues by year end 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implementing a more aggressive and performance based bonus plan for our restaurant management. We intend to provide our restaurant managers greater performance based compensation
and an increased sense of ownership through this program. Targets will be related to operating cash flows. We implemented an early version of this plan at the start of fiscal 2006. The final plan is expected to be rolled out no later than the end of
fiscal 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improving our site selection process. We are upgrading our site selection process to include more rigorous evaluation of the success factors for new site development. We are
currently testing a multi-factor software model aimed at testing potential business locations outside of the mall-based locations traditionally used by the company. Longer-term, this model will also be critical in helping us develop a smaller
prototype restaurant currently under consideration, but not yet contemplated for rollout in fiscal 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Develop a franchise network to extend future growth opportunities. We expect to hire a senior franchise development executive during the first half of fiscal year 2006 and begin the
planning for a robust franchise network by year-end. We believe franchise development will only become an integral part of Champps long-term growth strategy once each of the above objectives is completed and the negative trends in same store
sales are reversed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although some of the
initiatives can be implemented relatively quickly, such as a new bonus plan, others may take longer to implement, such as the rolling out of a new menu and developing a franchise network. Ultimately management believes the implementation of these
initiatives will improve the profitability of the Company. However, we may incur additional expenses and capital spending in the near term to achieve our long-term objectives.



In March 2005, Michael P. ODonnell entered into an employment agreement with us. As part of the agreement, 514,680
restricted shares of common stock are to be awarded to Mr. ODonnell. This award is subject to the availability of shares that have been authorized and are available under our stock option and incentive plans. The Company plans to seek
shareholder approval that would permit the issuance of any shares not granted due to their lack of availability. If the shareholders of the Company fail to approve such resolution by the date any portion of the grants would otherwise have vested,
the Company is required to make a cash payment to Mr. ODonnell equal to the economic value of the vesting shares. 128,670 shares of the restricted stock award vest on an equal 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 based upon the achievement of certain stock performance criteria. As a result of this agreement, we have incurred additional compensation expense and a corresponding
liability.



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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. The timing of revenues and expenses associated with opening new restaurants is expected also to result in fluctuations in our quarterly and annual results. Changes in any
of these factors could adversely affect us and our financial results.



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



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



Minimum wage increases have occurred this fiscal year in several states where we operate and several states have approved increases to take effect in our next fiscal year. While most of our kitchen staff are paid in
excess of minimum wage levels and would 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.



We were responsible for a significant
loss contingency related to a predecessor company (see Note 9 to our audited consolidated financial statements). We believe this contingency has been finally resolved.



In the third quarter of fiscal 2005, we recorded an asset impairment charge of $6.6 million to write-down to fair value the
carrying value of assets for four underperforming locations.



We previously restated our financials for fiscal 2004 and prior due to certain error corrections related to lease accounting and leasehold asset depreciation. All amounts in this Annual Report on Form 10-K reflect the restated amounts.



Our financial results for the fiscal year ended July 3, 2005 included:



| |  |  | Growth of consolidated revenues by 5.6% to $218.4 million reflective of the extra operating week in fiscal 2005, full-year inclusion of seven restaurants opened in fiscal 2004 and
the partial year sales of four restaurants opened in fiscal 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A loss before income taxes of $2.0 million was recorded in fiscal 2005 compared to income before income taxes of $5.0 million in the prior fiscal year. Included in fiscal
2005s results was an asset impairment charge of $6.6 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A net loss of $0.2 million, or $0.02 diluted loss per share, was reported in fiscal 2005 compared to net income of $4.3 million, or $0.33 diluted income per share, in fiscal
2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For fiscal 2005, operating cash flow totaled $19.8 million and outstanding debt balances were reduced by $4.1 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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Critical accounting policies



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



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



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 which requires
that we assess each contingency to determine estimates of the degree of probability and range of possible settlement. Contingencies which are deemed to be probable and where the amount of such settlement is reasonably estimable are accrued in our
financial statements. If only a range of loss can be determined, we accrue to the best estimate within that range; if none of the estimates within that range is better than another, we accrue to the low end of the range.



We are self-insured for a significant portion of our employee health
benefits, workers compensation and general liability programs. However, we maintain stop-loss coverage with third party insurers to limit our individual claim and total exposures under 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 practice.



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



Useful lives of property and equipment



Land,
buildings, leasehold improvements and equipment are recorded at cost less accumulated depreciation. These assets are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or the shorter of their
useful life 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.



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Valuation of long-lived assets



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



We
separately evaluate each individual restaurant for impairment. Generally, a restaurant is not evaluated for impairment until it has been open a full six quarters as the initial two quarters of operations are generally characterized by operating
inefficiencies associated with start-up operations. However, we may review a restaurant sooner for impairment if it is operating significantly below our expectations. We consider four consecutive 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 2005, we recorded a $6.6 million asset impairment charge covering four restaurants. Additionally, we had another three restaurants open for
at least six quarters which had positive cash flow over the last fiscal year, but the level of such cash flows were not high enough to sufficiently cover the restaurants long-term asset values if such cash flows continue for the remainder of
the restaurants lives. However, we have not recorded an impairment charge at this time for these restaurants because management believes certain plans can be implemented to improve the future prospects of those restaurants. We determined 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.



Our forward-looking judgments and estimates concerning the above mentioned
restaurants may not materialize. If such cash flows associated with any of these restaurants do not sufficiently improve, we would record an asset impairment charge for all or a portion of the respective restaurants long-lived assets depending
on the fair value assigned to such assets. As of July 3, 2005, the long-lived assets value on these three restaurants totaled $5.9 million.



We evaluate impairment of goodwill and other unidentifiable intangible assets in accordance with SFAS No. 142 Goodwill and Other Intangible
Assets. Under the provisions of SFAS No. 142, we are required to assess impairment at least annually by means of a fair value-based test. At July 3, 2005, we evaluated our goodwill and determined that the goodwill was not impaired. The
determination of fair value requires us to make certain assumptions and estimates related to our business and is highly subjective, and accordingly, actual amounts realized may differ significantly from our estimate.



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##### Table of Contents

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 a part of the lease 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.
Future authoritative changes to the methods of accounting for leases could have a material impact on the Companys reported results of operations and financial position.



Valuation of deferred tax assets



We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the carrying value for
financial reporting purposes and the tax basis of assets and liabilities in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded using the enacted tax rates expected to apply to
taxable income in the years in which such differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities, resulting from a change in tax rates, is recognized as a component of income tax expense (benefit) in
the period that such change occurs. Net operating loss and other credit carryforwards, including FICA tip tax credits, are recorded as deferred tax assets. A valuation allowance is recorded for the tax benefit of the deferred tax assets not expected
to be utilized based on projected future taxable income, feasible tax planning strategies and the reversal of temporary differences. As of July 3, 2005, we had net deferred tax assets of $29.2 million. As a result of our improved profitability in
recent years and our estimates of projected future taxable income, we believe that it is more likely than not that we will be able to realize these net deferred tax assets. As of July 3, 2005, we had federal net operating loss carryforwards of
approximately $45.0 million, expiring at various dates through 2023, certain states net operating loss carryforwords totaling $11.5 million expiring at various dates through 2024 and FICA tip credit carryforwards of approximately $7.8 million,
expiring at various dates through 2025.



Income tax provision



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



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



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



Financial definitions



Revenue - Our revenue is comprised of restaurant sales and net franchise royalties and fees. Restaurant sales are comprised almost entirely of food and beverage sales with less than 0.1% 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 15 months. As of the end of fiscal 2005, 47 restaurants of our total 52 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 associates 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 equipment operating leases, fixed rent, 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.



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.



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, restaurant manager-in-training wages and costs, bonuses and related associate payroll taxes and benefits, travel, information systems, communication expenses, corporate rent and related occupancy and operating costs, corporate
depreciation and amortization and professional and consulting fees.



Other Financial Definitions - Severance expense consists of the cost associated with the separation agreements with our former Chief Executive Officer and our Chief Operating Officer. Asset impairment charges relate to the write-down
of the assets of certain under-performing restaurants to their estimated fair value. Other (income) expense, net generally consists of gains or losses on asset disposals primarily from asset replacements but also included 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. Debt extinguishment costs consist of prepayment penalties and write-off
of unamortized debt issuance costs associated with repayment of debt before scheduled maturity.



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Fiscal Calendar -We utilize a 52/53 week fiscal year ending on the Sunday closest to June 30 for
financial reporting purposes. Fiscal year 2005 consisted of 53 weeks and fiscal years 2004 and 2003 each consisted of 52 weeks.



Reclassification of Promotional and Employee Discounts We provide discounted meals and beverages to guests for promotional purposes and
discounted meals to our employees. In the past, these discounts have been included in restaurant sales, with an offsetting charge to other operating expense. In 2005, we decided that these amounts should be reported on a net basis and, accordingly,
we eliminated such amounts for all periods presented. This reclassification had the effect of decreasing previously reported sales and expenses by approximately $4.6 million in fiscal 2004 and $3.6 million in fiscal 2003. These reclassifications had
no effect on net income.



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Results of operations



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



|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|--------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | ----- | -- | ------------ | - | ------- |  | ----- | - |  | - | ------- | - |  | ----- | -
|                                                                |  | Fiscal Year Ended |        
|                                                                |  | July 3,2005       |         |   | June 27,2004 |       |    | June 29,2003 |  
|Revenue                                                         |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Sales                                                           |  | $                 | 217,735 |   |              | 99.7  | %  |              | $ | 206,361 |  | 99.7  | % |  | $ | 176,520 |   |  | 99.7  | %
|Franchising and royalty, net                                    |  |                   | 621     |   |              | 0.3   |    |              |   | 579     |  | 0.3   |   |  |   | 616     |   |  | 0.3   |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Total revenue                                                   |  |                   | 218,356 |   |              | 100.0 | %  |              |   | 206,940 |  | 100.0 | % |  |   | 177,136 |   |  | 100.0 | %
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Cost of sales and operating expenses (as a percentage of sales) |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Product costs                                                   |  |                   | 62,157  |   |              | 28.5  | %  |              |   | 58,851  |  | 28.5  | % |  |   | 50,618  |   |  | 28.7  | %
|Labor costs                                                     |  |                   | 69,495  |   |              | 31.9  |    |              |   | 67,269  |  | 32.6  |   |  |   | 57,679  |   |  | 32.7  |  
|Other operating expense                                         |  |                   | 32,181  |   |              | 14.8  |    |              |   | 28,453  |  | 13.8  |   |  |   | 24,961  |   |  | 14.1  |  
|Occupancy                                                       |  |                   | 21,248  |   |              | 9.8   |    |              |   | 19,864  |  | 9.6   |   |  |   | 16,985  |   |  | 9.6   |  
|Pre-opening expenses                                            |  |                   | 1,455   |   |              | 0.7   |    |              |   | 1,898   |  | 0.9   |   |  |   | 3,124   |   |  | 1.8   |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Total cost of sales and operating expenses                      |  |                   | 186,536 |   |              | 85.7  |    |              |   | 176,335 |  | 85.4  |   |  |   | 153,367 |   |  | 86.9  |  
|(as a percentage of total revenue)                              |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|General and administrative expenses                             |  |                   | 13,889  |   |              | 6.4   |    |              |   | 11,719  |  | 5.7   |   |  |   | 10,519  |   |  | 5.9   |  
|Depreciation and amortization                                   |  |                   | 11,012  |   |              | 5.0   |    |              |   | 9,896   |  | 4.8   |   |  |   | 7,679   |   |  | 4.3   |  
|Severance                                                       |  |                   | 655     |   |              | 0.3   |    |              |   |        |  |      |   |  |   |        |   |  |      |  
|Asset impairment charges                                        |  |                   | 6,567   |   |              | 3.0   |    |              |   |        |  |      |   |  |   |        |   |  |      |  
|Other (income) expense, net                                     |  |                   | (76     | ) |              |      |    |              |   | 135     |  | 0.1   |   |  |   | 262     |   |  | 0.1   |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Income (loss) from operations                                   |  |                   | (227    | ) |              | (0.1  | )  |              |   | 8,855   |  | 4.3   |   |  |   | 5,309   |   |  | 3.0   |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Other expense                                                   |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Interest expense and income, net                                |  |                   | 1,444   |   |              | 0.6   |    |              |   | 2,101   |  | 1.0   |   |  |   | 1,826   |   |  | 1.0   |  
|Expenses related to predecessor companies                       |  |                   | 358     |   |              | 0.2   |    |              |   | 1,171   |  | 0.6   |   |  |   | 282     |   |  | 0.2   |  
|Debt extinguishment costs                                       |  |                   |        |   |              |      |    |              |   | 587     |  | 0.3   |   |  |   | 290     |   |  | 0.2   |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Income (loss) before income taxes (benefit)                     |  |                   | (2,029  | ) |              | (0.9  | )  |              |   | 4,996   |  | 2.4   |   |  |   | 2,911   |   |  | 1.6   |  
|Income tax expense (benefit)                                    |  |                   | (1,780  | ) |              | (0.8  | )  |              |   | 724     |  | 0.3   |   |  |   | (15,155 | ) |  | (8.6  | )
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Net income (loss)                                               |  | $                 | (249    | ) |              | (0.1  | )% |              | $ | 4,272   |  | 2.1   | % |  | $ | 18,066  |   |  | 10.2  | %
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Restaurant operating weeks                                      |  |                   | 2,635   |   |              |       |    |              |   | 2,376   |  |       |   |  |   | 1,947   |   |  |       |  
|Restaurant sales per operating week                             |  | $                 | 82.6    |   |              |       |    |              | $ | 86.9    |  |       |   |  | $ | 90.7    |   |  |       |  
|                                                                |  |                   |         |   |              |      
|Number of restaurants (end of period)                           |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Company-owned                                                   |  |                   | 52      |   |              |       |    |              |   | 48      |  |       |   |  |   | 41      |   |  |       |  
|Franchised                                                      |  |                   | 12      |   |              |       |    |              |   | 12      |  |       |   |  |   | 12      |   |  |       |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  
|Total restaurants                                               |  |                   | 64      |   |              |       |    |              |   | 60      |  |       |   |  |   | 53      |   |  |       |  
|                                                                |  |                   |         |   |              |       |    |              |   |         |  |       |   |  |   |         |   |  |       |  



Fiscal 2005 compared to fiscal 2004



Total revenue. Total revenue increased approximately $11.5
million, or 5.6%, to $218.4 million in fiscal 2005 from $206.9 million for fiscal 2004. The increase occurred due to the extra operating week in fiscal 2005 and operating approximately four more restaurants in fiscal 2005 compared to fiscal 2004.
However, comparable same store sales decreased 3.6% for fiscal 2005 compared to the prior year. Comparable food sales decreased 3.9% while comparable alcohol sales decreased 2.8%. Management believes that comparable sales were adversely affected by
reduced customer traffic arising from the presidential election and the NHL hockey lockout. Restaurant sales per operating week for all restaurants decreased $4,300, or 4.9%, to $82,600 for fiscal 2005 from $86,900 for fiscal 2004. This decrease
resulted primarily from a decrease in comparable same store sales and, in part, from our newer restaurants opened in fiscal 2004 and 2005 generating lower revenues than the restaurants that opened prior to fiscal 2004.



