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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Year Ended December 31, 2005

Commission File Number: 000-23739

STEAKHOUSE PARTNERS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                             
|-------------------------------------------------------------- |  | ----------------------------
|Delaware                                                       |  | 94-3248672                  
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer I.D.Number)

10200 Willow Creek Road, San Diego, California 92131

(Address of principal executive offices and Zip Code)

Registrants telephone number, including area code: (858) 689-2333

Securities
registered pursuant to Section 12(b) of the Exchange Act: None.

Securities registered pursuant to Section 12(g) of the
Exchange Act: Common Stock, par value $0.001 per share.

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

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days:    x  Yes ̈No

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:    x  Yes ̈No

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

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the Registrant is a shell company, as defined in Rule 12b-2 of the Exchange
Act.    Yes ̈No  x

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common stock was
sold, or the average bid and ask price of said common stock, as of June 28, 2005 was approximately $4,278,687.

Indicate by check mark
whether the Registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court:    x  Yes ̈No

Indicate the number of shares outstanding of each of the Registrants classes of common stock: 6,635,680 shares of common stock were outstanding as
of March 27, 2006.

DOCUMENTS INCORPORATED BY REFERENCE:

None.



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Table of Contents



|         |  |                                                                                                                |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                |  | Page
|PART I  
|ITEM 1.  |  | BUSINESS                                                                                                       |  | 1   
|ITEM 1A. |  | RISK FACTORS                                                                                                   |  | 9   
|ITEM 1B. |  | UNRESOLVED STAFF COMMENTS                                                                                      |  | 17  
|ITEM 2.  |  | PROPERTIES                                                                                                     |  | 17  
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                                              |  | 18  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            |  | 18  
|        
|PART II 
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES |  | 19  
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                                        |  | 20  
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                          |  | 22  
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                     |  | 29  
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                    |  | 29  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES                          |  | 29  
|ITEM 9A. |  | CONTROLS AND PROCEDURES                                                                                        |  | 29  
|ITEM 9B. |  | OTHER INFORMATION                                                                                              |  | 30  
|        
|PART III
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                             |  | 30  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                                         |  | 33  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                 |  | 37  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                 |  | 38  
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                         |  | 39  
|        
|PART IV 
|ITEM 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                     |  | 40  



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PART I



|ITEM 1. | BUSINESS.
|------- | ---------

Unless otherwise stated in this document
or unless the context otherwise requires, references herein to the Company, we, our and us include Steakhouse Partners, Inc. and its wholly owned subsidiaries, namely Paragon Steakhouse Restaurants,
Inc. and its subsidiaries (Paragon). Steakhouse refers to Steakhouse Partners, Inc., not including any of its wholly owned subsidiaries.

Overview

We own and operate 25 full-service steakhouse restaurants located in eight states. Our
restaurants principally operate under the brand names of Hungry Hunter, Hunter Steakhouse, Mountain Jacks and Carvers. Our restaurants specialize in complete steak and prime rib meals, and also offer fresh fish and other lunch and dinner
dishes. Our average check is $26.85 per guest (including alcoholic beverages) and our 25 restaurants serve approximately 2.5 million meals annually. Our management believes that our emphasis on quality service and our concentration on fresh
cut, high quality USDA graded steaks and prime ribs distinguishes our restaurants from our competitors, presenting an opportunity for growth.

Company
Background

We were incorporated in the State of Delaware on June 3, 1996 under the name Texas Looseys
Steakhouse & Saloon, Inc. On December 19, 1996, our Board of Directors adopted a resolution to change our name to Galvestons Steakhouse Corp. Up until December 21, 1998, Galvestons Steakhouse Corp.
owned two steakhouse restaurants and operated two others in Southern California, which together formerly comprised all of the restaurants known as Texas Looseys Chili Parlor & Saloon (Texas
Looseys).

Galvestons Steakhouse Corp. first acquired two Texas Looseys restaurants on August 19, 1996
pursuant to an Asset Purchase Agreement, dated April 10, 1996 (which was subsequently amended on November 1, 1998), and acquired the remaining two Texas Looseys restaurants on May 1, 1999.

On December 21, 1998, Galvestons Steakhouse Corp. acquired Paragon Steakhouse Restaurants, Inc. and its subsidiaries (Paragon of Michigan,
Inc., Paragon of Nevada, Inc., and Paragon of Wisconsin, Inc.) through its acquisition of all of the outstanding capital stock of Paragon. Paragon also owned Pacific Basin Foods, Inc. (PBF), a company which was engaged in
purchasing and selling food and other restaurant supplies to Paragon and nonaffiliated companies. On October 11, 2002 PBF filed for voluntary protection under Chapter 7 of the United States Bankruptcy Court. PBF ceased operations effective as
of the filing date thereof.

During the year ended December 31, 1999, Galvestons Steakhouse Corp.s name was changed to
Steakhouse Partners, Inc.

We maintain an Internet website at www.paragonsteak.com. This website offers free access to our press releases
and filings with the U.S. Securities and Exchange Commission (the SEC), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably
practicable after these reports are filed with or furnished to the SEC.

Bankruptcy Filing

Effective December 31, 2003, we confirmed a Plan of Reorganization, which allowed us to achieve the benefits that motivated the filings described
below. By way of background, on February 15, 2002, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Central
District of California (the Bankruptcy Court). On February 19, 2002, Paragon also filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (together, the Filing).



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The initial Filing was made in response to the maturing of certain notes aggregating $1,734,285, which we
were unable to pay. Throughout the course of the Reorganization, we sought to retain core locations, eliminate non-competitive leases, restructure our debt, and withdraw from under-performing markets.

During the process, we continued to manage our properties and operated our businesses as debtors-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

As a consequence to the Filing, all pending
litigation and claims against us were stayed, and no party was permitted to take action to realize its pre-petition claim, except pursuant to order of the Bankruptcy Code. While enjoying the protection of this stay, we disposed of under performing
assets and sought third party participation in funding a plan. Separately, our Pacific Basin subsidiary was a wholesale food distributor serving the restaurant industry. Its principal clients were Paragon and several small regional chains. As
Paragon downsized and reduced the total number of restaurants serviced by Pacific Basin Foods, the volume required to maintain its economic feasibility also diminished. On October 11, 2002, Pacific Basin Foods ceased operations and filed a
voluntary petition for bankruptcy under Chapter 7 of the Code.

In July 2003, the Bankruptcy Court approved a DIP loan and the general
terms pursuant to which a plan would be approved, as more fully described below. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors
are satisfied in full under the plan or unless creditors accept a reorganization plan that permits holders of equity interest to participate. The approved plan provided for no distribution to equity holders, but rather provided for distribution of
equity upon confirmation to the plan funder and creditors, as more fully described below.

We commenced a balloting and solicitation
process with respect to our plan of reorganization (the Plan), which concluded in early December 2003. On December 19, 2003, the Bankruptcy Court confirmed the Plan. Upon confirmation of the Plan, the entire balance of the
DIP facility of $5,000,000, including accrued interest, became due and payable to Steakhouse Investors, LLC or its assignees (Steakhouse Investors), and Steakhouse Investors received 90% of the new common stock of the reorganized
company in exchange for a full and complete release of the Companys obligations under the DIP agreement other than interest. The Plan provided that all of our capital stock outstanding prior to the confirmation of the Plan would be canceled.
In addition, all of our pre-petition liabilities were completely restructured by the Plan. As a result, we were obligated to pay the following claims:



|1. | Priority tax claim in the amount of approximately $1,921,000 will be paid over a four-year period from the Effective Date, with interest payable at a rate of 6% per annum. (See
Financial Note #8)
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | Secured claims in the amount of approximately $2,151,000 will be paid as follows: (a) $1,535,000 will be paid in full over a period of six years (interest only will be paid
over the first three years, and the principal will be paid over the remaining three years) and (b) $616,000 will be deemed paid upon the transfer of all of the assets and lease rights of one of our restaurants in Torrance, California. (See
Financial Note #8)
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | Unsecured claims estimated to be between $8,700,000 to $12,700,000 will be paid as follows: (a) General unsecured claims in the amount of $8,000,000 to $12,000,000 are expected
to receive recovery of 50% to 70% of their allowed claims. We paid to the creditors $1,000,000 within 30 days of the Effective Date of the Plan, and will make payments under a $5,030,000 note payable, which was scheduled in the amount of $500,000 on
each April, August, and December of each year for the next three years. The note is non-interest-bearing and the last payment is due on or before December 2006. Currently, we and the Trustee for the unsecured creditors are negotiating extending the
payments over a longer period of time so the payments conform more closely to available cash flow. In addition, the general unsecured creditors will receive their pro rata share of 500,000 shares of common stock, representing 10% of our new common
stock; and (b) Convenience claims in the amount of approximately $700,000 were paid an estimated recovery of 50%. (See Financial Note #8)
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Finally, the Plan provided for us to assume the core 25 profitable restaurants. For all the other units,
either our leasehold interests were sold or the leases were rejected as of the Effective Date. Any claims associated with the rejected leases were provided for in the Plan.