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The average guest check in our dining room, excluding alcoholic beverages, was approximately $13.59 in fiscal 2005
compared to $13.27 in fiscal 2004, a 2.4% increase primarily from higher menu prices. During fiscal 2005, food sales and alcoholic beverage sales represented 71.5% and 28.5% of our total food and beverage sales, respectively. During fiscal 2004,
food and alcoholic beverage sales represented 71.3% and 28.7% of our total food and beverage sales, respectively.



Cost of sales and operating expenses



Product costs. Product costs increased by $3.3 million, or 5.6%, to $62.2 million for fiscal 2005 from $58.9 million for the prior
year. Product costs as a percentage of restaurant sales were 28.5% for both fiscal 2005 and fiscal 2004. During the current fiscal year, rising fuel costs increased the delivery cost on the majority of our products. However, we were able to maintain
our product costs as a percentage of sales by lowering costs on select key items through purchasing initiatives.



Labor costs. Labor costs increased by $2.2 million, or 3.3%, to $69.5 million fiscal 2005 from $67.3 million in fiscal 2004. Labor
costs as a percentage of restaurant sales decreased to 31.9% in fiscal 2005 from 32.6% in fiscal 2004 despite lower comparable sales and increases in the minimum wage during fiscal 2005 for three states in which we operate. The decrease was largely
due to lower staff, bonus and health insurance benefit costs. The lower staff costs were due largely to a focus on improved productivity at our restaurants while bonus costs decreased due to lower achievement of bonus targets. Health insurance costs
decreased due to larger claim costs experienced in the prior year and health plan changes enacted in fiscal 2005.



Other operating expense. Other operating expense increased $3.7 million, or 13.0%, to $32.2 million in fiscal 2005 from $28.5
million in the prior year. Operating expense as a percentage of restaurant sales increased to 14.8% in fiscal 2005 from 13.8% in fiscal 2004. The increase was due largely to higher prices paid for supplies and utilities as well as higher costs for
credit card fees due to higher proportion of guests utilizing credit cards.



Occupancy.Occupancy expense increased $1.3 million, or 6.5%, to $21.2 million in fiscal 2005 from $19.9 million in the prior year. Occupancy expense as a percentage of restaurant sales increased to 9.8% in
fiscal 2005 from 9.6% in fiscal 2004. Occupancy expenses increased as a percent of sales largely as the result of lower average restaurant revenues.



Pre-opening expenses.Pre-opening expenses were $1.5 million for fiscal 2005 versus $1.9 million for the prior year. The average
restaurant pre-opening cost was lower in 2004 versus 2005 because of the timing of openings. We opened four restaurants during fiscal 2005 and seven restaurants during fiscal 2004. Pre-opening expenses as a percentage of restaurant sales were 0.7%
for fiscal 2005 and 0.9% for fiscal 2004.



Total Cost of Sales and Operating
Expenses. Total cost of sales and operating expenses increased $10.2 million, or 5.8%, to $186.5 million for fiscal 2005 from $176.3 million in the prior year primarily for the reasons described above.



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General and administrative expenses.General and administrative expenses increased $2.2 million, or 18.8%, to
$13.9 million fiscal 2005 from $11.7 million in the prior year. General and administrative expenses increased largely as a result of higher personnel costs, auditing and consulting costs associated with our Sarbanes-Oxley internal controls
assessment, lease accounting restatement and costs associated with our new operating initiatives. Such increases were partially offset by reduced bonus expense resulting from not achieving bonus targets in fiscal 2005. General and administrative
expenses as a percentage of total revenue increased to 6.4% for fiscal 2005 from 5.7% in fiscal 2004.



Depreciation and amortization.Depreciation and amortization expense increased $1.1 million, or 11.1%, to $11.0 million for fiscal 2005 from $9.9 million in the prior year primarily due to an increase in assets
associated with the opening of new restaurants. Depreciation and amortization expense as a percentage of restaurant sales increased to 5.0% in fiscal 2005 from 4.8% in fiscal 2004 due to lower average restaurant revenues and the additional
depreciation associated with the buy-out of two restaurant operating equipment leases in fiscal 2004.



Severance.Severance expenses totaled $0.7 million for fiscal 2005 compared to no such expenses in the prior year. These expenses resulted from separation agreements with our former Chief Executive Officer and
former Chief Operating Officer.



Asset impairment charges. Asset
impairment charges totaled $6.6 million for fiscal 2005 compared to no asset impairment charges in the prior year. The impairment related to four restaurant locations for which the estimated future cash flows could not recover the carrying value of
the applicable long-term assets and the fair market value of the assets was less than the carrying value.



Other (income)/expense, net.Other income totaled $0.1 million for fiscal 2005 compared to other expense of $0.1 million in fiscal 2004. The improvement in fiscal 2005 was due to a one-time gain from the sale
of a stock investment.



Interest expense and income, net.Interest
expense and income, net was approximately $1.4 million in fiscal 2005 and $2.1 million in fiscal 2004. The decrease resulted primarily from lower outstanding debt balances as a result of prepaying debt obligations and repaying advances under our
credit facility partially offset by reduced interest income as a result of utilizing excess cash for the debt prepayments.



Expenses related to predecessor companies.Expenses related to predecessor companies totaled $0.4 million for fiscal 2005 compared to $1.2 million in the prior
year. The fiscal 2004 expenses related to adjustments to the liabilities for the McCrae vs. Daka litigation as a result of the appellate decision and trial court redetermination (see Note 9 to the consolidated financial statements) and on-going
litigation costs partially offset by a reduction in the liability for the State of Florida proposed tax assessment due to the favorable settlement of the proposed assessment. The fiscal 2005 expenses related primarily to a court award of plaintiff
attorney fees on the McCrae vs. Daka litigation and on-going legal fees.



Debt extinguishment costs.No debt extinguishment costs were incurred in fiscal 2005 while $0.6 million of such costs were incurred in fiscal 2004 as a result of the repayment of $15.2 million of debt and capital lease obligations
before their scheduled maturity.



Income (loss) before income taxes.
Income before income taxes decreased $7.0 million to a loss of $2.0 million for fiscal 2005 from income of $5.0 million in the prior year. The major reason for the decrease was the $6.6 million asset impairment charge in fiscal 2005 as previously
discussed.



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Income tax expense (benefit). For fiscal 2005, we recorded an income tax benefit of $1.8 million compared to an
expense of $0.7 million in fiscal 2004. The tax benefit for fiscal 2005 is largely reflective of the federal tax benefit associated with the $2.0 million loss before income taxes and the $1.5 million benefit associated with our FICA tip tax credit.
The tax expense for fiscal 2004 is largely reflective of the federal tax expense associated with the $5.0 million income before income taxes, partially offset by the $1.3 million benefit associated with our FICA tip tax credit.



Fiscal 2004 compared to fiscal 2003



Total revenue. Total revenue increased approximately $29.8 million, or 16.8%, to
$206.9 million in fiscal 2004 from $177.1 million for the comparable prior year period primarily due to the opening of seven additional restaurants throughout fiscal 2004 and full year inclusion of sales from the seven restaurants that opened in
fiscal 2003. Comparable restaurant sales increased 0.2% between years. In fiscal 2004, comparable food sales increased 1.2% while comparable alcohol sales decreased 2.3%. The average guest check in our dining room, excluding alcoholic beverages, was
approximately $13.27 for fiscal 2004 versus $13.03 for fiscal 2003, or a 1.8% increase. During fiscal 2004, food sales and alcoholic beverage sales represented 71.3% and 28.7% of our total food and beverage sales, respectively. During fiscal 2003,
food and alcoholic beverage sales represented 70.0% and 30.0% of our total food and beverage sales, respectively.



Cost of sales and operating expenses



Product costs. Product costs increased by $8.3 million, or 16.4%, to $58.9 million in fiscal 2004 from $50.6 million in the prior year. Product
costs as a percentage of restaurant sales decreased to 28.5% for fiscal 2004 compared to 28.7% for fiscal 2003 due largely to recipe modifications and increased vendor rebates partially offset by rising costs for several commodities, particularly
proteins, dairy and higher beer and alcohol costs.



Labor
costs. Labor costs increased by $9.6 million, or 16.6%, to $67.3 million in fiscal 2004 from $57.7 million in the prior year. Labor costs as a percentage of restaurant sales decreased to 32.6% in fiscal 2004 from 32.7% in fiscal 2003. Lower
staff and management costs in fiscal 2004 resulted from cost cutting initiatives which were offset by insurance costs.



Other operating expense. Other operating expense increased $3.5 million, or 14.0%, to $28.5 million in fiscal 2004 from $25.0 million in the prior
year. Operating expense as a percentage of restaurant sales decreased to 13.8% in fiscal 2004 from 14.1% in fiscal 2003. The decrease was due to lower janitorial costs and credit card fees partially offset by higher utility costs.



Occupancy.Occupancy expense increased $2.9 million, or 17.1%, to
$19.9 million in fiscal 2004 from $17.0 million in the prior year primarily due to the opening of new restaurants. Occupancy expense as a percentage of restaurant sales was 9.6% in both fiscal 2004 and fiscal 2003.



Pre-opening expenses.Pre-opening expenses were $1.9 million for
fiscal 2004 and $3.1 million for the comparable prior year period. Pre-opening expenses as a percentage of restaurant sales were 0.9% for fiscal 2004 and 1.8% for fiscal 2003. Pre-opening expenses have historically been approximately $0.4 million
per location. We opened seven restaurants in both fiscal 2004 and fiscal 2003. The average restaurant pre-opening cost was significantly lower in 2004 versus 2003 because of the timing of openings, openings occurring in existing markets, and
improved management of the expenses.



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General and administrative expenses.General and administrative expenses increased $1.2 million, or 11.4%, to
$11.7 million in fiscal 2004 from $10.5 million in the comparable prior year period. The increase was the result of higher personnel costs to support growth, bonus expense and computer related costs. The increase was partially offset by lower hiring
and recruiting expenses as well as $160,000 of expenses related to terminated projects and litigation settlement costs of $441,000 incurred in the prior year. General and administrative expenses as a percentage of total revenue decreased to 5.7% for
fiscal 2004 from 5.9% in fiscal 2003 as a result of economies of scale associated with higher revenues.



Depreciation and amortization.Depreciation and amortization expense increased $2.2 million, or 28.6%, to $9.9 million for fiscal 2004 from $7.7 million in the
prior year primarily due to an increase in assets associated with the opening of new restaurants. Depreciation and amortization expense as a percentage of restaurant sales increased to 4.8% in fiscal 2004 from 4.3% in fiscal 2003 due to lower
average restaurant revenues associated with new restaurants.



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



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



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



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



Income before income taxes. Income before income taxes increased $2.1 million, or
72.4%, to $5.0 million for fiscal 2004 from $2.9 million in the comparable prior year period for the reasons described herein.



Income tax expense (benefit). For fiscal 2004, we recorded an income tax expense of $0.7 million, or an effective income tax rate of 14.5%. Although we recognized
an income tax expense of 14.5%, we anticipate paying income taxes at an effective tax rate of only 6% because of our ability to utilize net operating loss carryforwards to offset taxable federal income. In fiscal 2003, we recorded an income tax
benefit of $15.1 million reflecting a $16.8 million decrease in deferred tax asset valuation allowance.



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Liquidity and capital resources



As of July 3, 2005, our cash balance was $2.7 million. Our cash balance and working capital needs are generally low, as
sales are made for cash or through credit cards that are quickly converted to cash, purchases of food and supplies and other operating expenses are generally paid within 30 to 60 days after receipt of invoices and labor costs are paid bi-weekly. The
timing of our sales collections and vendor and labor payments are consistent with other companies engaged in the restaurant industry. Our net working capital increased by $2.4 million in fiscal 2005 primarily as a result of an improvement in our
cash position of $1.3 million and increase in prepaid expenses in fiscal 2005 by $1.4 million due to the timing of payment of our rents.



For fiscal years 2005, 2004 and 2003, we generated cash flow from operating activities of $19.8 million, $21.2 million and $16.5 million, respectively.
The decreased cash flow from operations in 2005 versus 2004 was primarily due to decreased cash from working capital changes and reduced proceeds from tenant improvement allowances. The increased cash flow from operating activities in 2004 versus
2003 was largely due to our improved profitability and, to a smaller extent, due to increased cash from working capital changes. Proceeds from tenant improvement allowances in the amount of $3.0 million, $4.1 million and $6.4 million in fiscal years
2005, 2004 and 2003, respectively, also contributed significantly 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 3, 2005, we had $52.8 million of such carryforwards and credits available through
2025 to offset federal taxes. We expect to fully utilize these carryforwards and credits in the next seven to ten years.



A significant portion of our cash flow generated from operating activities in each of the last three fiscal years has been invested in capital
expenditures, the majority of which was for the construction of new restaurants. We opened four new restaurants in fiscal 2005 and seven new restaurants in both fiscal 2004 and fiscal 2003. The following table, in thousands, details our capital
expenditures for the last three fiscal years.



|                                                       |  |                   |        |              |   |              |  |   |       
|------------------------------------------------------ |  | ----------------- | ------ | ------------ | - | ------------ |  | - | ------
|                                                       |  | Fiscal Year Ended
|                                                       |  | July 3,2005       |        | June 27,2004 |   | June 29,2003
|New store construction                                 |  | $                 | 12,747 |              | $ | 11,803       |  | $ | 21,708
|Existing store remodel and refurbishment               |  |                   | 2,841  |              |   | 2,244        |  |   | 2,373 
|Corporate related capital expenditures                 |  |                   | 340    |              |   | 393          |  |   | 369   
|Purchase of equipment previously under operating lease |  |                   |       |              |   | 1,422        |  |   |      
|                                                       |  |                   |        |              |   |              |  |   |       
|Purchase of property and equipment                     |  | $                 | 15,928 |              | $ | 15,862       |  | $ | 24,450
|                                                       |  |                   |        |              |   |              |  |   |       



Total capital
expenditures for fiscal year 2006 are anticipated to range from approximately $8 million to $13 million depending on the amount of capital expenditures for new restaurants. These expenditures will primarily be for the construction of at least two
and up to four new restaurants expected to open in fiscal 2006, construction for certain restaurants expected to open in early fiscal 2007 and for upgrades to existing restaurants. We review our capital expenditures budget on a monthly basis and
amounts are subject to change. We anticipate receiving cash for tenant improvement allowances of approximately $2.0 million for fiscal 2006.