In connection with our emergence from bankruptcy protection, we implemented fresh-start accounting under the provisions of SOP 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code. Under SOP 90-7, our reorganization fair value was allocated to our assets and liabilities, our accumulated deficit was eliminated, and our new equity was issued according to
the Plan as if we were a new reporting entity.

In accordance with fresh-start accounting, all assets and liabilities were recorded at
their respective fair market values upon emergence from Chapter 11. Such fair values represented our estimates based on independent appraisals and valuations. Immaterial differences between estimated pre-petition liabilities assumed by us as a
reorganized company and the final settlement amounts are recognized as they occur.

To facilitate the calculation of the enterprise value
of the reorganized company, we developed a set of financial projections. Based on these financial projections and with the assistance of a financial advisor, we determined the enterprise value using various valuation methods, including (i) a
comparison of us and our projected performance to the market values of comparable companies, (ii) a review and analysis of several recent transactions of companies in similar industries to us, and (iii) a calculation of the present value
of the future cash flows under the projections. The estimated enterprise value is highly dependent upon achieving the future financial results set forth in the projections as well as the realization of certain other assumptions, which are not
guaranteed.

SOP 90-7 requires an allocation of the reorganization equity value in conformity with procedures specified by APB 16, Business
Combinations, as amended by SFAS 141, Business Combinations, for transactions reported on the basis of the purchase method. The excess of reorganization value over fair value of net assets (goodwill) was approximately $18,900,000
as of December 31, 2003. (See Financial Note #2)

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the continuation of operations, realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the Filing, realization of certain of our assets and liquidation of certain of
our liabilities are subject to significant uncertainty. Furthermore, the Plan materially changed the amounts and classifications reported in the December 30, 2003 consolidated financial statements, which did not give effect to any adjustments
to the carrying value or classification of assets or liabilities that were necessary as a consequence of the Plan.

Our Business Background

The steakhouse industry is expected to continue to expand over the next several years. We believe that this industry is highly
fragmented and, if we are successful in implementing our Plan, we may have the opportunity to grow our business by expanding one of Paragons brand-name steakhouses, Carvers.

Our overall steakhouse operations have historically experienced seasonal fluctuations, with the fourth quarter and first quarter of each year being our
strongest quarters, reflecting both the Christmas season and the colder weather at our Mid-west operations, and the third quarter being the slowest, as people tend to eat less steak in restaurants in the summer months. This seasonality, however, is
less pronounced at our California locations, which do not experience the same seasonal changes in weather that occur at our Mid-west locations.

Restaurant Concepts

All of our restaurants are positioned as destination restaurants that attract loyal clientele.
Destination restaurants are restaurants situated as the primary destination of our clientele, rather than a destination or activity ancillary to another activity, such as shopping or sight seeing. All but one of our restaurants are full-service



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steakhouses. We hand-cut our steaks in-house from whole loins of beef for superior freshness and taste. Prime rib is our signature product and is
the basis for our distinctive merchandising commitment to The Best Prime Rib in Town. Our prime rib, which is served in a herb crust, is slow roasted for eighteen hours to enhance its flavor and tenderness. Portions are deliberately
generous. Prime Rib and steaks account for approximately 65.0% of our food revenue. Full liquor, wine and bar service are available. Alcoholic beverage sales account for approximately 19.0% of our total net sales.

Our restaurants are generally open seven days a week with typical hours of operation being from 4:30 p.m. to 9:30 p.m. on weekdays and from 4:00 p.m. to
10:00 p.m. on weekends. Some restaurants are open for lunch beginning at 11:30 a.m. on weekdays; most of these restaurants are closed for lunch on weekends.

We intend to continue our efforts to differentiate our restaurants by emphasizing personal and attentive service, consistent high-quality, fresh products and position in the mid-priced, full service steakhouse segment
of the restaurant industry.

We currently operate in three distinctive steakhouse markets:

Hungry Hunter, Hunter Steakhouse and Mountain Jacks

We have 17 steakhouses operating under our core registered trade names, Hungry Hunter, Hunter Steakhouse and Mountain Jacks, for which the average dinner check is approximately $26.35 per guest. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and the look and feel of a classic special occasion restaurant. For this reason, we have been able to position our Hungry Hunter, Hunter Steakhouse and Mountain Jacks
steakhouses as a step-above the lower ticket restaurant chains such as Outback Steakhouse and Lone Star Steakhouse & Saloon.

Our
core menu also features fresh fish, seafood, pasta and chicken in addition to prime rib and steaks. A complete meal includes salad and a choice of two side dishes including soup, choice of potato, and steamed vegetables. The menu also includes
appetizers and desserts. The restaurant menus have recently been revised and expanded to respond to changing guest palates and diets, and to increase variety and emotional value. The change included the addition of new appetizers, seafood, specialty
steaks, prime rib combinations and revisions to all plate presentations.

Our Hungry Hunter, Hunter Steakhouse and Mountain Jacks
restaurants are typically free-standing buildings with dinner seating capacities ranging from 150 to 220 seats and an average seating capacity of approximately 180 seats. Unlike an Outback Steakhouse or Lone Star Steakhouse & Saloon, our
restaurants typically have one or more banquet rooms to accommodate private parties and corporate events. The bar in each restaurant is generally located adjacent to the dining room primarily to accommodate customers waiting for dining tables and up
to approximately 30 additional diners.

Carvers

We have four steakhouses operating in the upscale steakhouse-dining segment under the Carvers brand name with an average dinner check per guest of slightly more than $36.20. Carvers is a sophisticated, upper tier yet mid-priced restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers are divided into distinctive dining areas to provide greater intimacy. Prices at the Carvers restaurants are slightly higher than those of our other restaurants, but are
substantially lower than high-end steakhouses such as Mortons and Ruths Chris.

Our Carvers restaurants are also typically
housed in freestanding buildings with dinner seating capacities ranging from 180 to 240 seats and an average seating capacity of approximately 220 seats. Our Carvers restaurants also have one or more banquet rooms to accommodate private parties and
corporate events. We are currently developing the next generation lunch and dinner menus for Carvers.



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Concept Restaurants

Paragon operates four concept (unique) properties, with average checks ranging from $28.00 to $37.00 per guest:

The Tippecanoe Place is an upscale restaurant located in a 24,000 square foot historical building formerly known as the Studebaker Mansion, in South Bend, Indiana. Both the menu (featuring 60% of Paragon core entrée complimented by
gourmet and local favorites) and the structure are South Bend landmarks. Tippecanoe Place is regularly voted the best steakhouse, dining location and wedding site in northern Indiana.

The Cliffhouse, in Folsom, California, overlooks the American River, and attracts both locals as well as tourists with its beef and seafood
specialties and panoramic patio seating. The restaurant is approximately 10,000 square feet in size, and attracts a younger dining clientele with expansive bar offerings and regular karaoke and dancing opportunities.

The Whaling Company, our only seafood restaurant, is situated in colonial Williamsburg, Virginia. Fresh catches and local-tradition offerings are
presented on a daily catch board. Tourists visiting historical Williamsburg and the Busch Gardens amusement park enhance the strong community use of this profitable venture.

We operate our final unique restaurant under the name Carvers Creek in Raleigh, North Carolina. When we entered the southeast region of the country, the
names Carvers Creek and Carvers were tested for market appeal. This former Mountain Jacks was renamed Carvers Creek, but retained substantially all of the core concept attributes except certain full meal add-ons (such as salad and soup) and
point variations.

Reorganization Strategy

The benefits of the Plan have included among others, the restructuring of our debt, the improvement of our financial performance through cost-reduction and restructuring of administrative overhead, the ability to raise money, through the
selective sale of non-strategic restaurants and the commitment of funding in connection with the Plan. Our goal for the future is to enhance our position in the steakhouse restaurant industry by building through internal growth (Carvers) and through
the potential acquisition of steakhouse (step-up casual) restaurants. Key components of this strategy include leveraging established brands, achieving operating efficiencies and cost savings through volume discounts on purchases, and efficiently
penetrating new markets.

Marketing

We
use a combination of national, local and four walls marketing initiatives to enhance our consumer appeal and to promote increased guest counts.