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In November 2004, we entered into an agreement with AEI Fund Management, Inc. (AEI) for the
development and sale/leaseback financing up to $50.0 million. At July 3, 2005, we had not completed any restaurants under this commitment. The agreement expires in October 2006. The funding of this build-to-suit facility is subject to various
pre-closing conditions.



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



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



In fiscal 2005, 2004 and fiscal 2003, we elected to prepay $1.0 million,
$15.2 million and $5.2 million, respectively, of our existing debt to reduce our annual interest costs. The funds to prepay the debt came from excess cash, the $15.0 million issuance of convertible notes in fiscal 2003 and borrowings under the new
$25.0 million senior secured bank credit facility obtained in fiscal 2004. No debt extinguishment costs were associated with the fiscal 2005 prepayment. Prepayment penalties and a write-off of unamortized deferred financing fees totaling $587,000
and $290,000 were recorded in fiscal 2004 and fiscal 2003, respectively, as a result of prepaying the debt before its scheduled maturity.



In March 2004, we obtained a three-year $25.0 million senior secured credit facility with a new lender, LaSalle Bank. We initially used a portion of the
facility to refinance certain of our existing debt and the facility may also be used to support growth and general working capital needs and provide up to $5.0 million for the issuance of letters of credit. The facility is secured by a blanket lien
on all personal assets and real property of the Company. Borrowings under the facility will bear interest depending on a total funded debt to EBITDA ratio and will range from prime to prime plus 50 basis points or, if elected by us, LIBOR plus 200
to 300 basis points. Total funded debt is defined as all indebtedness of the consolidated entities, including senior and subordinated debt, capital lease obligations and contingent liabilities. We paid an up-front fee of $188,000 and are required to
pay an annual unused commitment fee of 37.5 to 50 basis points.



The credit facility limits the opening of new company owned restaurants to a maximum of twenty-four over a three-year period and also limits the amount of dividends and/or stock repurchases. As of July 3, 2005, the Company had no
outstanding borrowings under this facility and had placed letters of credit of $2.6 million under the facility with $22.3 million available for additional borrowing.



Outstanding borrowings under the facility may be converted to a five-year term loan if the ratio of senior debt to EBITDA
exceeds specified levels. The facility requires the Company to maintain a minimum fixed charge coverage ratio and tangible net worth level and not exceed certain thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios.
EBITDA is defined in the agreement 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, and (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;
minus (b) without duplication, extraordinary gains, in each case as



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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 3, 2005, we were in compliance with all debt
covenants and financial ratios contained in the notes and the senior secured credit facility. This facility has four financial ratios that measure our fixed charge coverage ratio, borrowers total funded debt to EBITDA, total senior debt to
EBITDA and minimum tangible net worth.



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 credit facility with LaSalle Bank, please refer to the information provided
under Note 7 Long-term Debt, to the accompanying consolidated financial statements.



During fiscal 2005, 2004 and 2003, we expended approximately $1.4 million, $0.8 million and $1.0 million for settlements and on-going legal costs related
to the predecessor company matters. We believe that such costs in fiscal 2006 will not be significant and 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 ($22.3 million available at July 3, 2005) will be sufficient to fund our operations, debt repayment and expansion at least through the end of fiscal 2006. However, changes in our operating plans, acceleration of our
expansion plans, lower than anticipated sales, increased expenses or other events, including those described in Item 1 Business-Risk Factors, may cause us to seek additional debt or equity financing on an accelerated basis. Additional
financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Any additional equity financing may be
dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate or grow our business.



Contractual obligations and commitments



Payments, including interest, due by period as of July 3, 2005 (in
000s)



|                         |  |       |         |                   |   |                    |  |                    |        |                 |   |        |  |   |        
|------------------------ |  | ----- | ------- | ----------------- | - | ------------------ |  | ------------------ | ------ | --------------- | - | ------ |  | - | -------
|Contractual Obligations  |  | Total |         | One year and less |   | Two to three years |  | Four to five years |        | Afterfive years
|Operating leases         |  | $     | 218,788 |                   | $ | 16,007             |  | $                  | 32,889 |                 | $ | 33,484 |  | $ | 136,408
|Long-term debt           |  |       | 17,213  |                   |   | 916                |  |                    | 16,297 |                 |   |       |  |   |       
|Letters of credit        |  |       | 2,606   |                   |   | 2,606              |  |                    |       |                 |   |       |  |   |       
|Construction commitments |  |       | 246     |                   |   | 246                |  |                    |       |                 |   |       |  |   |       
|Royalties                |  |       | 19,788  |                   |   | 355                |  |                    | 712    |                 |   | 764    |  |   | 17,957 
|                         |  |       |         |                   |   |                    |  |                    |        |                 |   |        |  |   |        
|                         |  | $     | 258,641 |                   | $ | 20,130             |  | $                  | 49,898 |                 | $ | 34,248 |  | $ | 154,365
|                         |  |       |         |                   |   |                    |  |                    |        |                 |   |        |  |   |        



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 term. Our restaurant leases also contain provisions that require additional rent payments based on sales



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performance and the payment of common area maintenance charges and real estate taxes. Amounts in this table do not reflect any of these additional amounts.



Our long-term debt is principally comprised of a $15.0 million
issuance of 5.5% convertible notes due December 2007. 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, we may redeem some or all of the notes at par plus accrued and unpaid interest. All of the notes will be automatically converted, at our option, into shares of common stock at the then effective
conversion price if the closing price of the common stock exceeds 150% of the then effective conversion price for any 15 out of 20 consecutive trading days at any time within three years after the first issuance date of the notes. There are no
assurances that the convertible debt holders will convert their debt into common shares prior to December 2007, nor are there any assurances that the stock price will rise, allowing us to automatically convert the debt. If the debt is not converted
it may be necessary for us to seek additional financing when this debt matures. 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. Portions of such contracts not completed at July 3, 2005 as stated above were not reflected as assets or liabilities in our consolidated financial statements.



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)



Future Application of Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (Revised),
Share-Based Payment. SFAS No. 123R revises SFAS No. 123, Accounting for Stock-Based Compensation and generally requires the cost associated with employee services received in exchange for an award of equity instruments be
measured based on the grant-date fair value of the award and recognized in the financial statements over the period during which employees are required to provide service in exchange for the award. SFAS No. 123R also provides guidance on how to
determine the grant-date fair value for awards of equity instruments as well as alternative methods of adopting its requirements. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2005 which for us is our first quarter
of fiscal 2006. As disclosed in Note 1 of notes to the consolidated financial statements, based on the current assumptions and calculations used, had we recognized compensation expense based on the fair value of awards of equity instruments, net
earnings would have been reduced by approximately $921,000 $591,000 and $355,000 for fiscal 2005, 2004 and 2003, respectively. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R and have not determined whether
the adoption will result in future amounts similar to the current pro forma disclosures under SFAS No. 123.



Our analysis indicated and we do not believe that the implementation of SFAS No. 123R will result in any technical violations of the financial covenants
under our debt agreements.



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Impact of inflation



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



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 2005 and 2004, our relative sales were highest in our second quarter (October through December), followed by our third quarter (January through March), then by our fourth quarter (April through
June). Our first quarter (July through September) recorded the lowest relative sales for those years. Factors influencing sales variability in addition to those noted above include the frequency and popularity of sporting events, holidays (including
which day of the week the holiday occurs) and weather.



|Item 7A. | Quantitative and Qualitative Market Risk Disclosures.
|-------- | -----------------------------------------------------



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



At July 3, 2005, we were exposed to interest rate fluctuations on
approximately $0.1 million of notes payable carrying variable interest rates. A hypothetical one hundred basis point increase in interest rates for these notes payable would increase our annual interest expense by approximately $1,400.



We have also been subject to interest rate market risk for short-term
invested cash and cash equivalents. The principal of such invested funds would not be subject to fluctuating value because of their highly liquid short-term nature. As of July 3, 2005, we had no 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 agreements for the products we use most extensively. Also, we believe that
our commodity cost risk is diversified as many of our food products are available from several sources and we have the ability to modify product recipes or vary our menu items offered. Historically, we have also been able to increase certain menu
prices in response to food commodity price increases and believe the opportunity may exist in the future. To compensate for a hypothetical price increase of 10% for food and beverages, we would need to increase prices charged to our guests by an
average of approximately 2.9%. We have not used financial instruments to hedge our commodity product prices.



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|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------



The information required under this Item 8 is set forth on pages F-1 through F-35 of this Report.



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



None.



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



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or
submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commissions rules and forms, and that information
is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure. 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 (the Exchange Act)) as of July 3, 2005, 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 3, 2005.



During the quarter ended April 3, 2005, we effected material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) to remediate internal control deficiencies related to lease accounting by restating certain financial statements and modifying certain internal lease accounting related policies and procedures. Also, during the
quarter ended July 3, 2005, we effected material changes in our internal control over financial reporting to remediate internal control deficiencies related to inadequate accounting and financial reporting staffing by hiring a controller on May 31,
2005. Please refer to our reports on Form 10-Q for these quarters for further detail.



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 Form 10-K.



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PART III



|Item 10. | Directors and Executive Officers of the Registrant.
|-------- | ---------------------------------------------------



Part of the information required by this Item is incorporated herein by reference to the information from the section captioned Election of
Directors contained in the Proxy Statement for the Companys Annual Stockholders Meeting to be held on or about December 1, 2005 and to be filed with the Securities and Exchange Commission within 120 days of July 3, 2005.



Our executive officers include the following persons:



|                     |  |     |  |                                                      
|-------------------- |  | --- |  | -----------------------------------------------------
|Name                 |  | Age |  | Positions                                            
|Michael P. ODonnell |  | 49  |  | Chairman, President and Chief Executive Officer      
|Donna L. Depoian     |  | 45  |  | Vice President, Secretary and General Counsel        
|David J. Miller      |  | 54  |  | Vice President of Construction and Design            
|Richard Scanlan      |  | 46  |  | Vice President and Chief Operating Officer           
|David D. Womack      |  | 42  |  | Vice President, Treasurer and Chief Financial Officer

|
|



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



Michael
P. ODonnell. Mr. ODonnell was elected the Companys Chairman of the Board, Chief Executive Officer and President in March 2005. He has served on the Companys Board of Directors since September 2002. Mr. ODonnell most
recently served as the President, Chief Executive Officer and a member of the board of directors of Sbarro, Inc. from September 2003 to March 2005 and continues to serve as a director of Sbarro, Inc. From August 1998 through May 2002, he served in
various capacities for Outback Steakhouse, Inc., including as chief executive officer and as director for all new businesses of Outback Steakhouse including the following Outback joint ventures: Roys; Flemings; Carrabbas Italian Grill; and
Cheeseburger in Paradise.



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



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



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Richard Scanlan.Mr. Scanlan was appointed our vice president and chief operating officer in
August 2005. From November 2004 to August 2005, he was vice president of operations for Sbarro, Inc., where he was specifically responsible for creating and opening its new full service concept Carmelas. From February 2000 to
November 2004, he was senior director of operations for Hard Rock Café and from August 1997 to February 2000, Mr. Scanlan worked for Champps as a director of operations.



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 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.



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



The information required by this Item is incorporated by reference to the section captioned Executive Compensation contained in the Proxy
Statement for the Companys Annual Shareholders Meeting to be held on or about December 1, 2005 and to be filed with the Securities and Exchange Commission within 120 days of July 3, 2005.



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



The information required by this Item is incorporated by reference to the section captioned Principal and Management Shareholders contained in
the Proxy Statement for the Companys Annual Shareholders Meeting to be held on or about December 1, 2005 and to be filed with the Securities and Exchange Commission within 120 days of July 3, 2005.



|Item 13. | Certain Relationships And Related Transactions.
|-------- | -----------------------------------------------



The information required by this Item is incorporated by reference from the sections captioned Certain Relationships and Related Transactions
contained in the Proxy Statement for the Companys Annual Shareholders Meeting to be held on or about December 1, 2005 and to be filed with the Securities and Exchange Commission within 120 days of July 3, 2005.



|Item 14. | Independent Registered Public Accountant and Fees.
|-------- | --------------------------------------------------



The information required by this Item is incorporated by reference from the section captioned Audit and Other Fees contained in the Proxy
Statement for the Companys Annual Shareholders Meeting to be held on or about December 1, 2005 and to be filed with the Securities and Exchange Commission within 120 days of July 3, 2005.



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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                                                                                       |  | F-1
|                                                                                                                                                       | 
|Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting                                                   |  | F-2
|                                                                                                                                                       | 
|Report of Independent Registered Public Accounting Firm                                                                                                |  | F-4
|                                                                                                                                                       | 
|Consolidated Balance Sheets  As of July 3, 2005, and June 27, 2004                                                                                    |  | F-5
|                                                                                                                                                       | 
|Consolidated Statements of Operations - Fiscal years ended July 3, 2005, June 27, 2004 and June 29, 2003                                               |  | F-6
|                                                                                                                                                       | 
|Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income  Fiscal years ended July 3, 2005, June 27, 2004 and June 29, 2003 |  | F-7
|                                                                                                                                                       | 
|Consolidated Statements of Cash Flows - Fiscal years ended July 3, 2005, June 27, 2004 and June 29, 2003                                               |  | F-8
|                                                                                                                                                       | 
|Notes to Consolidated Financial Statements for the fiscal years ended July 3, 2005, June 27, 2004 and June 29, 2003                                    |  | F-9



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



Not applicable.