On a national scale, we encourage trial by new guests and increase weekday customer counts with both print and electronic mediums. Our targeted advertisements consist of freestanding newspaper inserts and limited
discount coupons such as bulk mailers. In certain markets, we feature local image advertising and spot radio ads. Our print marketing is supplemented by an electronic guest loyalty outreach in partnership with the Fishbowl organization. This
restaurant-industry email service is utilized to disseminate regular, targeted dining opportunities to interested guests.

These nationally
directed marketing campaigns are complemented by local marketing efforts that feature unique programs responsive to our local communities. Our restaurant management teams participate in community activities, partner with local charities, and seek
opportunities to serve the communities that have supported our businesses. They also coordinate birthday and anniversary programs, hotel relationships, catering outreach, and community-unique guest relations programs.

Within our four walls, we rely on delivering an excellent-price value to retain those customers who respond to our trial invitations or return for a
meal. A collection of in-store print materials promotes quarterly seasonal food and beverage selections, and new dining features.



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Restaurant Operations and Management

We maintain quality and consistency in our restaurants through the careful hiring, training and supervision of personnel and the establishment of standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. To achieve our service goals, each service employee completes a training program, which teaches employees to provide the level of quality service that encourages guests to return and request the same server on
subsequent visits.

We maintain financial and accounting controls for each of our restaurants through the use of centralized accounting and
management information systems. All levels of our management participate in the ongoing process of strategic and financial planning and our systems are continuously refined to allow management to compare actual results with budgets and projections.

We also utilize management information systems to allow timely information analysis and response. Our computerized point-of-sale (POS)
data management system and related telecommunication equipment permits daily polling of restaurant operations and rapid collection of sales data and cash management information. Transaction level data is electronically transferred from each
restaurant location via POS systems on a daily basis. By consolidating individual restaurants sales, purchasing, payroll, operating expenses, guest related statistics and other data, we can regularly monitor restaurant operations. Our
management uses real-time information and control systems to reduce labor costs, to maintain constant surveillance of inventory usage and to analyze various aspects of restaurant operations including ideal food costs, sales mix, labor, minutes per
meal, promotional programs, restaurant costs and general marketing data. However, because of the age, reliability and serviceability issues of our existing POS system, we have begun to upgrade this critical feature starting in 2005. The software and
hardware vendors have been selected; five installations have been completed with testing and training in process. Once proven and tested, we anticipate it will take approximately twelve to eighteen months to convert all the units.

Our management team for a typical steakhouse restaurant generally consists of one general manager, one or two leaders and a kitchen manager. Each
restaurant also employs a staff consisting of approximately 40 to 70 hourly employees, many of whom work part-time. Typically, each general manager reports directly to either a district leader or one of our two regional vice presidents of
operations, who each supervise five to seven restaurants. Our restaurant managers complete an extensive training program during which they are instructed in areas including food quality and preparation, customer satisfaction, alcoholic beverage
service, governmental regulations compliance, liquor liability management and employee relations. Our restaurant managers are also provided with an operations manual relating to food and beverage preparation, all areas of restaurant management and
compliance with governmental regulations. Working in concert with the individual restaurant managers, our senior management defines operations and performance objectives for each restaurant and monitor implementation. Our senior management regularly
visits our restaurants and meets with the respective management teams to ensure compliance with our strategies and standards of quality in all respects of our restaurant operations and personnel development.

Each of our new restaurant employees participates in a training program during which the employee works under the close supervision of a restaurant
manager or an experienced key employee. Each general manager is required to attend the annual conference, which is held in San Diego, California, for individualized training and the opportunity to hear directly from their peer group. Our management
continuously solicits employee feedback concerning restaurant operations and strives to be responsive to our employees concerns.

Purchasing

During 2005, we had a major meat vendor that accounted for approximately $5.0 million (11%) of our total purchases. We purchase
our food and beverage products from a number of food distributors, including Southwest Traders on the West Coast and U.S. Foodservice in the Midwest. We did not have any supplier concentrations in



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2004. Food and supplies are shipped directly to the restaurants, although invoices for purchases are sent to the corporate support center for payment. Our
emphasis on high-quality food requires frequent deliveries of fresh food supplies. Tops, strips and porterhouse steaks are angus beef.

Sources and Availability of Raw Materials

We strive to obtain quality menu ingredients, raw materials and other supplies
and services for our operations from reliable sources at competitive prices. We concentrate our distribution to achieve more favorable terms, but believe we could replace any distributor, if necessary, on a timely basis. Substantially all menu items
are prepared on each restaurants premises daily from scratch, which includes fresh (non-frozen) beef. Each restaurants management determines the quantities of food and supplies required and orders items from regional suppliers on terms
negotiated by us. Restaurant level inventories are maintained at a minimum dollar-value level in relation to sales due to the relatively rapid turnover of the perishable produce, poultry, meat, fish and dairy commodities that are used in operations.

Trademarks and Service Marks

We have
registered various service marks, including Hungry Hunter, Hunter Steakhouse, Mountain Jacks and Carvers and their related designs with the United States Patent and Trademark Office. All of our trademarks and service marks have stated
expiration dates ranging from 2008 to 2012. However, they are renewable for an unlimited number of additional 10-year terms at our option.

Competition

The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many
well-established competitors with substantially greater financial and other resources than the Company. The food service is often impacted by changes in the taste and eating habits of the public, economic and political conditions affecting spending
habits, population and traffic patterns. The principal bases of competition in the industry are the quality and price of the food products offered. Our restaurants compete with other mid-priced, full service restaurants, which are not necessarily
steakhouse restaurants, primarily on the basis of quality of food and service, ambiance, location and price-value relationship. We also compete with a number of other steakhouse restaurants within our markets, including both locally owned
restaurants and regional or national chains. Although, we believe that the quality of our service, our well-regarded brands, attractive price-value relationship and quality of food will enable us to differentiate ourselves from our competitors and
place us in an excellent competitive position, many of our competitors are well established in the mid-priced dining segment and certain competitors have substantially greater financial, marketing and other resources than us. We also compete with
other restaurants and retail establishments for sites. We believe that our ability to compete effectively will continue to depend upon our ability to offer high-quality, mid-priced food in a full service, distinctive dining environment.

Research

We engage an outside company to do two
secret shops per month for each of our locations answering sixty-six questions regarding food, service, quality, value and suggestions for improvement. We also regularly provide bounce-back cards to its guests to solicit dining
experience information in return for discounts or free desserts.

Government Regulation

Our restaurants are subject to numerous federal, state and local laws affecting health, sanitation and safety standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each restaurant currently has appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, and each restaurant has food service licenses from local health
authorities. We are required to renew these licenses annually. In addition, these licenses may be suspended or revoked at any time for cause, including violation by us



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or our employees of any law or regulation pertaining to alcoholic beverage control. Our failure to obtain or retain liquor or food service licenses would
likely cause significant harm to our operations. In order to reduce this risk, each of our restaurants is expected to be operated in accordance with standardized procedures designed to assure compliance with all applicable codes and regulations.
Training of all restaurant employees on alcohol awareness and related laws is mandatory.

We are subject in certain states to
dram-shop statutes, which generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Our training covers prevention of such
occurrences and we carry liquor liability coverage as part of our comprehensive general liability insurance.

Our restaurant operations are
also subject to federal and state employment and wage laws governing such matters as working conditions, overtime, meal breaks, rest breaks and tip credits and other employee matters. Significant numbers of our employees are paid at rates related to
the federal minimum wage. Government-imposed increases in minimum wages, paid leaves of absence and mandated health benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities, could be detrimental to the
economic viability of our restaurants.

Our restaurants are also subject to numerous laws related to the fair treatment of employees, these
laws are designed to ensure a harassment free and safe environment. Among others, the Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We review plans and
specifications and make periodic inspections to ensure our restaurants will comply with the ADA. We believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled. We do
not anticipate that such compliance will require us to expend substantial funds.

Employees

At February 21, 2006, we employed approximately 1,300 individuals, of which 109 occupy executive, managerial or clerical positions, and 1,191 hold
non-managerial restaurant-related positions. None of our employees is covered by a collective bargaining agreement.

We consider our
relations with our employees to be good and have not experienced any interruption of operations due to labor disputes.

Information as to Classes of
Similar Products or Services

We operate in only one industry segment. All significant revenues and pre-tax earnings are related to
retail sales of food and beverages to the general public through Company-operated restaurants. At December 31, 2005, we had no operations outside the continental United States.



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ITEM 1A. RISK FACTORS.

Forward-Looking Information

Some of the statements in this Annual Report, including, but not limited to, Item 7Managements Discussion and Analysis of Financial
Condition and Results of Operations, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a safe harbor for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made in this Annual Report on Form 10-K are forward looking. The words estimates, plans, anticipates, expects,
intends, believes and similar expressions are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These statements involve known
and unknown risks, uncertainties and other factors that may cause our or our industrys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those discussed below.

You are cautioned not to place undue reliance on forward-looking statements, which reflect managements view only as of the date of this Annual
Report. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements after the date of this Annual
Report, whether as a result of any new information, future events or otherwise.

Risk factors that may affect future results and
financial condition

The following risk factors and other information included in this Annual Report should be carefully considered.
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks
actually occur, our business, financial condition and operating results could be significantly harmed.

Our prior bankruptcy could hinder our ability to
negotiate effectively with third parties and could adversely affect our operations going forward.

In February 2002, Steakhouse, along
with our wholly owned subsidiary Paragon, filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. We officially emerged from bankruptcy on December 31, 2003. However, our Chapter 11 reorganization and financial condition and
performance could adversely affect our operations going forward. Our bankruptcy filings had an adverse affect on our credit standing with our lenders, certain suppliers and other trade creditors. This can increase our costs of doing business and can
hinder our negotiating power with our lenders, certain suppliers and other trade creditors. The failure to negotiate favorable terms could adversely affect our financial performance. Though we have emerged from Chapter 11, the distribution of shares
0.5 million shares of common stock to the general unsecured creditors is not complete as we continue to reconcile the claims made by these creditors. Until this process is complete, we will continue to incur expenses with respect to the
reorganization process.

If we are unable to obtain additional funds in a timely manner or on acceptable terms or the plan of reorganization is
unsuccessful, we may have to curtail or suspend certain or all of our operations, which could adversely affect our financial condition, results of operations and prospects.

We cannot be certain that additional financing will be available when and to the extent required or that, if available, it will be on acceptable terms. If
we are unable to obtain additional funds in a timely manner or on



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acceptable terms to fund our deferred capital expense, it will seriously affect our ability to meet our Plan objectives, and we may have to curtail or
suspend the expansion of our operations and possibly terminate existing operations, which could lead to overall lower revenues and adversely affect our financial results and prospects. If adequate funds are not available on acceptable terms, we may
not be able to fund our expansion or respond to competitive pressures, which could lead to our inability to continue as a going concern.

We have
incurred losses from inception and may never generate substantial profits.

We were organized in May 1996 and have incurred significant
losses since inception. We may never generate profits. We incurred net losses in the approximate amounts: $0.5 million for the fiscal year ended December 31, 2005; $0.6 million for the fiscal year ended December 31, 2004; $4.9 million for
the fiscal year ended December 31, 2003; and $6.6 million for the fiscal year ended December 31, 2002. If we do not achieve and maintain profitability, we will be unable to continue our operations and you may lose the value of your entire
investment in our common stock.

We will need additional capital for expansion.

The development of new restaurants requires funds for construction, tenant improvements, furniture, fixtures, equipment, training of employees, permits,
initial franchise fees, and other expenditures. We will require funds to develop additional restaurants and to pursue any additional restaurant development or restaurant acquisition opportunities that may develop.

In the future, we may seek additional equity or debt financing to provide funds so that we can develop or acquire additional restaurants. Such financing
may not be available or may not be available on satisfactory terms. If financing is not available on satisfactory terms, we may be unable to expand our restaurant operations. While debt financing will enable us to add more restaurants than we
otherwise would be able to add, debt financing increases expenses and is limited as to availability due to our financial results and bankruptcy history, and we must repay the debt regardless of our operating results. Future equity financings could
result in dilution to our stockholders.

We may not have sufficient cash reserves to maintain and fund our operations and fund our obligations.

We may not have sufficient cash reserves to maintain our operations and fund our obligations. In such event, we may need to seek
additional financing. Any required additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our Plan and may be required to sell core assets or
dissolve the business. If we raise additional funds by issuing equity securities, shareholders may experience dilution of their ownership interest and the newly issued securities may have a rights superior to those of the common stock. If we issue
or incur debt to raise funds, we may be subject to limitations on our operations.

If we lose or are unable to obtain key personnel, our ability to
effectively operate our business could be hindered.

Our ability to maintain or enhance our competitive position will depend to a
significant extent on the efforts and ability of our executive officers, particularly our chief executive officer. Our future success and our ability to manage future growth will depend in large part upon the efforts of our management team and on
our ability to attract and retain other highly qualified personnel. Competition for personnel is intense, and we may not be successful in attracting and retaining our personnel. Our inability to retain our current management team and attract and
retain other highly qualified personnel could adversely affect our results of operations and hinder our ability to effectively manage our business.



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Because fresh start reporting will make future financial statements difficult to compare with our
historical financial statements, it may be difficult for investors to measure our financial performance or assess our prospects for growth.

In accordance with the requirements of SOP 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, we adopted fresh start reporting effective December 31, 2003. Because SOP 90-7 required us to reset our
assets and liabilities to current fair value, our financial position, results of operations and cash flows for periods ending after December 31, 2003 will not be comparable to the financial position, results of operations and cash flows
reflected in our historical financial statements for periods ending on or prior to December 31, 2003 included elsewhere in this report. The use of fresh start reporting will make it difficult to assess our future prospects based on historical
performance.

Changing consumer preferences and discretionary spending patterns, potential outbreaks of mad cow disease or foot/mouth
disease and other factors affecting the availability of beef could force us to modify our restaurants concept and menu and could result in a reduction in our revenues.

Even if we are able to successfully compete with other restaurant companies with similar concepts, we may be forced to make changes in one or more of our
concepts in order to respond to changes in consumer tastes or dining patterns. Consumer preferences could be affected by health concerns about the consumption of beef, the primary item on our Hungry Hunter, Hunter Steakhouse, Mountain Jacks,
Carvers restaurants menus, or by specific events such as the recently confirmed cases of mad cow disease by the Canadian government or foot/mouth disease which occurred in the United Kingdom. In addition, these events
could reduce the available supply of beef or significantly raise the price of beef. If we were to modify the emphasis on beef in our restaurants menus, we may lose additional customers who do not prefer the new concept and menu, and we may not
be able to attract a sufficient new customer base to generate the necessary revenues needed to make the restaurant profitable. In addition, we may have different or additional competitors for our intended customers as a result of such a concept
change and may not be able to successfully compete against such competitors. Our success also depends on numerous factors affecting discretionary consumer spending, including economic conditions, the cost of gasoline, 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 reduce revenues and operating income.

We face risks associated with changes in general economic conditions that affect consumer spending.

If the U.S. economy falters, our customers may reduce their level of discretionary spending. We believe that a decrease in discretionary spending could impact the frequency with which our customers choose to dine out or the amount they
spend on meals while dining out, thereby decreasing our revenues. Adverse economic conditions and any related decrease in discretionary spending by our customers could have an adverse effect on our revenues and operating results.

Our profitability is dependent in large measure on food and supply costs which are not within our control.

Our profitability is dependent in large measure on our ability to anticipate and react to changes in food and supply costs. Various factors beyond our
control, including climatic changes and government regulations, may affect food costs. Specifically, our dependence on frequent, timely deliveries of fresh beef, poultry, seafood and produce subjects us to the risks of possible shortages or
interruptions in supply caused by adverse weather or other conditions, which could adversely affect the availability and cost of any such items. We cannot assure you that we will be able to anticipate or react to increasing food and supply costs in
the future. The failure to react to these increases could materially and adversely affect our business and result of operations.

Our ability to execute
our expansion plans depends on securing suitable locations at favorable prices.

Our strategy for expansion of our operations includes
the construction of new restaurant properties and/or acquisition of existing properties. Our ability to open additional restaurants will depend upon our ability to



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identify and acquire available new construction sites or restaurant conversions at favorable prices. We must also have sufficient available funds from
operations or otherwise to support this expansion.

If we cannot successfully construct new restaurant properties or convert acquired
restaurant properties to our established brands within projected budgets or time periods, our business and our ability to continue as a going concern will be adversely affected. Even with a successful reorganization and sufficient funds, plans to
expand our business may fail due to construction delays or cost overruns, which could be caused by numerous factors, such as shortages of materials and skilled labor, labor disputes, weather interference, environmental problems and construction or
zoning problems.

We face risks associated with the expansion of our operations.

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



| |  |  | the availability and cost of suitable restaurant locations for development;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the availability of restaurant acquisition opportunities;
| | - |  | ---------------------------------------------------------



| |  |  | the hiring, training, and retention of additional management and restaurant personnel;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the availability of adequate financing;
| | - |  | ---------------------------------------



| |  |  | the continued development and implementation of management information systems;
| | - |  | -------------------------------------------------------------------------------



| |  |  | competitive factors; and
| | - |  | ------------------------



| |  |  | general economic and business conditions.
| | - |  | -----------------------------------------

Increased
construction costs and delays resulting from governmental regulatory approvals, strikes, or work stoppages, adverse weather conditions, and various acts of God may also affect the opening of new restaurants. Newly opened restaurants may operate at a
loss for a period following their initial opening. The length of this period will depend upon a number of factors, including the time of the year the restaurant is opened, the sales volume, and our ability to control costs.