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



The exhibits listed in the accompanying Exhibit Index are filed as part of this 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, 2005
|Michael P. ODonnell                         |  |                          |  |  |  | 
|Chairman, President and Chief                |  |                          |  |  |  | 
|Executive Officer                            |  |                          |  |  |  | 
|                                             |  |                          |  | 
|By:                                          |  | /s/ David D. Womack      |  |  |  |  |  | Date: September 6, 2005
|David D. Womack                              |  |                          |  |  |  | 
|Vice President, Chief Financial              |  |                          |  |  |  | 
|Officer and 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 DonnellMichael P. ODonnell, Chairman of the Board |  |       |  | Date: September 6, 2005
|                                                                     |  |      
|/s/ Stephen F. EdwardsStephen F. Edwards, Director                   |  |       |  | Date: September 6, 2005
|                                                                     |  |      
|/s/ James GoodwinJames Goodwin, Director                             |  |       |  | Date: September 6, 2005
|                                                                     |  |      
|/s/ Ian HamiltonIan Hamilton, Director                               |  |       |  | Date: September 6, 2005
|                                                                     |  |      
|/s/ Karl OkamotoKarl Okamoto, Director                               |  |       |  | Date: September 6, 2005
|                                                                     |  |      
|/s/ Charles G. PhillipsCharles G. Phillips, Director                 |  |       |  | Date: September 6, 2005



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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.                                                                                                                                                                                                                          
|              | 
|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.                                                                          
|              | 
|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.                                                                                                                                         



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|       |  |                                                                                                                                                                                                                                                                                                                                                           
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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  |  | Multi-Site Sale Leaseback Agreement, dated November 23, 2004, by and between Champps Entertainment Inc. and AEI Fund Management, Inc., incorporated herein by reference to the Companys
Current Report on Form 8-K dated November 23, 2004.                                                                                                              
|       | 
|10.13* |  | Separation Agreement, dated March 2, 2005, by and between Champps Entertainment, Inc. and William H. Baumhauer, incorporated herein by reference to the Companys Current Report on Form
8-K dated March 2, 2005.                                                                                                                                         
|       | 
|10.14* |  | 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.                                                                              



49



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|       |  |                                                                                                                                                                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.15* |  | Separation Agreement, dated May 4, 2005, by and between Champps Entertainment, Inc. and Donnie N. Lamb, incorporated herein by reference to the Quarterly Report on Form 10-Q of Champps
Entertainment, Inc. for the quarter ended April 3, 2005.
|       | 
|10.16* |  | Employment Agreement, dated August 17, 2005, by and between Champps Entertainment, Inc. and Richard Scanlan, incorporated herein by reference to the Companys Current Report on Form 8-K
dated August 17, 2005.                                 
|       | 
|10.17* |  | 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.                                    
|       | 
|10.18* |  | Separation Agreement, dated September 1, 2005, by and between Champps Entertainment, Inc. and Frederick J. Dreibholz, incorporated herein by reference to the Companys Current Report on
Form 8-K dated September 2, 2005.                      
|       | 
|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 principal financial officer assessed the
effectiveness of the Companys internal control over financial reporting as of July 3, 2005. 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 3, 2005, 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.



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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. maintained effective internal control
over financial reporting as of July 3, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Champps Entertainment, Inc.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.



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##### Table of Contents

In our opinion, managements assessment that Champps Entertainment, Inc. maintained effective internal control over
financial reporting as of July 3, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, Champps Entertainment, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 3, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (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. and subsidiaries as of July 3, 2005 and June 27, 2004, 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 3, 2005, and our report dated September 6, 2005 expressed an
unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP



Denver, Colorado

September 6, 2005



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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 3, 2005 and June 27, 2004, 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 3, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.



We conducted our audits in accordance with 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 3, 2005 and June 27,
2004, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended July 3, 2005, 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 3, 2005, 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, 2005 expressed an unqualified opinion on managements assessment of and the effective operation of internal control over financial reporting.



/s/ KPMG LLP



Denver, Colorado

September 6, 2005



F-4



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##### Table of Contents



CHAMPPS ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

As of July 3, 2005 and June 27, 2004

(In
thousands, except share data)



|                                                                                                                                                               |  |             |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                               |  | July 3,2005 |         |   | June 27,2004 |  
|ASSETS                                                                                                                                                         |  |             |         |   |              |   |         |  
|Current assets:                                                                                                                                                |  |             |         |   |              |   |         |  
|Cash and cash equivalents (Note 1)                                                                                                                             |  | $           | 2,702   |   |              | $ | 1,449   |  
|Restricted cash (Note 1)                                                                                                                                       |  |             |        |   |              |   | 101     |  
|Accounts receivable (Note 1)                                                                                                                                   |  |             | 3,417   |   |              |   | 3,046   |  
|Inventories (Note 1)                                                                                                                                           |  |             | 4,467   |   |              |   | 4,394   |  
|Prepaid expenses and other current assets (Notes 1 and 2)                                                                                                      |  |             | 3,204   |   |              |   | 1,782   |  
|Deferred tax assets (Notes 1 and 8)                                                                                                                            |  |             | 3,263   |   |              |   | 2,825   |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Total current assets                                                                                                                                           |  |             | 17,053  |   |              |   | 13,597  |  
|Property and equipment, net (Notes 1 and 3)                                                                                                                    |  |             | 86,745  |   |              |   | 88,955  |  
|Goodwill                                                                                                                                                       |  |             | 5,069   |   |              |   | 5,069   |  
|Deferred tax assets (Notes 1 and 8)                                                                                                                            |  |             | 25,911  |   |              |   | 23,547  |  
|Other assets, net (Notes 1 and 4)                                                                                                                              |  |             | 2,533   |   |              |   | 2,581   |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Total assets                                                                                                                                                   |  | $           | 137,311 |   |              | $ | 133,749 |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                           |  |             |         |   |              |   |         |  
|Current liabilities:                                                                                                                                           |  |             |         |   |              |   |         |  
|Accounts payable                                                                                                                                               |  | $           | 4,772   |   |              | $ | 4,315   |  
|Accrued expenses (Notes 5 and 9)                                                                                                                               |  |             | 9,752   |   |              |   | 8,505   |  
|Current portion of long-term debt (Note 7)                                                                                                                     |  |             | 143     |   |              |   | 942     |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Total current liabilities                                                                                                                                      |  |             | 14,667  |   |              |   | 13,762  |  
|Long-term debt, net of current portion (Note 7)                                                                                                                |  |             | 14,506  |   |              |   | 17,621  |  
|Other long-term liabilities (Notes 5 and 9)                                                                                                                    |  |             | 32,077  |   |              |   | 27,358  |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Total liabilities                                                                                                                                              |  |             | 61,250  |   |              |   | 58,741  |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Commitments and contingencies (Notes 6 and 9)                                                                                                                  |  |             |         |   |              |   |         |  
|Shareholders equity (Notes 1, 10 and 11):                                                                                                                     |  |             |         |   |              |   |         |  
|Preferred stock ($.01 par value per share; authorized 5,000,000 shares; none issued)                                                                           |  |             |        |   |              |   |        |  
|Common stock ($.01 par value per share; authorized 30,000,000 shares; 13,507,909 and 13,285,253 shares issued at July 3, 2005 and June 27,
2004, respectively) |  |             | 135     |   |              |   | 133     |  
|Additional paid-in capital                                                                                                                                     |  |             | 91,917  |   |              |   | 90,393  |  
|Accumulated deficit                                                                                                                                            |  |             | (12,408 | ) |              |   | (12,159 | )
|Accumulated other comprehensive income                                                                                                                         |  |             |        |   |              |   | 224     |  
|Treasury stock, at cost (471,588 shares)                                                                                                                       |  |             | (3,583  | ) |              |   | (3,583  | )
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Total shareholders equity                                                                                                                                     |  |             | 76,061  |   |              |   | 75,008  |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  
|Total liabilities and shareholders equity                                                                                                                     |  | $           | 137,311 |   |              | $ | 133,749 |  
|                                                                                                                                                               |  |             |         |   |              |   |         |  



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 3, 2005, June 27, 2004 and June 29, 2003

(In thousands, except per share data)



|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|-------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------------ |  | - | ------- | -
|                                                   |  | Fiscal Year Ended |        
|                                                   |  | July 3,2005       |         |   | June 27,2004 |   | June 29,2003 | 
|Revenue                                            |  |                   |         |   |              |   |              |  |   |         |  
|Sales                                              |  | $                 | 217,735 |   |              | $ | 206,361      |  | $ | 176,520 |  
|Franchising and royalty, net                       |  |                   | 621     |   |              |   | 579          |  |   | 616     |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Total revenue                                      |  |                   | 218,356 |   |              |   | 206,940      |  |   | 177,136 |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Costs and expenses                                 |  |                   |         |   |              |   |              |  |   |         |  
|Cost of sales and operating expenses               |  |                   | 186,536 |   |              |   | 176,335      |  |   | 153,367 |  
|General and administrative expenses                |  |                   | 13,889  |   |              |   | 11,719       |  |   | 10,519  |  
|Depreciation and amortization                      |  |                   | 11,012  |   |              |   | 9,896        |  |   | 7,679   |  
|Severance                                          |  |                   | 655     |   |              |   |             |  |   |        |  
|Asset impairment charges                           |  |                   | 6,567   |   |              |   |             |  |   |        |  
|Other (income) expense                             |  |                   | (76     | ) |              |   | 135          |  |   | 262     |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Income (loss) from operations                      |  |                   | (227    | ) |              |   | 8,855        |  |   | 5,309   |  
|Other expense                                      |  |                   |         |   |              |   |              |  |   |         |  
|Interest expense and income, net                   |  |                   | 1,444   |   |              |   | 2,101        |  |   | 1,826   |  
|Expenses related to predecessor companies (Note 9) |  |                   | 358     |   |              |   | 1,171        |  |   | 282     |  
|Debt extinguishment costs (Note 7)                 |  |                   |        |   |              |   | 587          |  |   | 290     |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Income (loss) before income taxes (benefit)        |  |                   | (2,029  | ) |              |   | 4,996        |  |   | 2,911   |  
|Income tax expense (benefit)                       |  |                   | (1,780  | ) |              |   | 724          |  |   | (15,155 | )
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Net income (loss)                                  |  | $                 | (249    | ) |              | $ | 4,272        |  | $ | 18,066  |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Basic income (loss) per share (Note 11)            |  | $                 | (0.02   | ) |              | $ | 0.33         |  | $ | 1.44    |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Diluted income (loss) per share (Note 11)          |  | $                 | (0.02   | ) |              | $ | 0.33         |  | $ | 1.35    |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Basic weighted average common shares outstanding   |  |                   | 12,887  |   |              |   | 12,793       |  |   | 12,536  |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  
|Diluted weighted average common shares outstanding |  |                   | 12,887  |   |              |   | 13,000       |  |   | 13,683  |  
|                                                   |  |                   |         |   |              |   |              |  |   |         |  



See accompanying
notes to consolidated financial statements.



F-6



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##### Table of Contents



CHAMPPS ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY AND

COMPREHENSIVE INCOME

Fiscal Years Ended July 3, 2005, June 27, 2004 and June 29, 2003

(In thousands, except share data)



|                                                                                                         |  |              |  |        |     |                            |                |        |                     |  |        |                                        |   |  |   |      |   |  |         |                             |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------ | --- | -------------------------- | -------------- | ------ | ------------------- |  | ------ | -------------------------------------- | - |  | - | ---- | - |  | ------- | --------------------------- | - | ------ | - |  | - | ------ | -
|                                                                                                         |  |              |  |        |     | Additional Paid-in Capital |                |        | Accumulated Deficit |  |        | AccumulatedOtherCompre- hensive Income |   |  |   |      |   |  |         | TotalShare- holders Equity |  
|                                                                                                         |  | Common Stock |  |        |     |                            | Treasury Stock |        |                    
|                                                                                                         |  | Shares       |  | Amount |     |                            |                |        | Shares              |  | Amount |                                        |  
|Balance as of June 30, 2002                                                                              |  | 12,174,524   |  | $      | 122 |                            | $              | 81,546 |                     |  | $      | (34,497                                | ) |  | $ |     |   |  |        |                             | $ |       |   |  | $ | 47,171 |  
|Net income                                                                                               |  |             |  |        |    |                            |                |       |                     |  |        | 18,066                                 |   |  |   |     |   |  |        |                             |   |       |   |  |   | 18,066 |  
|Common shares issued (Note 11)                                                                           |  | 1,061,114    |  |        | 10  |                            |                | 4,956  |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 4,966  |  
|Income tax benefit of stock options exercised                                                            |  |             |  |        |    |                            |                | 2,087  |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 2,087  |  
|Fair value of common stock warrants issued (Note 10)                                                     |  |             |  |        |    |                            |                | 905    |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 905    |  
|Repurchase of common shares (Note 11)                                                                    |  |             |  |        |    |                            |                |       |                     |  |        |                                       |   |  |   |     |   |  | 471,588 |                             |   | (3,583 | ) |  |   | (3,583 | )
|Interest on loan for exercise of stock options (Note 15)                                                 |  |             |  |        |    |                            |                | (28    | )                   |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | (28    | )
|Repayment of loan for exercise of stock options (Note 15)                                                |  |             |  |        |    |                            |                | 350    |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 350    |  
|                                                                                                         |  |              |  |        |     |                            |                |        |                     |  |        |                                        |   |  |   |      |   |  |         |                             |   |        |   |  |   |        |  
|Balance as of June 29, 2003                                                                              |  | 13,235,638   |  |        | 132 |                            |                | 89,816 |                     |  |        | (16,431                                | ) |  |   |     |   |  | 471,588 |                             |   | (3,583 | ) |  |   | 69,934 |  
|Net income                                                                                               |  |             |  |        |    |                            |                |       |                     |  |        | 4,272                                  |   |  |   |     |   |  |        |                             |   |       |   |  |   | 4,272  |  
|Unrealized gains on equity securities, net of tax of $55                                                 |  |             |  |        |    |                            |                |       |                     |  |        |                                       |   |  |   | 224  |   |  |        |                             |   |       |   |  |   | 224    |  
|                                                                                                         |  |              |  |        |     |                            |                |        |                     |  |        |                                        |   |  |   |      |   |  |         |                             |   |        |   |  |   |        |  
|Total comprehensive income                                                                               |  |              |  |        |     |                            |                |        |                     |  |        |                                        |   |  |   |      |   |  |         |                             |   |        |   |  |   | 4,496  |  
|Common shares issued                                                                                     |  | 49,615       |  |        | 1   |                            |                | 254    |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 255    |  
|Income tax benefit of stock options exercised                                                            |  |             |  |        |    |                            |                | 9      |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 9      |  
|Interest on loan for exercise of stock options (Note 15)                                                 |  |             |  |        |    |                            |                | (2     | )                   |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | (2     | )
|Repayment of loan for exercise of stock options (Note 15)                                                |  |             |  |        |    |                            |                | 316    |                     |  |        |                                       |   |  |   |     |   |  |        |                             |   |       |   |  |   | 316    |  
|                                                                                                         |  |              |  |        |     |                            |                |        |                     |  |        |                                        |   |  |   |      |   |  |         |                             |   |        |   |  |   |        |  
|Balance as of June 27, 2004                                                                              |  | 13,285,253   |  |        | 133 |                            |                | 90,393 |                     |  |        | (12,159                                | ) |  |   | 224  |   |  | 471,588 |                             |   | (3,583 | ) |  |   | 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                                                                               |  | 13,507,909   |  | $      | 135 |                            | $              | 91,917 |                     |  | $      | (12,408                                | ) |  | $ |     |   |  | 471,588 |                             | $ | (3,583 | ) |  | $ | 76,061 |  
|                                                                                                         |  |              |  |        |     |                            |                |        |                     |  |        |                                        |   |  |   |      |   |  |         |                             |   |        |   |  |   |        |  



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 3, 2005, June 27, 2004 and June 29, 2003

(In thousands)



|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | ------------ |  | - | ------- | -
|                                                                                                    |  | Fiscal Year Ended |        
|                                                                                                    |  | July 3,2005       |         |   | June 27,2004 |   |         | June 29,2003 | 
|Cash flows from operating activities:                                                               |  |                   |         |   |              |   |         |              |  |   |         |  
|Net income (loss)                                                                                   |  | $                 | (249    | ) |              | $ | 4,272   |              |  | $ | 18,066  |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:            |  |                   |         |   |              |   |         |              |  |   |         |  
|Depreciation and amortization                                                                       |  |                   | 11,363  |   |              |   | 10,275  |              |  |   | 8,056   |  
|Amortization of notes payable discount                                                              |  |                   | 201     |   |              |   | 201     |              |  |   | 109     |  
|Asset impairment charges                                                                            |  |                   | 6,567   |   |              |   |        |              |  |   |        |  
|Loss on disposal of assets                                                                          |  |                   | 212     |   |              |   | 257     |              |  |   | 276     |  
|Gain on sale of security                                                                            |  |                   | (279    | ) |              |   |        |              |  |   |        |  
|Income tax benefit of stock options exercised                                                       |  |                   | 201     |   |              |   | 9       |              |  |   | 2,087   |  
|Interest on loan for exercise of stock options                                                      |  |                   |        |   |              |   | (2      | )            |  |   | (28     | )
|Deferred income tax expense                                                                         |  |                   | (2,747  | ) |              |   | 201     |              |  |   | (17,916 | )
|Changes in assets and liabilities:                                                                  |  |                   |         |   |              |   |         |              |  |   |         |  
|Accounts receivable                                                                                 |  |                   | 376     |   |              |   | (377    | )            |  |   | 1       |  
|Inventories                                                                                         |  |                   | (73     | ) |              |   | (800    | )            |  |   | (893    | )
|Prepaid expenses and other current assets                                                           |  |                   | (1,422  | ) |              |   | 4,284   |              |  |   | (4,423  | )
|Accounts payable                                                                                    |  |                   | 457     |   |              |   | (1,088  | )            |  |   | 573     |  
|Accrued expenses                                                                                    |  |                   | 1,247   |   |              |   | (983    | )            |  |   | 3,949   |  
|Other assets                                                                                        |  |                   | 9       |   |              |   | 119     |              |  |   | 7       |  
|Other long-term liabilities                                                                         |  |                   | 1,007   |   |              |   | 761     |              |  |   | 251     |  
|Proceeds from tenant improvement allowances                                                         |  |                   | 2,965   |   |              |   | 4,050   |              |  |   | 6,350   |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Net cash provided by operating activities                                                           |  |                   | 19,835  |   |              |   | 21,179  |              |  |   | 16,465  |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Cash flows from investing activities:                                                               |  |                   |         |   |              |   |         |              |  |   |         |  
|Purchase of property and equipment                                                                  |  |                   | (15,928 | ) |              |   | (15,862 | )            |  |   | (24,450 | )
|Proceeds from disposal of assets                                                                    |  |                   | 35      |   |              |   | 54      |              |  |   | 139     |  
|Restricted cash balances                                                                            |  |                   | 101     |   |              |   | 640     |              |  |   | 289     |  
|Repayment of loan for exercise of stock options                                                     |  |                   |        |   |              |   | 316     |              |  |   | 350     |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Net cash used in investing activities                                                               |  |                   | (15,792 | ) |              |   | (14,852 | )            |  |   | (23,672 | )
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Cash flows from financing activities:                                                               |  |                   |         |   |              |   |         |              |  |   |         |  
|Proceeds from issuance of common stock                                                              |  |                   | 1,325   |   |              |   | 255     |              |  |   | 4,966   |  
|Proceeds from issuance of convertible subordinated notes and common stock warrants (Notes 7 and 10) |  |                   |        |   |              |   |        |              |  |   | 15,000  |  
|Issuance costs for subordinated convertible notes and common stock warrants (Notes 7 and 10)        |  |                   |        |   |              |   |        |              |  |   | (1,375  | )
|Repurchase of common stock (Note 11)                                                                |  |                   |        |   |              |   |        |              |  |   | (3,583  | )
|Repayment of long-term debt and capitalized lease obligations                                       |  |                   | (19,115 | ) |              |   | (21,038 | )            |  |   | (7,889  | )
|Proceeds from long-term debt                                                                        |  |                   | 15,000  |   |              |   | 10,850  |              |  |   | 500     |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Net cash provided by (used in) financing activities                                                 |  |                   | (2,790  | ) |              |   | (9,933  | )            |  |   | 7,619   |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Net change in cash and cash equivalents                                                             |  |                   | 1,253   |   |              |   | (3,606  | )            |  |   | 412     |  
|Cash and cash equivalents, beginning of period                                                      |  |                   | 1,449   |   |              |   | 5,055   |              |  |   | 4,643   |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Cash and cash equivalents, end of period                                                            |  | $                 | 2,702   |   |              | $ | 1,449   |              |  | $ | 5,055   |  
|                                                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Supplemental disclosures of cash flow information:                                                  |  |                   |         |   |              |   |         |              |  |   |         |  
|Cash paid during the period for:                                                                    |  |                   |         |   |              |   |         |              |  |   |         |  
|Interest, net of amount capitalized                                                                 |  | $                 | 935     |   |              | $ | 1,851   |              |  | $ | 1,441   |  
|Income taxes, net of refunds                                                                        |  |                   | 679     |   |              |   | 467     |              |  |   | 541     |  



See accompanying
notes to consolidated financial statements.



F-8



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##### Table of Contents



CHAMPPS ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended July 3, 2005, June 27, 2004 and June 29, 2003



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). At July 3, 2005, the Company operated one business segment. The Companys principal business activity is to own, operate and franchise Champps casual dining restaurants that
serve customers in upscale restaurant settings in 23 states throughout the United States with larger concentrations of restaurants in the upper Midwest, mid-Atlantic and Texas.



Basis of Presentation



The accompanying consolidated financial statements include the accounts of the Champps 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 3, 2005, June 27, 2004 and June 29, 2003, are referred to as fiscal 2005, 2004 and 2003, respectively. Fiscal 2005 consisted of 53 weeks and
fiscal 2004 and fiscal 2003 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
Fuddruckers sale in 1998. Actual results could differ from those estimates.



Cash and Cash Equivalents and Restricted Cash



Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value due to their short-term
maturities. The Company placed certificates of deposit to serve as cash collateral for stand-by letters of credit in the amount of $101,000 at June 27, 2004.



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##### Table of Contents

Accounts Receivable



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



Concentration of Credit Risk



Financial instruments that potentially subject the Company to a concentration of credit risk are cash and cash equivalents, restricted cash and accounts
receivable. The Company maintains its day-to-day operating cash, temporary excess cash and restricted cash balances with 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 3,2005 |       | June 27,2004
|Food and liquor products |  | $           | 1,453 |              | $ | 1,341
|Smallwares and supplies  |  |             | 3,014 |              |   | 3,053
|                         |  |             |       |              |   |      
|Total inventory          |  | $           | 4,467 |              | $ | 4,394
|                         |  |             |       |              |   |      



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.



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##### Table of Contents

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. Interest capitalized is based upon the weighted-average of accumulated expenditures. The interest capitalization period commences when expenditures are made to prepare an asset for its intended use and interest costs are incurred. The
interest capitalization period ends when the restaurant opens or when the asset is substantially complete and ready for service. The Company utilizes an interest rate based upon the weighted average of the rates applicable to 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 our 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 has an asset retirement policy and any assets that are replaced are retired. In fiscal years 2005, 2004 and 2003, the Company capitalized $2.8 million, $2.2 million and $2.4 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 2005, 2004 and 2003, the
Company recorded repair and maintenance expense of $4.1 million, $3.7 million and $3.4 million, respectively. These repairs and maintenance costs generally relate to repairs to existing equipment, fixtures or facilities (e.g. electrical, plumbing,
refrigeration, air conditioning, heating, painting, tile work, roof repairs and wood repairs).



Property and Equipment



Property and equipment are stated at cost. Property and equipment 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.



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##### Table of Contents

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.



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. 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 technique in
determining fair value. The present value technique utilizes a single set of estimated cash flows and a single interest rate that is commensurate with the risk of the operation.



The Company evaluates impairment of goodwill and other unidentifiable intangible assets in accordance with SFAS No. 142
Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, the Company is required to assess 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.



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##### Table of Contents

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.



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. Revenues from our gift cards are recognized upon redemption. Until
redemption of the gift cards, outstanding balances on such cards are included in other accrued expenses on our accompanying consolidated balance sheets.



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##### Table of Contents

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 $621,000, $579,000 and $616,000 during fiscal year 2005, 2004 and 2003, 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 2005, 2004 or 2003.



Advertising Costs



Advertising costs are expensed as incurred. Advertising expenses were $2.9 million, $2.3 million and $2.2 million in fiscal 2005, 2004 and 2003,
respectively.



Pre-opening Expense



Pre-opening costs are expensed as incurred and include the direct and
incremental costs incurred in connection with the commencement of each restaurants operations. Pre-opening costs are principally comprised of training-related costs. Pre-opening expenses were $1.5 million, $1.9 million and $3.1 million in
fiscal years 2005, 2004 and 2003, respectively.



Income Taxes



Income taxes are accounted for under the asset and
liability method. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the carrying value for financial reporting purposes and the tax basis of assets and liabilities.
Deferred tax assets and liabilities are recorded using the enacted tax rates expected to apply to taxable income in the years in which such differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
resulting from a change in tax rates is recognized as a component of income tax expense (benefit) in the period that such change occurs. Net operating loss and other credit carryforwards, including FICA tip tax credits 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.



Accounting for Stock-Based Compensation



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



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##### Table of Contents

The Company maintains an employee stock purchase plan (the purchase plan) under which the
employees of the Company may purchase stock at a discount. The purchase plan requires our employees to make a contribution commitment prior to the start of a quarter and allows the employee to purchase stock at the lower of the closing price at the
beginning of the quarter or the end of the quarter less a 10 percent discount.



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



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



|                                                                                                                                                                   |  |             |        |   |              |   |       |              |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ------ | - | ------------ | - | ----- | ------------ |  | - | ------ | -
|                                                                                                                                                                   |  | July 3,2005 |        |   | June 27,2004 |   |       | June 29,2003 | 
|Net income (loss), as reported                                                                                                                                     |  | $           | (249   | ) |              | $ | 4,272 |              |  | $ | 18,066 |  
|Add: Stock-based employee compensation expense included in net income, net of related tax effects                                                                  |  |             |       |   |              |   |      |              |  |   |       |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects of
$640, $411 and $247 |  |             | (921   | ) |              |   | (591  | )            |  |   | (355   | )
|                                                                                                                                                                   |  |             |        |   |              |   |       |              |  |   |        |  
|Pro forma net income (loss)                                                                                                                                        |  | $           | (1,170 | ) |              | $ | 3,681 |              |  | $ | 17,711 |  
|                                                                                                                                                                   |  |             |        |   |              |   |       |              |  |   |        |  
|Income (loss) per share:                                                                                                                                           |  |             |        |   |              |   |       |              |  |   |        |  
|Basic - as reported                                                                                                                                                |  | $           | (0.02  | ) |              | $ | 0.33  |              |  | $ | 1.44   |  
|Basic - pro forma                                                                                                                                                  |  |             | (0.09  | ) |              |   | 0.29  |              |  |   | 1.41   |  
|                                                                                                                                                                   |  |             |       
|Diluted - as reported                                                                                                                                              |  | $           | (0.02  | ) |              | $ | 0.33  |              |  | $ | 1.35   |  
|Diluted - pro forma                                                                                                                                                |  |             | (0.09  | ) |              |   | 0.28  |              |  |   | 1.32   |  



The fair value of each
stock option granted in fiscal years 2005, 2004 and 2003 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 and the stock purchased under the purchase plan
for each year:



|     |  |                               |   |  |                      |  |            |   |  |                |  
|---- |  | ----------------------------- | - |  | -------------------- |  | ---------- | - |  | -------------- | -
|     |  | WeightedAverage RiskFree Rate |   |  | AverageExpected Life |  | Volatility |   |  | Dividend Yield |  
|2003 |  | 1.40                          | % |  | 2.4 Years            |  | 88.0       | % |  | 0.00           | %
|     |  |                               |   | 
|2004 |  | 2.06                          | % |  | 2.8 Years            |  | 98.0       | % |  | 0.00           | %
|     |  |                               |   | 
|2005 |  | 2.71                          | % |  | 2.8 Years            |  | 97.0       | % |  | 0.00           | %



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 2004 was comprised of unrealized investment gains on available for sale securities. These securities were sold in fiscal 2005.



Reclassifications



The Company provides discounted meals and beverages to guests for promotional purposes and discounted meals to its
employees. In the past, these discounts have been included in restaurant sales, with an offsetting charge to other operating expense. In 2005, the Company decided that these amounts should be reported on a net basis and, accordingly, has eliminated
such amounts for all periods presented. This reclassification had the effect of decreasing previously reported sales and expenses by approximately $4.6 million in fiscal 2004 and $3.6 million in fiscal 2003. These reclassifications had no effect on
net income.



Future Application of Accounting Standards



In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, Inventory Costs. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilities expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 151 will have a material impact on its financial statements.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-Monetary Assets. SFAS No. 153 eliminates the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.



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##### Table of Contents

In December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based Payment. SFAS No. 123R revises SFAS No.
123, Accounting for Stock-Based Compensation and generally requires the cost associated with employee services received in exchange for an award of equity instruments be measured based on the grant-date fair value of the award and
recognized in the financial statements over the period during which employees are required to provide service in exchange for the award. SFAS No. 123R also provides guidance on how to determine the grant-date fair value for awards of equity
instruments as well as alternative methods of adopting its requirements. SFAS No. 123R is effective for annual reporting periods beginning after June 15, 2005. As disclosed in Note 1, based on the current assumptions and calculations used, had the
Company recognized compensation expense based on the fair value of awards of equity instruments, net earnings would have been reduced by approximately $921,000, $591,000, and $355,000 for fiscal 2005, 2004 and 2003, respectively. The Company has not
yet determined the method of adoption or the effect of adopting SFAS No. 123R and have not determined whether the adoption will result in future amounts similar to the current pro forma disclosures under SFAS No. 123. Our analysis indicated and we
do not believe that the implementation of SFAS No. 123R will result in any technical violations of the financial covenants under our debt agreements.