We may not successfully achieve our expansion goals. Additional restaurants that we develop or acquire may not be profitable. In addition, the opening of
additional restaurants in an existing market may have the effect of drawing customers from and reducing the sales volume of our existing restaurants in those markets.

Successful mergers, acquisitions, divestitures and other strategic transactions are important to our future growth and profitability.

We intend to evaluate potential mergers, acquisitions, joint venture investments, and divestitures as part of our strategic planning initiative. These
transactions involve various inherent risks, including, among other things,



| |  |  | our ability to identify suitable acquisition targets, including assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential
profitability of any acquisition candidate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to negotiate favorable acquisition terms for such targets;
| | - |  | ----------------------------------------------------------------------



| |  |  | our ability to prevail over competing bidders for any acquisition candidate;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our ability to secure financing necessary to complete such acquisitions in a timely manner and on acceptable terms;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to achieve projected economic and operating synergies from any acquired business;
| | - |  | ---------------------------------------------------------------------------------------------



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| |  |  | unanticipated changes in business and economic conditions affecting any acquired business;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | our ability to complete divestitures on acceptable terms and at or near the prices estimated as attainable by us; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to integrate successfully the operations and management of any business we acquire into our business.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Given that our growth strategy is heavily dependent on acquiring new businesses, if we are unable to execute on this strategy for any reason our future
operating results may be harmed materially.

We depend on key food product distributors.

We have a major meat vendor that accounted for $5.0 million (11%) of our total purchases in 2005. We purchase our food and beverage products from a
number of food distributors, including Southwest Traders on the West Coast and U.S. Foodservice in the Midwest. If any of our vendors is unable to continue providing us with a high level of quality and dependability in the receipt of our
supplies, at the cost advantages resulting from our volume purchases, this could have a material impact on our business.

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

We face commodity price and availability risk.

We purchase energy and agricultural products that are subject to price volatility caused by weather, market conditions and other factors that are not
predictable or within our control. Increases in commodity prices could result in lower restaurant-level operating margins for our restaurant concepts. Occasionally, the availability of commodities can be limited due to circumstances beyond our
control. If we are unable to obtain such commodities, we may be unable to offer related products, which would have a negative impact on our profitability.

Increases in federal and state statutory minimum wages could increase our expenses, which could adversely affect our results of operations.

Certain states have each increased their state minimum wages to a level that significantly exceeded the federal minimum wage. These recent increases in the state statutory minimum wage and any future federal or state
minimum wage increases could raise minimum wages above the current wages of some of our employees. As a result, competitive factors could require us to make corresponding increases in our employees wages. Increases in our wage rates increase
our expenses, which could adversely affect our results of operations.

The failure to enforce and maintain our trademarks and trade names could
adversely affect our ability to establish and maintain brand awareness.

Our current operations and marketing strategy depend
significantly on the strength of trademarks and service marks. Our wholly owned subsidiary, Paragon of Michigan, Inc., has registered, among others, the names Hungry Hunter, Mountain Jacks and Carvers. The success of our growth strategy
depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products. Although we are not aware of any infringing uses of any of the trademarks or service
marks that we believe could materially affect us; we cannot assure you that we will be free from such infringements in the future.



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The names Hungry Hunter, Mountain Jacks and Carvers represent our core concept restaurants. The
termination of our right to use this name or our failure to maintain any of our other existing trademarks could materially and adversely affect our growth and marketing strategies.

Because we maintain a small number of restaurants, the negative performance of a single restaurant could have a substantial impact on our operating results.

We currently own and operate 25 restaurants. Due to this relatively small number of restaurants, poor financial performance at any owned restaurant could
have a significant negative impact on our profitability as a whole. The results achieved to date by our relatively small restaurant base may not be indicative of the results of a larger number of restaurants in a more geographically dispersed area
with varied demographic characteristics. We cannot assure you that we will be able to operate our existing restaurants at higher sales levels that generate equal or higher operating profits or increase the number of our restaurants sufficiently to
offset the impact of poor performance at any one restaurant.

Our operating results may fluctuate significantly due to seasonality and other factors
beyond our control.

Our business is subject to seasonal fluctuations, which may vary greatly depending upon the region of the United
States in which a particular restaurant is located. In addition to seasonality, our quarterly and annual operating results and comparable unit sales may fluctuate significantly as a result of a variety of factors, including:



| |  |  | the amount of sales contributed by new and existing restaurants;
| | - |  | ----------------------------------------------------------------



| |  |  | the timing of new openings;
| | - |  | ---------------------------



| |  |  | increases in the cost of key food or beverage products;
| | - |  | -------------------------------------------------------



| |  |  | labor costs for our personnel;
| | - |  | ------------------------------



| |  |  | our ability to achieve and sustain profitability on a quarterly or annual basis;
| | - |  | --------------------------------------------------------------------------------



| |  |  | consumer confidence and changes in consumer preferences;
| | - |  | --------------------------------------------------------



| |  |  | health concerns, including adverse publicity concerning food-related illness;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the level of competition from existing or new competitors in our segment of the restaurant industry; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | economic conditions generally and in each of the markets in which we are located.
| | - |  | ---------------------------------------------------------------------------------

These fluctuations make it difficult for us to predict and address in a timely manner factors that may have a negative impact on our results of operations.

We could face labor shortages, increased labor costs and other adverse effects of varying labor conditions.

The development and success of our restaurants depend, in large part, on the efforts, abilities, experience and reputations of the general managers and
chefs at such restaurants. In addition, our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and wait staff. Qualified individuals
needed to fill these positions are in short supply and the inability to recruit and retain such individuals may delay the planned openings of new restaurants or result in high employee turnover in existing restaurants. A significant delay in finding
qualified employees or high turnover of existing employees could materially and adversely affect our results of operations or business. Also, competition for qualified employees could require us to pay higher wages to attract sufficient qualified
employees, which could result in higher, labor costs. In addition, increases in the minimum hourly wage, employment tax rates and levies, related benefits costs, including health insurance, and similar matters over which we have no control may
increase our operating costs.



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The restaurant industry is affected by litigation and publicity concerning food quality, health and other issues,
which can cause guests to avoid our restaurants and result in liabilities.

Health concerns, including adverse publicity concerning
food-related illness, although not specifically related to our restaurants, could cause guests to avoid our restaurants, which would have a negative impact on our sales. We may also be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality, health or operational concerns. A lawsuit or claim could result in an adverse decision against us that could have a material adverse effect on our business and results of
operations. We may also be subject to litigation, which, regardless of the outcome, could result in adverse publicity. Adverse publicity resulting from such allegations or related litigation may interfere with our managements ability to focus
on operating our restaurants, result in reduced business at our restaurants, harm our reputation, and generally have a negative impact on our business and operations, regardless of whether such allegations are true or whether we are ultimately held
liable.

Compliance with environmental laws may affect our financial condition.

We are subject to various federal, state and local environmental laws. These laws govern discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes. These laws may also impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions or
contamination relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurant or land in question and regardless of whether such environmental conditions were created by us or by a
prior owner or tenant. The costs of any cleanup could be significant and have a material adverse effect on our financial position and results of operations.

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

Keeping abreast of, and in compliance with, changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, and new SEC regulations, has
required an increased amount of management attention and external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to
comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Risks Related To Our Common Stock

Since our
shares are thinly traded, and trading on the pink sheets may be sporadic because it is not an exchange, stockholders may have difficulty reselling their shares.

Our common stock is currently quoted on the Pink Sheets. The fact that our common stock is not listed is likely to make trading more difficult for broker-dealers, shareholders and investors, potentially leading to
further declines in share price. An investor may find it more difficult to sell our common stock or to obtain accurate quotations of the share price of our common stock.

The price of our common stock may fluctuate significantly.

The market price of our common stock
could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies, trading volume in our common stock, dilution systemic to financing
operations, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the



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stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by
many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

In the past,
following periods of volatility in the market price of a companys securities, securities class-action litigation has often been instituted. Such litigation, if initiated, could result in substantial costs, a material adverse effect on our
business, and a diversion of managements attention and resources.

Failure of our common stock to appreciate in value could affect our ability to
raise working capital and adversely impact our ability to continue our normal operations.

A prolonged period in which our common stock
trades at current levels could result in our inability to raise capital and may force us to reallocate funds from other planned uses, which would have a significant negative effect on our business plans and operations. If our stock price does not
recover from its current levels, there can be no assurance that we can raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to
have the resources to continue our normal operations.

The large number of shares of our common stock eligible for public sale and the fact that a
relatively small number of investors hold our publicly traded common stock could cause our stock price to fluctuate.

The market price
of our common stock could fluctuate as a result of sales by our existing stockholders of a large number of shares of our common stock in the market or the perception that such sales could occur. A large number of shares of our stock are eligible for
public sale and our common stock is concentrated in the hands of a small number of investors and is thinly traded. An attempt to sell by a large holder could adversely affect the price of our common stock. These sales or the perception that these
sales might occur could also make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Trading of our stock may be restricted by the SECs penny stock regulations, which may limit a stockholders ability to buy and sell our stock.

The SEC has adopted regulations which generally define penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited
investors. The term accredited investor refers generally to institutions with assets in excess of $5.0 million or individuals with a net worth in excess of $1.0 million or annual income exceeding $200,000 or $300,000 jointly with
their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information
about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in
the transaction and monthly account statements showing the market value of each penny stock held in the customers account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the
customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customers confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock
not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchasers written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to
trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.



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NASD sales practice requirements may also limit a stockholders ability to buy and sell our stock.

In addition to the penny stock rules described above, the National Association of Securities Dealers, Inc.
(the NASD) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending
speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customers financial status, tax status, investment objectives and other information. Under
interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend
that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

Delaware law contains anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Because we are a Delaware corporation, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or Delaware Law. These provisions may prohibit large stockholders, in particular
those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common
stock in the future, resulting in the market price being lower than it might be without these provisions.

Ownership of approximately 38% of our
outstanding common stock by five stockholders will limit your ability to influence corporate matters.

A substantial majority of our
capital stock is held by a limited number of stockholders. Five stockholders, including our officers and directors and parties affiliated with or related to such persons or to us, own approximately 38% of the shares of common stock outstanding.
Accordingly, such stockholders will likely have a strong influence on major decisions of corporate policy, and the outcome of any major transaction or other matters submitted to our stockholders or board of directors, including potential mergers or
acquisitions, and amendments to our Amended and Restated Certificate of Incorporation. Stockholders other than these principal stockholders are therefore likely to have little influence on decisions regarding such matters.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS.
|-------- | --------------------------

None.



|ITEM 2. | PROPERTIES.
|------- | -----------

We lease all of our restaurant
locations. Lease terms are generally 10 to 35 years, with renewal options. All of our leases provide for a minimum annual rent and some leases provide for additional rent based on sales volume at the particular location over specified minimum
levels. Generally, the leases are net leases that require us to pay the costs of insurance, taxes and maintenance. We intend to continue to lease restaurant locations where cost-effective if cash flow permits. On July 19, 2000, we completed a
sale and leaseback transaction with PS Realty Partners, LP with respect to 19 of our properties, yielding net proceeds of approximately $22 million. We utilized a majority of these net proceeds to pay down a $20 million mortgage debt.



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The following table sets forth the location of our existing Hungry Hunters, Hunters
Steakhouse, and Mountain Jacks restaurants as of March 27, 2006:



|                                                                                                   |  |                                |  |         |  |                                                           
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ |  | ------- |  | ----------------------------------------------------------
|California                                                                                         |  |                                |  | Indiana
|Bakersfield Fairfield Lafayette Modesto Oceanside S. San Francisco Sacramento San Diego Santa Rosa |  | Temecula Thousand Oaks Ventura |  |         |  | Lafayette  Michigan Auburn Hills Taylor Troy Traverse City

The following table sets forth the location of our existing Carvers restaurants as well as our
concept (unique) restaurants:



|                                                                      |  |                                                                                      
|--------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|Carvers Locations                                                     |  | Concept (Unique) Restaurant Locations                                                
|Glendale, Arizona Centerville, Ohio Roseville, California Sandy, Utah |  | Folsom, California South Bend, Indiana Williamsburg, Virginia Raleigh, North Carolina

Our executive offices are located at 10200 Willow Creek Road, San Diego, California 92131. Our
executive offices have a three-year lease expiring in May 2007 at very competitive rates with an option to renew. Our telephone number is (858) 689-2333. We believe that there is sufficient office space available at favorable leasing terms in
the San Diego, California, metropolitan area to satisfy our current and anticipated needs.



|ITEM 3. | LEGAL PROCEEDINGS.
|------- | ------------------

From time to time, we are
involved in various legal claims and litigation arising in the normal course of business. Based on currently known legal actions, management believes that, as a result of its legal defenses and insurance arrangements, none of these actions, other
than the bankruptcy filing described above, will have a material adverse effect on our business or financial condition, taken as a whole. See Part I, Item 1. BusinessBankruptcy Filing.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

No matters were submitted for shareholder approval during the fourth quarter of the fiscal year covered by this Report.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES.
|------- | ---------------------------------------------------------------------------------------------------------------

Market Information

Our common stock traded on the
NASDAQ Small Cap Market under the symbol SIZL from February 27, 1998, the date of our initial public offering, until December 19, 2001, the day it was delisted. Our common stock was then listed on the over-the-counter market
and traded on the Pink Sheets under the symbol SIZLQ.PK until the Effective Date of the Plan. As of the Effective Date, all of our outstanding capital stock was cancelled and new shares of common stock of the reorganized company were
issued. On May 3, 2004, our common stock began trading on the Pink Sheets as a reorganized company under the symbol STPK.PK.

The
following table sets forth the range of high and low closing prices for our common stock for each quarterly period indicated, as reported by brokers and dealers making a market in the stock. Such quotations reflect inter-dealer prices without retail
markup, markdown or commission, and may not necessarily represent actual transactions:



|                             |  |      |             |     |   |     
|---------------------------- |  | ---- | ----------- | --- | - | ----
|                             |  | High |             | Low
|Year ended December 31, 2004 |  |      |             |     |   |     
|First Quarter                |  |      | No Activity
|Second Quarter               |  | $    | 2.75        |     | $ | 2.30
|Third Quarter                |  |      | 2.75        |     |   | 1.15
|Fourth Quarter               |  |      | 2.12        |     |   | 2.00



|                             |  |      |      |     |   |     
|---------------------------- |  | ---- | ---- | --- | - | ----
|                             |  | High |      | Low
|Year ended December 31, 2005 |  |      |      |     |   |     
|First Quarter                |  | $    | 2.00 |     | $ | 1.05
|Second Quarter               |  |      | 1.40 |     |   | 1.03
|Third Quarter                |  |      | 1.04 |     |   | 0.60
|Fourth Quarter               |  |      | 0.70 |     |   | 0.50

Holders

As of January 4, 2006 there were approximately 130 record holders of our common stock. Upon the Effective Date of the Plan, the entire balance of the DIP facility (described above) was converted to common stock.
The former members of Steakhouse Investors received 90% of the new common stock of the reorganized company in exchange for a full and complete release of our obligations under the DIP agreement other than interest. All of our outstanding capital
stock as of the filing of the Plan was canceled as of the Effective Date.

Dividends

We have not paid any cash or other dividends on our common stock since our inception and do not anticipate paying any such dividends in the foreseeable
future. We intend to retain any earnings for use in our operations and to finance our Plan.



19



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##### Table of Contents

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information on the number of securities to be issued upon the exercise of outstanding options, warrants and rights and the
number of securities remaining available for future issuance.



|                                                           |  |                                                                                               |  |                                                                                    |      |                                                                                                                                         |       
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | (a) Number ofSecurities to beIssued uponExercise ofOutstandingOptions, Warrantsand Rights (#) |  | (b) Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights($/Sh) |      | (c) Number ofSecuritiesRemaining Availablefor Future Issuanceunder EquityCompensation Plans(ExcludingSecurities Reflectedin Column (a))
|Equity compensation plans approved by security holders (1) |  | 1,410,000                                                                                     |  | $                                                                                  | 1.11 |                                                                                                                                         | 90,000
|Equity compensation plans not approved by security holders |  | 0                                                                                             |  |                                                                                    | 0    |                                                                                                                                         | 0     
|                                                           |  |                                                                                               |  |                                                                                    |      |                                                                                                                                         |       
|Total                                                      |  | 1,410,000                                                                                     |  |                                                                                    | 1.11 |                                                                                                                                         | 90,000
|                                                           |  |                                                                                               |  |                                                                                    |      |                                                                                                                                         |       

---

|(1) | The 2004 Stock Option Incentive Plan (the Option Plan) was approved by our Board of Directors in April 2004 and by our shareholders in January 2005. The Option
Plan was intended to provide incentive to our key employees, officers, directors and consultants who provide significant services to us. There are 1.5 million shares available for grant under the Option Plan. The number of shares available
under the Option Plan may automatically increase, at the discretion of the Board, by a number equal to the lesser of (i) 25% of the fully diluted total number of shares of common stock then outstanding, or (ii) 2.0 million shares.
Options generally vest over a three-year period and the Board determines the option exercise price at the time of grant.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Recent Sales of
Unregistered Securities

All sales of equity securities that were not registered under the Securities Act during the 2005 fiscal year
have been previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.



|ITEM 6. | SELECTED FINANCIAL DATA.
|------- | ------------------------

The selected consolidated
financial data for the five years ended December 31, 2005 has been derived from our Consolidated Financial Statements. This data should be read in conjunction with Consolidated Financial Statements and related Notes for the year ended
December 31, 2005, and the Managements Discussion and Analysis of Financial Condition and Results of Operations. It should be noted that the Plan materially changed the amounts and classifications reported in the December 30, 2003
consolidated financial statements, which did not give effect to any adjustments to the carrying value or classification of assets and liabilities that were necessary as a consequence of the Plan. We report our operations on a 52-53 week fiscal year
ending on the Tuesday closest to December 31. For financial statement purposes, we report all years as ending December 31.