2. Prepaid Expenses and Other Current Assets



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



|                                                   |  |             |       |              |   |      
|-------------------------------------------------- |  | ----------- | ----- | ------------ | - | -----
|                                                   |  | July 3,2005 |       | June 27,2004
|Prepaid rents, real estate taxes and related costs |  | $           | 1,582 |              | $ | 3    
|Prepaid insurance                                  |  |             | 895   |              |   | 981  
|Prepaid licenses and permits                       |  |             | 219   |              |   | 187  
|Prepaid contracts and other                        |  |             | 508   |              |   | 611  
|                                                   |  |             |       |              |   |      
|                                                   |  | $           | 3,204 |              | $ | 1,782
|                                                   |  |             |       |              |   |      



Prepaid rents, real estate taxes and
related costs at July 3, 2005 consisted of July 2005 costs paid in advance.



3. Property and Equipment



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



|                                          |  |             |         |   |              |   |         |  
|----------------------------------------- |  | ----------- | ------- | - | ------------ | - | ------- | -
|                                          |  | July 3,2005 |         |   | June 27,2004 |  
|Land                                      |  | $           | 2,923   |   |              | $ | 2,923   |  
|Buildings & leasehold improvements        |  |             | 80,107  |   |              |   | 76,704  |  
|Software                                  |  |             | 1,329   |   |              |   | 1,268   |  
|Equipment                                 |  |             | 47,857  |   |              |   | 46,777  |  
|Construction in progress                  |  |             | 3,831   |   |              |   | 2,222   |  
|                                          |  |             |         |   |              |   |         |  
|                                          |  |             | 136,047 |   |              |   | 129,894 |  
|Accumulated depreciation and amortization |  |             | (49,302 | ) |              |   | (40,939 | )
|                                          |  |             |         |   |              |   |         |  
|Total property and equipment              |  | $           | 86,745  |   |              | $ | 88,955  |  
|                                          |  |             |         |   |              |   |         |  



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##### Table of Contents

In fiscal 2005, the Company recorded a $6,567,000 asset impairment charge to write-down the carrying
value of four restaurant assets to fair value. The Company determined fair value of the impaired assets utilizing the net salvage value method. The impairment resulted from managements determination that the restaurants future cash flow
was not sufficient to cover its asset carrying value. The asset impairment was recorded as a reduction of cost. The Company would have recorded additional depreciation expense of $225,000 in fiscal 2005 for the assets which were written down with
the asset impairment charge.



General and administrative
expense on the consolidated statement of operations included $351,000, $379,000 and $377,000 of depreciation and amortization expense for the years ended July 3, 2005, June 27, 2004 and June 29, 2003, 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).



4. Other Assets, Net



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



|                              |  |             |       |              |   |      
|----------------------------- |  | ----------- | ----- | ------------ | - | -----
|                              |  | July 3,2005 |       | June 27,2004
|Deferred financing costs      |  | $           | 968   |              | $ | 1,368
|Liquor licenses               |  |             | 808   |              |   | 745  
|Available for sale securities |  |             |      |              |   | 279  
|Long-term deposits            |  |             | 112   |              |   | 90   
|Leasehold rights              |  |             | 606   |              |   |     
|Other                         |  |             | 39    |              |   | 99   
|                              |  |             |       |              |   |      
|                              |  | $           | 2,533 |              | $ | 2,581
|                              |  |             |       |              |   |      



Available for sale
securities decreased as the result of the sale of the securities in July 2004 for $294,000. The increase in leasehold rights resulted from the Companys purchase of a leasehold interest for a location it previously subleased.



Accumulated amortization for other assets, net totaled $1,180,000 and
$990,000 at July 3, 2005 and June 27, 2004, respectively.



5. Accrued
Expenses and Other Long-Term Liabilities



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



|                                                                  |  |             |       |              |   |      
|----------------------------------------------------------------- |  | ----------- | ----- | ------------ | - | -----
|                                                                  |  | July 3,2005 |       | June 27,2004
|Salaries, wages, related taxes and benefits                       |  | $           | 3,333 |              | $ | 2,721
|Accrued taxes, predominantly sales and property                   |  |             | 2,678 |              |   | 2,291
|Accrued insurance                                                 |  |             | 1,006 |              |   | 1,041
|Predecessor obligations for legal and insurance matters (Note 10) |  |             |      |              |   | 1,015
|Accrued severance (Note 12)                                       |  |             | 482   |              |   |     
|Accrued utilities                                                 |  |             | 561   |              |   | 466  
|Gift card/certificate liability                                   |  |             | 1,033 |              |   | 446  
|Other                                                             |  |             | 659   |              |   | 525  
|                                                                  |  |             |       |              |   |      
|                                                                  |  | $           | 9,752 |              | $ | 8,505
|                                                                  |  |             |       |              |   |      



F-18



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##### Table of Contents

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



|                                |  |             |        |              |   |       
|------------------------------- |  | ----------- | ------ | ------------ | - | ------
|                                |  | July 3,2005 |        | June 27,2004
|Tenant improvement allowances   |  | $           | 21,129 |              | $ | 18,640
|Deferred rents                  |  |             | 9,610  |              |   | 8,035 
|Accrued insurance               |  |             | 1,002  |              |   | 673   
|Deferred compensation (Note 11) |  |             | 331    |              |   |      
|Other                           |  |             | 5      |              |   | 10    
|                                |  |             |        |              |   |       
|                                |  | $           | 32,077 |              | $ | 27,358
|                                |  |             |        |              |   |       



Tenant improvement
allowances are reimbursements received from certain landlords for initial construction costs and are amortized on a straight-line basis over the lease term as a reduction in rent. The tenant improvement allowances are recorded when the Company has
completed its obligations and the tenant improvement allowance is receivable. Tenant improvement allowances of $3.7 million were recorded for new restaurants during fiscal year 2005.



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



6. Leases



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



The
Company has a commitment for the development and sale/leaseback of restaurants from AEI Fund Management, Inc. (AEI) that provides a maximum $50.0 million financing commitment through an agreement executed November 23, 2004. The agreement
expires in October 2006. The funding of this build-to-suit facility is subject to various pre-closing conditions. Under the agreement, AEI purchases the land and funds a substantial portion of the construction costs of new restaurants selected by
the Company for participation under the agreement. The Company serves as the developer of the site and is responsible for completing the project on time and within budget. Once the project is completed per the terms of the development agreement, the
Company enters into a lease with AEI for the property. The Company, as seller-lessee, has no continuing involvement in the property other than that of lessee. For accounting purposes, the Company is considered the owner of the property during the
construction period due to the Companys obligation to develop the property and AEIs option to sell the funded assets to the Company in the event of a default under the development agreement.



F-19



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##### Table of Contents

Future minimum lease payments pursuant to leases with non-cancelable lease terms, excluding option
periods, at July 3, 2005 were as follows (in 000s):



|                                    |  |                  |        
|----------------------------------- |  | ---------------- | -------
|Fiscal Years Ending                 |  | Operating Leases
|2006                                |  | $                | 16,007 
|2007                                |  |                  | 16,279 
|2008                                |  |                  | 16,610 
|2009                                |  |                  | 16,869 
|2010                                |  |                  | 16,615 
|Thereafter                          |  |                  | 136,408
|                                    |  |                  |        
|Total future minimum lease payments |  | $                | 218,788
|                                    |  |                  |        



Total rent expense in
fiscal years 2005, 2004 and 2003 approximated $15,623,000, $14,501,000 and $12,728,000, respectively. Contingent rentals in rent expense for 2005, 2004 and 2003 approximated $392,000, $362,000 and $382,000, respectively.



7. Long-term Debt



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



|                               |  |                                    |  |             |        |             |   |              |  |               |        |                     |                         |          |                              |  |           
|------------------------------ |  | ---------------------------------- |  | ----------- | ------ | ----------- | - | ------------ |  | ------------- | ------ | ------------------- | ----------------------- | -------- | ---------------------------- |  | ----------
|Lender                         |  | Interest rate                      |  | Face amount |        | July 3,2005 |   | June 27,2004 |  | Nature ofdebt |        | Nature ofcollateral |                         | Maturity
|Convertible Subordinated Notes |  | 5.50%                              |  | $           | 15,000 |             | $ | 14,506       |  | $             | 14,305 |                     | Note Payable            |          | Unsecured                    |  | Dec., 2007
|LaSalle Bank N.A.              |  | Prime - Prime+ .50% or LIBOR+ 2-3% |  |             | 25,000 |             |   |             |  |               | 2,500  |                     | RevolvingLine of Credit |          | All personaland realproperty |  | Mar., 2007
|GE Capital                     |  | Commercial paper+ 3.75%            |  |             | 3,022  |             |   |             |  |               | 979    |                     | Note Payable            |          | Equipment                    |  | Dec., 2006
|GE Capital                     |  | Commercial paper+ 3.75%            |  |             | 1,978  |             |   | 143          |  |               | 779    |                     | Note Payable            |          | Equipment                    |  | Feb., 2007
|                               |  |                                    |  |             |        |             |   |              |  |               |        |                     |                         |          |                              |  |           
|                               |  |                                    |  |             |        |             | $ | 14,649       |  | $             | 18,563 |                     |                         |          |                              |  |           
|                               |  |                                    |  |             |        |             |   |              |  |               |        |                     |                         |          |                              |  |           
|Less current portion           |  |                                    |  |             |        |             |   | 143          |  |               | 942    |                     |                         |          |                              |  |           
|                               |  |                                    |  |             |        |             |   |              |  |               |        |                     |                         |          |                              |  |           
|Debt, net of current portion   |  |                                    |  |             |        |             | $ | 14,506       |  | $             | 17,621 |                     |                         |          |                              |  |           
|                               |  |                                    |  |             |        |             |   |              |  |               |        |                     |                         |          |                              |  |           



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



F-20



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##### Table of Contents

The Notes are convertible at the option of the holder at any time prior to maturity into shares of Common
Stock, at a conversion price of $10.66 per share, subject to adjustment upon certain events. At any time on or after December 15, 2005, the Company may redeem some or all of the Notes at par plus accrued and unpaid interest. All of the Notes can be
converted, at the Companys option, into shares of Common Stock at the then effective conversion price if the closing price of the Common Stock exceeds 150% of the then effective conversion price for any 15 out of 20 consecutive trading days at
any time within three years after the first issuance date of the Notes.



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



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



In March 2004, the Company obtained a three-year $25.0 million senior secured credit facility with LaSalle Bank (the facility). A portion of
the facility was initially used to refinance certain of the Companys existing debt and the facility may also be used to support growth and general working capital needs and provide up to $5.0 million for the issuance of letters of credit. The
facility is secured by a blanket lien on all personal assets and real property of the Company. Borrowings under the facility will bear interest depending on a total funded debt to EBITDA ratio and will range from prime to prime plus 50 basis points
or, if elected by us, LIBOR plus 200 to 300 basis points. Total funded debt is defined as all indebtedness of the consolidated entities, including senior and subordinated debt, capital lease obligations and contingent liabilities. The Company paid
an up-front fee of $188,000 and is required to pay an annual unused commitment fee of 37.5 basis points to 50 basis points. The weighted-average interest rate on credit line borrowings at June 27, 2004 was 3.7%.



The credit facility limits the opening of new company-owned restaurants to a
maximum of twenty-four over a three-year period and also limits the amount of dividends and/or stock repurchases. As of July 3, 2005, the Company had no outstanding borrowings under this facility and had placed letters of credit of $2.6 million
under the facility with $22.3 million available for additional borrowing.



Outstanding borrowings under the facility may be converted to a five-year term loan if the ratio of senior debt to EBITDA exceeds specified levels. The facility requires the Company to maintain a minimum fixed charge
coverage ratio and tangible net worth level and not exceed thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios. EBITDA is defined in the agreement 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, and (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; 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



F-21



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##### Table of Contents

GAAP. Capitalized terms used in the preceeding sentence refer to defined terms in the credit agreement.



As of July 3, 2005, the Company was in compliance with all debt covenants and
financial ratios. This credit facility has four financial ratios that measure our fixed charge coverage ratio, borrowers total funded debt to EBITDA, total senior debt to EBITDA and minimum tangible net worth.



In fiscal 2005, 2004 and 2003, the Company repaid certain debt with existing
balances totaling approximately $1,000,000, $15,200,000 and $5,200,000, respectively, before scheduled maturity. Related prepayment costs and unamortized debt issuances costs totaling $587,000 and $290,000 in fiscal 2004 and 2003, respectively, were
recorded as debt extinguishment costs in the accompanying consolidated statement of operations.



The Company incurred interest expense of $1,717,000, $2,480,000 and $2,372,000 in fiscal years 2005, 2004 and 2003, respectively. Of these amounts,
$146,000, $142,000 and $310,000 were capitalized in each respective year. Interest income totaled $127,000, $237,000 and $236,000 in 2005, 2004 and 2003, respectively.



Principal amounts of long-term debt outstanding as of July 3, 2005 due during each of the three succeeding fiscal years were
$86,000 in 2006, $57,000 in 2007 and $14,506,000 in 2008.



8. Income
Taxes



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



|                                                  |  |             |        |   |              |   |        |  
|------------------------------------------------- |  | ----------- | ------ | - | ------------ | - | ------ | -
|                                                  |  | July 3,2005 |        |   | June 27,2004 |  
|Deferred tax assets:                              |  |             |        |   |              |   |        |  
|Net operating loss carryforwards                  |  | $           | 16,285 |   |              | $ | 17,916 |  
|Alternative minimum tax carryforwards             |  |             | 231    |   |              |   |       |  
|Deferred rent                                     |  |             | 11,816 |   |              |   | 3,942  |  
|FICA tip tax credits                              |  |             | 7,833  |   |              |   | 5,560  |  
|Accrued expenses                                  |  |             | 1,225  |   |              |   | 1,236  |  
|Other                                             |  |             | 130    |   |              |   |       |  
|                                                  |  |             |        |   |              |   |        |  
|Total deferred tax assets                         |  |             | 37,520 |   |              |   | 28,654 |  
|                                                  |  |             |        |   |              |   |        |  
|Less valuation allowance                          |  |             | (93    | ) |              |   |       |  
|                                                  |  |             |        |   |              |   |        |  
|Net deferred tax assets after valuation allowance |  | $           | 37,427 |   |              | $ | 28,654 |  
|                                                  |  |             |        |   |              |   |        |  
|Deferred tax liabilities:                         |  |             |        |   |              |   |        |  
|Property and equipment                            |  | $           | (7,652 | ) |              | $ | (1,748 | )
|Goodwill                                          |  |             | (601   | ) |              |   | (497   | )
|Other                                             |  |             |       |   |              |   | (37    | )
|                                                  |  |             |        |   |              |   |        |  
|Total deferred tax liabilities                    |  | $           | (8,253 | ) |              | $ | (2,282 | )
|                                                  |  |             |        |   |              |   |        |  
|Net deferred tax assets                           |  | $           | 29,174 |   |              | $ | 26,372 |  
|                                                  |  |             |        |   |              |   |        |  
|Current portion                                   |  | $           | 3,263  |   |              | $ | 2,825  |  
|Long-term                                         |  |             | 25,911 |   |              |   | 23,547 |  



F-22



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##### Table of Contents

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



|                                |  |                   |        |   |              |   |              |  |   |         |  
|------------------------------- |  | ----------------- | ------ | - | ------------ | - | ------------ |  | - | ------- | -
|                                |  | Fiscal Year Ended |       
|                                |  | July 3,2005       |        |   | June 27,2004 |   | June 29,2003 | 
|Current tax expense (benefit):  |  |                   |        |   |              |   |              |  |   |         |  
|Federal                         |  | $                 | 231    |   |              | $ | 6            |  | $ | 1,912   |  
|State                           |  |                   | 736    |   |              |   | 517          |  |   | 849     |  
|                                |  |                   |        |   |              |   |              |  |   |         |  
|                                |  |                   | 967    |   |              |   | 523          |  |   | 2,761   |  
|                                |  |                   |        |   |              |   |              |  |   |         |  
|Deferred tax expense (benefit): |  |                   |        |   |              |   |              |  |   |         |  
|Federal                         |  |                   | (2,394 | ) |              |   | 117          |  |   | (17,630 | )
|State                           |  |                   | (353   | ) |              |   | 84           |  |   | (286    | )
|                                |  |                   |        |   |              |   |              |  |   |         |  
|                                |  |                   | (2,747 | ) |              |   | 201          |  |   | (17,916 | )
|                                |  |                   |        |   |              |   |              |  |   |         |  
|Income tax expense (benefit)    |  | $                 | (1,780 | ) |              | $ | 724          |  | $ | (15,155 | )
|                                |  |                   |        |   |              |   |              |  |   |         |  



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 3,2005       |        |   | June 27,2004 |   |        | June 29,2003 | 
|Income tax provision computed at statutory federal income tax rates |  | $                 | (710   | ) |              | $ | 1,749  |              |  | $ | 1,019   |  
|FICA tip tax credit                                                 |  |                   | (1,485 | ) |              |   | (1,339 | )            |  |   | (1,007  | )
|Non-deductible costs                                                |  |                   | 37     |   |              |   | 28     |              |  |   | 24      |  
|Increase (decrease) in the valuation allowance                      |  |                   | 93     |   |              |   |       |              |  |   | (16,747 | )
|State income tax provision, net of federal benefit                  |  |                   | 186    |   |              |   | 266    |              |  |   | 696     |  
|Changes in state tax laws                                           |  |                   | 103    |   |              |   |       |              |  |   |        |  
|Expired net operating loss carryforward                             |  |                   |       |   |              |   |       |              |  |   | 707     |  
|Other, net                                                          |  |                   | (4     | ) |              |   | 20     |              |  |   | 153     |  
|                                                                    |  |                   |        |   |              |   |        |              |  |   |         |  
|Income tax expense (benefit)                                        |  | $                 | (1,780 | ) |              | $ | 724    |              |  | $ | (15,155 | )
|                                                                    |  |                   |        |   |              |   |        |              |  |   |         |  



All income from
continuing operations and related income tax expense was attributable to domestic operations. As of July 3, 2005, the Company had federal net operating loss carryforwards of approximately $45.0 million expiring at various dates through 2023 and
certain states net operating loss carryforwards totaling $11.5 million expiring at various dates through 2024. The Companys FICA tip tax credits totaling $7.8 million may be used to offset federal income taxes and expire at various dates
through 2025.



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



|              |  |                              |       |                                       |   |                                     |  |   |       
|------------- |  | ---------------------------- | ----- | ------------------------------------- | - | ----------------------------------- |  | - | ------
|Year Expiring |  | FICA TipCreditsCarryforwards |       | FederalNet OperatingLossCarryforwards |   | StateNet OperatingLossCarryforwards
|2006          |  | $                            |      |                                       | $ |                                    |  | $ | 1,007 
|2007          |  |                              |      |                                       |   |                                    |  |   | 116   
|2009          |  |                              |      |                                       |   |                                    |  |   | 2,452 
|2010          |  |                              |      |                                       |   |                                    |  |   | 428   
|2011          |  |                              |      |                                       |   |                                    |  |   | 462   
|2012          |  |                              |      |                                       |   |                                    |  |   | 231   
|2018          |  |                              |      |                                       |   |                                    |  |   | 558   
|2019          |  |                              |      |                                       |   | 39,135                              |  |   | 745   
|2020          |  |                              |      |                                       |   | 3,689                               |  |   | 4,644 
|2021          |  |                              | 827   |                                       |   | 16                                  |  |   | 678   
|2022          |  |                              | 1,124 |                                       |   | 17                                  |  |   |      
|2023          |  |                              | 1,549 |                                       |   | 2,104                               |  |   |      
|2024          |  |                              | 2,049 |                                       |   |                                    |  |   | 218   
|2025          |  |                              | 2,284 |                                       |   |                                    |  |   |      
|              |  |                              |       |                                       |   |                                     |  |   |       
|              |  | $                            | 7,833 |                                       | $ | 44,961                              |  | $ | 11,539
|              |  |                              |       |                                       |   |                                     |  |   |       



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 2003, the Company determined that it was more likely than not that it would realize the tax benefits of its deferred tax assets and the existing valuation allowance was released. During fiscal 2005, management determined
that to fully realize the deferred tax asset, the Company will need to generate average annual future taxable income of approximately $4.4 million prior to the expiration of the net operating loss carryforwards and FICA tip tax credit carryforwards
through 2025. Taxable income for the year ended July 3, 2005 was $7.1 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 3, 2005. The increase in the valuation allowance by $93,000 during the year ended July
3, 2005 is attributable to managements belief that the likelihood of realizing certain state net operating loss carryforwards is not more likely than not. The amount of the deferred tax asset considered realizable could be reduced in the near
term if estimates of future taxable income during the carryforward. As of 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.



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##### Table of Contents



9. Commitments and Contingencies



Letters of Credit



The Company had outstanding letters of credit of $2,606,000 at July 3, 2005
to guarantee its performance primarily related to certain insurance contracts. The letters of credit are irrevocable and have one-year renewable terms.



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, the Company may either (i) require the purchaser to reconvey to the Company full ownership and
control of the shares and all assets (to the extent then owned by the purchaser or Fuddruckers) that were transferred pursuant to the agreement in such a manner as to rescind the transactions contemplated by the agreement based upon a formula price.
During 2005, 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.



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##### Table of Contents

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 restaurant group. 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, Litigation And Reserves. Although the Company has incurred certain expenses in connection with these obligations and retained liabilities in the past, at this time,
based upon the circumstances known to us at this time, 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.



Accrued Insurance Costs



The Company is self-insured for certain losses related to workers
compensation claims, 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.



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 our estimates.



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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 associates, and others related to issues common to the restaurant industry. A number of such claims may exist at any given time. Other than the matters described below, the Company is currently not a party to any litigation that
management believes will have a material adverse effect on the Companys consolidated financial position or results of operations.



We assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc. (Daka) in connection with their spin-off. In the third
quarter of fiscal 2000, a Washington, D.C. superior court jury awarded a former Daka associate damages related to the associates claim of negligent supervision and retaliation, due to alleged conduct that occurred in 1996 at a former Daka food
service location. The events at issue in the case took place while a predecessor company of Champps owned Daka. Daka filed a Notice of Appeal with the Court of Appeals for the District of Columbia. In the third quarter of fiscal 2004, the Court
issued its decision affirming the award of compensatory damages and the attorneys fees and costs. The Company subsequently paid the compensatory damages and attorneys fees, costs and related interest. However, the Court held that the
punitive damages award was unconstitutional, vacated the award and remanded the case to the trial court for re-determination of punitive damages in accordance with legal principles outlined in its opinion. In the fourth quarter of fiscal 2004, the
trial court re-determined the amount of punitive damages to be $937,500 and the Company accrued a liability for the full amount of this re-determination. In November 2004, the court awarded additional attorney fees and costs of $287,000 to
plaintiffs attorneys related to the appeal of this matter. The Company accrued a liability for the full amount of the additional judgment for attorney fees in our first quarter of fiscal 2005. In December 2004, the Company settled this matter
and made a final payment of $1,175,000.



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. AIG was also provided with cash collateral in connection with the insurance policies of approximately $2.1 million. 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. 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 since the policies were with a subsidiary of AIG, the letter agreement is not valid. AIG, through its subsidiaries, has continued to request payments
from Champps.



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On or about June 24, 2004, Champps filed suit in U.S. District Court for the District of Massachusetts
against AIG and National Union Fire Insurance Company of Pittsburgh, PA (National Union) 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. On August 9, 2004, National Union filed a motion to compel arbitration against Champps in U.S. District Court for the Southern District of New York
based on an Indemnity Agreement containing an arbitration clause. By Order dated December 13, 2004 the New York District Court granted the Motion to Compel Arbitration as to National Union only.



On March 24, 2005, Champps filed its Notice of Voluntary Dismissal in the
Federal District Court for the District of Massachusetts and on March 25, 2005, Champps filed suit in Trial Court of the Commonwealth of Massachusetts naming AIG as defendant based on AIGs 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 matter against AIG has been stayed by the Trial Court in the Commonwealth of
Massachusetts pending the outcome of the arbitration proceedings. The matter involving National Union is currently pending arbitration in New York. The AIG litigation matter described above is in its preliminary phase and the Company will pursue
release from further liability vigorously. The Company has not yet conducted discovery on AIGs liability assertions and other relevant issues. Thus, the Company is unable at this time to predict an outcome or estimate reasonably a range of
loss that it would incur if AIG was to prevail.



We may also be
required to assume other liabilities of DAKA in connection with the spin-off and we may be required to indemnify Fuddruckers in connection with future breaches of our representations and warranties that survived the closing of the sale of
Fuddruckers. These indemnifications are discussed further in this section under the heading Indemnifications and Representations Related to Predecessor Companies. Based upon the circumstances known to us 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 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.



Reserves



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



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



|                         |  |                        |        |  
|------------------------ |  | ---------------------- | ------ | -
|                         |  | PredecessorObligations |       
|Balance at June 30, 2002 |  | $                      | 1,372  |  
|Expense recognition      |  |                        | 282    |  
|Payments                 |  |                        | (1,006 | )
|                         |  |                        |        |  
|Balance at June 29, 2003 |  |                        | 648    |  
|Expense recognition      |  |                        | 1,171  |  
|Payments                 |  |                        | (804   | )
|                         |  |                        |        |  
|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.



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



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



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



10. Shareholders Equity and Income Per Share



The authorized capital stock of the Company consists of 30.0 million shares
of common stock, of which 13,036,321 and 12,813,665 shares were issued and outstanding as of July 3, 2005 and June 27, 2004, respectively. The Company also has 5.0 million shares of authorized preferred stock, none of which is issued.



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



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On December 16, 2002, the Company issued warrants to purchase 386,961 shares of common stock of the
Company in conjunction with the issuance of the Notes described in Note 7. Each warrant is exercisable for one share of common stock at an initial exercise price of $11.10 per share, subject to adjustment upon certain events. The warrants are
exercisable (in whole or in part) at any time on or before December 15, 2007, unless terminated earlier at the Companys option upon certain events. 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.



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



|                                                                                                       |  |             |        |   |              |   |              |  |   |       
|------------------------------------------------------------------------------------------------------ |  | ----------- | ------ | - | ------------ | - | ------------ |  | - | ------
|                                                                                                       |  | July 3,2005 |        |   | June 27,2004 |   | June 29,2003
|Basic income per share:                                                                                |  |             |        |   |              |   |              |  |   |       
|Net income (loss)                                                                                      |  | $           | (249   | ) |              | $ | 4,272        |  | $ | 18,066
|                                                                                                       |  |             |        |   |              |   |              |  |   |       
|Weighted average shares outstanding                                                                    |  |             | 12,887 |   |              |   | 12,793       |  |   | 12,536
|Net income (loss) per share - basic                                                                    |  | $           | (0.02  | ) |              | $ | 0.33         |  | $ | 1.44  
|                                                                                                       |  |             |        |   |              |   |              |  |   |       
|Diluted income per share:                                                                              |  |             |        |   |              |   |              |  |   |       
|Net income (loss)                                                                                      |  | $           | (249   | ) |              | $ | 4,272        |  | $ | 18,066
|Plus income impact of assumed conversion of 5.5% convertible subordinated notes                        |  |             | (c)    |   |              |   | (c)          |  |   | 415   
|                                                                                                       |  |             |        |   |              |   |              |  |   |       
|Net income (loss) plus assumed conversions                                                             |  |             | (249   | ) |              |   | 4,272        |  |   | 18,481
|                                                                                                       |  |             |        |   |              |   |              |  |   |       
|Weighted average shares outstanding                                                                    |  |             | 12,887 |   |              |   | 12,793       |  |   | 12,536
|Net effect of dilutive stock options based on the treasury stock method using average market price (a) |  |             |       |   |              |   | 207          |  |   | 389   
|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)          |  |   | 758   
|                                                                                                       |  |             |        |   |              |   |              |  |   |       
|Total shares outstanding for computation of per share earnings                                         |  |             | 12,887 |   |              |   | 13,000       |  |   | 13,683
|Net income (loss) per share - diluted                                                                  |  | $           | (0.02  | ) |              | $ | 0.33         |  | $ | 1.35  
|                                                                                                       |  |             |        |   |              |   |              |  |   |       



|(a) | For the years ended July 3, 2005, June 27, 2004 and June 29, 2003, 1,109,568, 220,763 and 67,154 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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11. Stock Options, Restricted Stock
Awards and Employee Benefit Plans



Stock Options



The Company has adopted stock option and incentive plans for the benefit of
the associates and non-employee directors of the Company whereby the Company authorized and reserved for issuance an aggregate of 2,615,000 shares of common stock. As of July 3, 2005, options to purchase approximately 474,000 shares of common stock
remained available for grant under the plans.