20



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##### Table of Contents

|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                    |  | Fiscal Years                             |       
|Income Statement Data:                                                                              |  | 2005                                     |        |   | 2004 |   |        | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                                                    |  | (in thousands, except per share amounts) |       
|Net Revenues                                                                                        |  | $                                        | 52,001 |   |      | $ | 55,070 |      |  | $ | 77,758  |   |  | $    | 97,102  |   |  | $ | 110,684 |  
|Cost of sales                                                                                       |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Food and beverage                                                                                   |  |                                          | 17,016 |   |      |   | 18,710 |      |  |   | 28,396  |   |  |      | 33,887  |   |  |   | 38,481  |  
|Payroll and payroll related costs                                                                   |  |                                          | 17,726 |   |      |   | 18,598 |      |  |   | 27,704  |   |  |      | 34,313  |   |  |   | 36,720  |  
|Direct operating costs                                                                              |  |                                          | 11,183 |   |      |   | 11,429 |      |  |   | 20,008  |   |  |      | 24,297  |   |  |   | 27,259  |  
|Non-cash impairment of property, plant, and equipment                                               |  |                                          | 51     |   |      |   |       |      |  |   |        |   |  |      |        |   |  |   | 6,582   |  
|Depreciation and amortization                                                                       |  |                                          | 1,283  |   |      |   | 1,235  |      |  |   | 1,877   |   |  |      | 2,785   |   |  |   | 3,452   |  
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total cost of sales                                                                                 |  |                                          | 47,259 |   |      |   | 49,972 |      |  |   | 77,985  |   |  |      | 95,282  |   |  |   | 112,494 |  
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross profit (loss)                                                                                 |  |                                          | 4,742  |   |      |   | 5,098  |      |  |   | (227    | ) |  |      | 1,820   |   |  |   | (1,810  | )
|Costs and expenses                                                                                  |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|General and administrative Expenses (includes non-cash compensation $388 in 2005 and $500 in 2004)  |  |                                          | 4,348  |   |      |   | 4,459  |      |  |   | 4,711   |   |  |      | 5,104   |   |  |   | 8,515   |  
|Legal settlement                                                                                    |  |                                          |       |   |      |   | 35     |      |  |   |        |   |  |      |        |   |  |   | 800     |  
|Reserve for advances to officers                                                                    |  |                                          |       |   |      |   |       |      |  |   |        |   |  |      | 277     |   |  |   | 617     |  
|Income (loss) before other income (expense)                                                         |  |                                          | 394    |   |      |   | 604    |      |  |   | (4,938  | ) |  |      | (3,561  | ) |  |   | (11,742 | )
|Other income (expense)                                                                              |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest Income                                                                                     |  |                                          |       |   |      |   | 1      |      |  |   |        |   |  |      |        |   |  |   |        |  
|Miscellaneous income                                                                                |  |                                          | 386    |   |      |   | 131    |      |  |   | 179     |   |  |      | 392     |   |  |   | 260     |  
|Interest and financing costs                                                                        |  |                                          | (1,257 | ) |      |   | (1,324 | )    |  |   | (2,567  | ) |  |      | (2,328  | ) |  |   | (2,690  | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total other (expense)                                                                               |  |                                          | (871   | ) |      |   | (1,192 | )    |  |   | (2,388  | ) |  |      | (1,936  | ) |  |   | (2,430  | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before reorganization items, provisions for income taxes, and discontinued operations |  |                                          | (477   | ) |      |   | (588   | )    |  |   | (7,326  | ) |  |      | (5,497  | ) |  |   | (14,172 | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Reorganization items                                                                                |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gain on sale of property, plant, and equipment                                                      |  |                                          | 26     |   |      |   | 54     |      |  |   | 3,516   |   |  |      | 2,048   |   |  |   |        |  
|Professional Fees                                                                                   |  |                                          | (47    | ) |      |   | (28    | )    |  |   | (1,968  | ) |  |      | (1,217  | ) |  |   |        |  
|IDine settlement                                                                                    |  |                                          |       |   |      |   |       |      |  |   |        |   |  |      | (960    | ) |  |   |        |  
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total reorganization items                                                                          |  |                                          | (21    | ) |      |   | 26     |      |  |   | 1,548   |   |  |      | (129    | ) |  |   |        |  
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (Loss) before provision for income taxes and discontinued operations                         |  |                                          | (498   | ) |      |   | (562   | )    |  |   | (5,778  | ) |  |      | (5,626  | ) |  |   | (14,172 | )
|Provision for income taxes                                                                          |  |                                          | (43    | ) |      |   | 73     |      |  |   | 130     |   |  |      | 129     |   |  |   | 148     |  
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (Loss) before discontinued Operations                                                        |  |                                          | (455   | ) |      |   | (635   | )    |  |   | (5,908  | ) |  |      | (5,755  | ) |  |   | (14,320 | )
|Income (Loss) before discontinued operations, net of income taxes of $0, $0, $850, $850 & $1,851    |  |                                          |       |   |      |   |       |      |  |   | 1,057   |   |  |      | (828    | ) |  |   | (2,397  | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss                                                                                            |  | $                                        | (455   | ) |      | $ | (635   | )    |  | $ | (4,851  | ) |  | $    | (6,583  | ) |  | $ | (16,717 | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings (loss) per share                                                                           |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                                               |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings (Loss) from continuing operations                                                          |  | $                                        | (0.08  | ) |      | $ | (0.13  | )    |  | $ | (1.74   | ) |  | $    | (1.70   | ) |  | $ | (4.23   | )
|Earnings (Loss) from discontinued operations                                                        |  |                                          |       |   |      |   |       |      |  | $ | 0.31    |   |  | $    | (0.24   | ) |  | $ | (0.71   | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic loss per share                                                                                |  | $                                        | (0.08  | ) |      | $ | (0.13  | )    |  | $ | (1.43   | ) |  | $    | (1.94   | ) |  | $ | (4.94   | )
|                                                                                                    |  |                                          |        |   |     
|Diluted loss per share                                                                              |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings (Loss) from continuing operations                                                          |  | $                                        | (0.08  | ) |      | $ | (0.13  | )    |  | $ | (1.74   | ) |  | $    | (1.70   | ) |  | $ | (4.23   | )
|Earnings (Loss) from discontinued operations                                                        |  |                                          |       |   |      |   |       |      |  | $ | 0.31    |   |  | $    | (0.24   | ) |  | $ | (0.71   | )
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Diluted loss per share                                                                              |  | $                                        | (0.08  | ) |      | $ | (0.13  | )    |  | $ | (1.43   | ) |  | $    | (1.94   | ) |  | $ | (4.94   | )
|                                                                                                    |  |                                          |        |   |     
|Shares used to calculate loss per share                                                             |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                                               |  |                                          | 5,966  |   |      |   | 5,000  |      |  |   | 3,387   |   |  |      | 3,387   |   |  |   | 3,387   |  
|Diluted                                                                                             |  |                                          | 5,966  |   |      |   | 5,000  |      |  |   | 3,387   |   |  |      | 3,387   |   |  |   | 3,387   |  
|                                                                                                    |  |                                          |        |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                                    |  |                                          |        |   |     
|Balance Sheet Data:                                                                                 |  | 2005                                     |        |   | 2004 |   |        | 2003 |  |   | 2002    |   |  | 2001 |        
|Total assets                                                                                        |  | $                                        | 30,734 |   |      | $ | 31,474 |      |  | $ | 17,763  |   |  | $    | 25,995  |   |  | $ | 31,000  |  
|Total debt, excluding capital lease obligations                                                     |  | $                                        | 8,620  |   |      | $ | 9,385  |      |  | $ | 6,478   |   |  | $    | 2,188   |   |  | $ | 5,760   |  
|Total capital lease obligations                                                                     |  | $                                        | 8,738  |   |      | $ | 8,996  |      |  | $ | 9,865   |   |  | $    | 14,376  |   |  | $ | 17,433  |  
|Stockholders equity (deficit)                                                                      |  | $                                        | 7,090  |   |      | $ | 5,511  |      |  | $ | (25,687 | ) |  | $    | (20,896 | ) |  | $ | (14,373 | )