In fiscal 2003,
Mr. William Baumhauer, the Companys former chairman of the board, president and chief executive officer, exercised options to purchase 1,009,000 shares of common stock of the Company under a stock trading plan complying with the requirements
of Rule 10b5-1 of the Securities and Exchange Commission with an aggregate exercise price of approximately $4,620,000. Mr. Baumhauer satisfied the exercise price of options and paid certain of his withholding tax liabilities by tendering to the
Company 471,588 common shares held by him and having a fair market value of approximately $3,583,000 plus cash of $1,037,000. On July 31, 2003, Mr. Baumhauer terminated the stock trading plan.



The Company has historically granted options to the Companys board of
directors, its executive officers, its corporate office staff, its regional directors of operations and its general managers of the restaurants.



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



|                             |  |                  |   |  |                               |      |                                      |     
|---------------------------- |  | ---------------- | - |  | ----------------------------- | ---- | ------------------------------------ | ----
|                             |  | Number ofOptions |   |  | WeightedAverage ExercisePrice |      | WeightedAverage GrantDate Fair Value
|Outstanding at June 30, 2002 |  | 1,565,555        |   |  | $                             | 5.15 |                                      |     
|Granted                      |  | 186,900          |   |  |                               | 4.94 |                                      | 4.94
|Exercised                    |  | (1,027,265       | ) |  |                               | 4.59 |                                      |     
|Forfeited                    |  | (12,836          | ) |  |                               | 7.18 |                                      |     
|                             |  |                  |   |  |                               |      |                                      |     
|Outstanding at June 29, 2003 |  | 712,354          |   |  | $                             | 5.87 |                                      |     
|Granted                      |  | 388,100          |   |  |                               | 6.97 |                                      | 6.97
|Exercised                    |  | (10,165          | ) |  |                               | 6.17 |                                      |     
|Forfeited                    |  | (53,501          | ) |  |                               | 6.51 |                                      |     
|                             |  |                  |   |  |                               |      |                                      |     
|Outstanding at June 27, 2004 |  | 1,036,788        |   |  | $                             | 6.24 |                                      |     
|Granted                      |  | 420,700          |   |  |                               | 7.85 |                                      | 7.85
|Exercised                    |  | (195,200         | ) |  |                               | 5.78 |                                      |     
|Forfeited                    |  | (152,720         | ) |  |                               | 7.14 |                                      |     
|                             |  |                  |   |  |                               |      |                                      |     
|Outstanding at July 3, 2005  |  | 1,109,568        |   |  | $                             | 6.81 |                                      |     
|                             |  |                  |   |  |                               |      |                                      |     



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



|              |  |                    |  |                                  |     
|------------- |  | ------------------ |  | -------------------------------- | ----
|              |  | OptionsExercisable |  | WeightedAverageExercisable Price
|June 29, 2003 |  | 367,936            |  | $                                | 5.82
|June 27, 2004 |  | 561,227            |  |                                  | 5.81
|July 3, 2005  |  | 702,131            |  |                                  | 6.34



The following table sets forth
information regarding options outstanding at July 3, 2005:



|                  |  |                 |              |                       |   |                                           |  |                            |  |                                                |  |   |     
|----------------- |  | --------------- | ------------ | --------------------- | - | ----------------------------------------- |  | -------------------------- |  | ---------------------------------------------- |  | - | ----
|Number of Options |  | Range of Prices |              | WeightedAverage Price |   | Weighted AverageRemainingContractual Life |  | NumberCurrentlyExercisable |  | Weighted AveragePrice for CurrentlyExercisable
|199,918           |  | $               | 4.00 - $5.12 |                       | $ | 4.61                                      |  | 6.5                        |  | 199,918                                        |  | $ | 4.61
|387,415           |  |                 | 5.75 - 6.97  |                       |   | 6.67                                      |  | 7.0                        |  | 280,328                                        |  |   | 6.56
|170,585           |  |                 | 7.50         |                       |   | 7.50                                      |  | 6.3                        |  | 170,585                                        |  |   | 7.50
|351,650           |  |                 | 7.85 - 13.80 |                       |   | 7.87                                      |  | 9.1                        |  | 51,300                                         |  |   | 8.00



Restricted Stock Awards



In March 2005, the Company entered into an employment
agreement with Mr. Michael P. O Donnell, its new Chief Executive Officer, President and Chairman of the Board. As part of the agreement, 514,680 restricted shares of common stock will be awarded to Mr. ODonnell over a seven year period.
These awards are subject to the availability of common shares that have been authorized and are available under the Companys stock incentive plans. If common shares are not available, the Company will seek shareholder approval for additional
available shares. If the shareholders of the Company fail to approve such resolution by the date any portion of the restricted stock award would otherwise have vested, the Company is required to make a cash payment to Mr. ODonnell equal to the
economic value of the shares. 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.



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 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% or more for a sixty consecutive day period prior to the second anniversary of the award. The remainder of the restricted
stock award vests over an eight quarter period if the market price of the stock appreciates 300% or more for a sixty consecutive day period prior to the 3rd anniversary of the award.



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There were not sufficient shares available under the Companys stock incentive plans for the
issuance of the restricted stock awards. Compensation expense totaling $331,000 for the period of March 2, 2005 through July 3, 2005 was recorded as a liability since there were not enough shares available to fulfill the restricted stock award, and
it is not certain that the shareholders will authorize the additional shares to be awarded. The liability as of July 3, 2005, represented the economic (e.g. market value) at that date of shares which would have vested under the award. The Company is
obligated to make a cash payment to Mr. ODonnell equal to the economic value of the vesting shares if the shareholders do not approve the authorization of additional incentive shares to be issued.



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 to permit the issuance of any shares. If approved, the new Chief Operating Officer, Mr. Richard Scanlan, will be 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. If approved, the new Chief Financial Officer, Mr. David
Womack, will be 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.



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 3, 2005, 252,266 shares of common stock had been issued under the purchase plan. Under the purchase plan, eligible associates of the Company may participate in quarterly
offerings of shares made by the Company. The participating associates purchase shares at a discount from the lower of fair value at the beginning or end of each quarterly offering period through payroll deductions. In fiscal 2003, associates
purchased 33,849 shares for a total of $252,000. In fiscal 2004, associates purchased 39,450 shares for a total of $191,000. In fiscal 2005, associates purchased 27,456 shares for a total of $196,000. The proforma expense associated with the
purchase plan was $72,000, $67,000 and $91,000 for fiscal 2005, 2004 and 2003, respectively.



Employee Benefit Plan



The Company sponsors a 401(k) retirement plan enabling associates to contribute up to 15% of their annual compensation. The Companys discretionary contributions to the 401(k) plan are determined by the Companys Board of
Directors. The Companys contribution to the plan for fiscal 2003 was $55,000. In 2004, the Company changed its 401(k) plan year-end to coincide with the calendar year-end. The Companys contribution for calendar 2004 and half of calendar
2003 totaled $70,000. For fiscal 2005, $35,000 was accrued for half of the Companys discretionary contribution expected to be paid for calendar 2005.



12. Severance Expense



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 provides for an additional four months of salary after payments under the employment
agreement would otherwise cease. These additional four months of payments are payable at the discretion of the Board and are contingent upon his completing certain obligations to the Company.



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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 would be paid over the ensuing 26 weeks.



13. 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.



Current portion of long-term debt  The carrying value of the current portion of long-term debt approximates fair value based upon the variable
interest rate on this debt and current market rates available to the Company for similar instruments.



Long-term debt  At June 3, 2005, the Company had $15.0 million, 5.5% subordinated convertible notes outstanding with a carrying value of $14.5
million (Note 7). The Company estimates the fair value of the notes to be approximately $14.8 million. There is no active market for the notes. The Company estimated the fair value of the notes utilizing discounted cash flow and option pricing
models.



14. Segment Reporting



As of July 3, 2005, the Company operated 52 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.



15. Related Party Transactions



In fiscal 2001, the Company amended Mr. William Baumhauers employment
contract. Mr. Baumhauer served as the Companys chairman of the board, president and chief executive officer until his resignation in March 2005. As part of the amended employment contract, the Company loaned $550,000 to Mr. Baumhauer. The loan
was evidenced by a promissory note with interest at 9.0% and was due on September 30, 2003. The proceeds of the loan were used to exercise options to purchase 178,000 shares of the Companys common stock and pay related tax liabilities. The
loan was secured by a pledge of the purchased stock. In fiscal 2003, Mr. Baumhauer repaid $350,000 of the loan. The remainder of the loan of $200,000 plus accrued interest of $116,000 was repaid in fiscal 2004.



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16. Quarterly Financial Data (Unaudited)



The Companys quarterly results of operations for fiscal years 2005
and 2004 are summarized as follows (in 000s except per share data):



|                                          |  |                    |        |                  |            |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|----------------------------------------- |  | ------------------ | ------ | ---------------- | ---------- | ------ | ------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                          |  | Quarter ended      |        |                  | Year ended |       
|                                          |  | October 3,2004 (a) |        | January 3,2005   |            |        | April 3,2005  |  |   | July 3,2005  |   |  | July 3,2005  |       
|Fiscal 2005                               |  |                    |        |                  |            |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|Revenue                                   |  | $                  | 54,154 |                  | $          | 56,419 |               |  | $ | 54,089       |   |  | $            | 53,694 |   |  | $ | 218,356 |  
|Pre-opening expenses                      |  |                    | 213    |                  |            | 431    |               |  |   | 340          |   |  |              | 471    |   |  |   | 1,455   |  
|Severance                                 |  |                    |       |                  |            |       |               |  |   | 547          |   |  |              | 108    |   |  |   | 655     |  
|Asset impairment charges                  |  |                    |       |                  |            |       |               |  |   | 6,567        |   |  |              |       |   |  |   | 6,567   |  
|Expenses related to predecessor companies |  |                    | 310    |                  |            | (45    | )             |  |   | 50           |   |  |              | 43     |   |  |   | 358     |  
|Income (loss) from continuing operations  |  |                    | 1,583  |                  |            | 3,544  |               |  |   | (6,247       | ) |  |              | (909   | ) |  |   | (2,029  | )
|Net income (loss)                         |  |                    | 1,187  |                  |            | 2,658  |               |  |   | (3,572       | ) |  |              | (522   | ) |  |   | (249    | )
|Basic income (loss) per share:            |  |                    | 0.09   |                  |            | 0.21   |               |  |   | (0.28        | ) |  |              | (0.04  | ) |  |   | (0.02   | )
|Diluted income (loss) per share:          |  |                    | 0.09   |                  |            | 0.20   |               |  |   | (0.28        | ) |  |              | (0.04  | ) |  |   | (0.02   | )
|                                          |  |                   
|                                          |  | Quarter ended      |        |                  | Year ended |       
|                                          |  | September 28,2003  |        | December 28,2003 |            |        | March 28,2004 |  |   | June 27,2004 |   |  | June 27,2004 |       
|Fiscal 2004                               |  |                    |        |                  |            |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|Revenue                                   |  | $                  | 47,812 |                  | $          | 53,692 |               |  | $ | 53,000       |   |  | $            | 52,436 |   |  | $ | 206,940 |  
|Pre-opening expenses                      |  |                    | 839    |                  |            | 756    |               |  |   | 45           |   |  |              | 258    |   |  |   | 1,898   |  
|Expenses related to predecessor companies |  |                    | 39     |                  |            | 166    |               |  |   | 54           |   |  |              | 912    |   |  |   | 1,171   |  
|Debt extinguishment costs                 |  |                    |       |                  |            |       |               |  |   | 4            |   |  |              | 583    |   |  |   | 587     |  
|Income from continuing operations         |  |                    | 523    |                  |            | 2,458  |               |  |   | 2,009        |   |  |              | 6      |   |  |   | 4,996   |  
|Net income                                |  |                    | 400    |                  |            | 1,878  |               |  |   | 1,614        |   |  |              | 380    |   |  |   | 4,272   |  
|Basic income per share:                   |  |                    | 0.03   |                  |            | 0.15   |               |  |   | 0.13         |   |  |              | 0.03   |   |  |   | 0.33    |  
|Diluted income per share:                 |  |                    | 0.03   |                  |            | 0.15   |               |  |   | 0.12         |   |  |              | 0.03   |   |  |   | 0.33    |  



|(a) | The quarter ended October 3, 2004 consisted of 14 weeks while the other quarters presented each consisted of 13 weeks.
|--- | ----------------------------------------------------------------------------------------------------------------------



Revenue for the first three quarters of fiscal 2005 and all quarters in
fiscal 2004 as detailed in the table above are different than previously reported due to a reclassification of discounted meals (Note 1). These reclassifications had no effect on net income. The effect of the reclassification decreased revenue as
follows:



|                                        |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|--------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | ------------- |  | - | ------------ | - |  | ------------ | ------ | - |  | - | ------- | -
|                                        |  | Quarter ended     |        |   |                  |   |        |               | 
|                                        |  | October 3,2004    |        |   | January 3,2004   |   |        | April 3,2005  |  |   |              |   |  |              |       
|Fiscal 2005                             |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|Revenue, as previously reported         |  | $                 | 55,497 |   |                  | $ | 57,783 |               |  | $ | 55,631       |   |  |              |        |   |  |   |         |  
|Reclassification                        |  |                   | (1,343 | ) |                  |   | (1,364 | )             |  |   | (1,542       | ) |  |              |        |   |  |   |         |  
|                                        |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|Revenue reflecting the reclassification |  | $                 | 54,154 |   |                  | $ | 56,419 |               |  | $ | 54,089       |   |  |              |        |   |  |   |         |  
|                                        |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|                                        |  |                  
|                                        |  | Quarter ended     |        |   | Year ended       |  
|                                        |  | September 28,2003 |        |   | December 28,2003 |   |        | March 28,2004 |  |   | June 27,2004 |   |  | June 27,2004 |       
|Fiscal 2004                             |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|Revenue, as previously reported         |  | $                 | 48,885 |   |                  | $ | 54,811 |               |  | $ | 54,165       |   |  | $            | 53,641 |   |  | $ | 211,502 |  
|Reclassification                        |  |                   | (1,073 | ) |                  |   | (1,119 | )             |  |   | (1,165       | ) |  |              | (1,205 | ) |  |   | (4,562  | )
|                                        |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  
|Revenue reflecting the reclassification |  | $                 | 47,812 |   |                  | $ | 53,692 |               |  | $ | 53,000       |   |  | $            | 52,436 |   |  | $ | 206,940 |  
|                                        |  |                   |        |   |                  |   |        |               |  |   |              |   |  |              |        |   |  |   |         |  



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