21



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related footnotes for the year ended
December 31, 2005 included in this Annual Report. We report our operations on a 52-53 week fiscal year ending on the Tuesday closest to December 31. For financial statement purposes, we report all years as ending December 31. The
discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

Company Overview

As of December 31, 2005, we operated 25 full-service steakhouse restaurants located in eight states.
We operate under the brand names of Carvers, Hungry Hunter Steakhouse, Hunter Steakhouse and Mountain Jacks. On December 21, 1998, we acquired Paragon Steakhouse Restaurants, Inc. and its subsidiaries (Paragon) and Pacific
Basin Foods, Inc. (PBF). Prior to the acquisition of Paragon, we owned and operated four restaurants. On February 28, 2002, we rejected nine leases as part of our Chapter 11 Plan of Reorganization, which was confirmed effective
December 31, 2003 (the Plan). At December 31, 2003, we had rejected or sold forty units and as of December 31, 2004 we sold an additional three units.

We believe that our restaurants are well positioned in a high quality, moderately priced segment of the restaurant industry. Our Carvers restaurants
represent an upscale restaurant market specializing in complete steak, chop, prime rib and seafood meals. Our growth strategy is based on internal growth and growth through acquisition. Internal growth focuses on improvement in same store sales and
construction of new restaurant properties. Acquisition growth focuses on either a conversion of acquired restaurant properties to our steakhouse brand names or the targeted acquisition of one or more large steakhouse chains. Now that we have emerged
from our reorganization, we are focused on acquisitions.

To the extent we establish or build steakhouses in new locations, there is likely
to be a time lag between the time expenses of the startup are incurred and the time newly constructed steakhouses are opened and begin to generate revenues, which time lag could affect quarter-to-quarter comparisons and results.

Our overall steakhouse operations tend to experience seasonal fluctuations, with the fourth quarter and first quarter of each year being our strongest
quarters, reflecting both the Christmas season and the colder weather at our Midwest operations, and the third quarter being the weakest, as people tend to eat less steak in restaurants in the summer months. This seasonality, however, is less
pronounced at our California locations, in which we do not experience the same seasonal changes in weather that occur at our Midwest locations.

As of the filing date of our Chapter 11 reorganization, we had three business units, which had separate management and reporting infrastructures that offered different products and services. The business units were aggregated into two
reportable segments, restaurant services and food service distribution, since the long-term financial performance of these reportable segments is affected by similar economic conditions. The restaurant services segment consisted of two business
unitsParagon Steakhouse Restaurants, Inc. and Steakhouse Partners, Inc.that operated specialty restaurants around the country. Our food service distribution segment, which operated as Pacific Basin Foods, performed distribution of
restaurant foods and restaurant-related products for internal operations, as well as customers outside our internal operations.

As Paragon
downsized and reduced the total number of restaurants serviced by PBF, the volume required to maintain its economic feasibility also diminished. Therefore, on October 11, 2002, PBF ceased operations and filed under Chapter 7 with the United
States Bankruptcy Court in Riverside, California.



22



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##### Table of Contents

Results of Operations

Results of OperationsSelected Items as a Percentage of Net Sales

The following table sets forth, as a percentage of
revenue for core restaurants only, certain items in our condensed consolidated statements of operations for the indicated periods:



|                                   |  |                                       |    |  |                                       |   
|---------------------------------- |  | ------------------------------------- | -- |  | ------------------------------------- | --
|                                   |  | FIFTY-TWOWEEKS ENDEDDecember 31, 2005 |    |  | FIFTY-TWOWEEKS ENDEDDecember 31, 2004 |   
|Net revenues                       |  | 100.0                                 | %  |  | 100.0                                 | % 
|Cost of Sales                      |  |                                       |    |  |                                       |   
|Food and Liquor costs              |  | 32.7                                  | %  |  | 33.5                                  | % 
|Payroll and Related Costs          |  | 34.1                                  | %  |  | 33.6                                  | % 
|Direct Operating Cost              |  | 21.6                                  | %  |  | 20.5                                  | % 
|Depreciation                       |  | 2.5                                   | %  |  | 2.2                                   | % 
|Gross Profit                       |  | 9.1                                   | %  |  | 10.1                                  | % 
|Costs and Expenses                 |  |                                       |    |  |                                       |   
|General and administrative Expense |  | 8.4                                   | %  |  | 7.3                                   | % 
|Capital Lease Interest             |  | 1.9                                   | %  |  | 1.9                                   | % 
|Other                              |  | 0.3                                   | %  |  | 2.1                                   | % 
|Net Loss                           |  | (0.9                                  | %) |  | (1.2                                  | %)

Factors that have affected the results of operations for fifty-two weeks of fiscal 2005 for us as
compared to the fifty-two weeks of fiscal 2004 for us are discussed below.

52 Weeks Ended December 31, 2005 Compared to the 52 Weeks Ended
December 31, 2004

Net revenues for the fifty-two week period ended December 31, 2005 decreased approximately $3.0 million or
5.6% from $55.1 million for the fifty-two week period ended December 31, 2004 to $52.0 for the same period in 2005. A portion of the decrease is attributable to the decrease in total operating units. Three operating units were disposed of in
February 2004 and contributed almost $0.6 million in net revenue before their disposition. The major reason for the decrease in net revenue was the same store sales for the core twenty-five units that were open at the end of the year reflected a
decrease of 4.5% for the 52 weeks ended December 31, 2005 versus the same period in 2004. We believe this was the result of a 4.8% increase in total average per guest price, which in turn negatively affected the total guest count. These changes
were additive to significant changes to the menu and menu prices from the same period in 2004. The total price increases and changes in the menu were required as we had deferred any changes through the entire bankruptcy process and to offset beef
and labor increases during that time.

Food and beverage costs for the fifty-two week period ended December 31, 2005 decreased
approximately $1.7 million or 9.3% from $18.7 million for the fifty-two week period ended December 31, 2004 to $17.0 million for the same period in 2005. Food and beverage costs as a percentage of net revenues for the core twenty-five
restaurants were 32.7% for the fifty-two week period ended December 31, 2005 compared to 33.5% for the same period in 2004. The major reason for this decrease was the effect of a mid-year major menu price increase coupled with a reengineering
of the menu that increased the average entrée price in total 4.8%. Also the record high beef prices that affected us through the first half of fiscal year 2004 declined in the summer of 2004 and stabilized for most of 2005.

Payroll and payroll related costs for the fifty-two week period ended December 31, 2005 decreased approximately $0.9 million or 4.7% from $18.6
million for the fifty-two week period ended December 31, 2004 to $17.7 million for the same period in 2005. The total payroll and payroll related costs as a percentage of net revenues were 34.1% for the fifty-two week period ended
December 31, 2005 compared to 33.6% for the same



23



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##### Table of Contents

period in 2004 or 0.5% increase. The major reason for this increase as a percentage relationship to revenue is the impact of the decrease in the
restaurants net revenue was slightly greater than the minimum staffing required per unit to maintain guest services and a positive dining experience. During the year the management teams at a number of units were reduced to minimize (where
ever possible) this effect. Partially offsetting these increases were the effect of a mid-year major menu price increase coupled with a reengineering of the menu that increased the average entrée price in total 4.8%.

Direct operating costs include all other unit-level operating costs, the major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, rent, insurance and other occupancy costs. A substantial portion of these expenses is fixed or indirectly variable. Direct operating costs for the fifty-two week period ended December 31, 2005 decreased by
almost $0.2 million or 1.7% from $11.4 million for the fifty-three week period ended December 31, 2004 to $11.2 million for the same period in 2005. The costs as a percentage of net revenues were 21.6% for the fifty-two week period ended
December 31, 2005 compared to 20.5% for the same period in 2004 or 0.9% increase. The major reason for this increase as a percentage relationship to revenue is the impact of the decrease in the restaurants net revenue, which was greater
than reductions in the fixed or indirectly variable expenses. Also contributing to this increase is an asset impairment write-off of the Troy, Michigan, location for $51,000. This location has experienced losses over the past two years and an
immediate turnaround is not likely. Partially offsetting these increases was the effect of a mid-year major menu price increase coupled with a reengineering of the menu that increased the average entrée price in total 4.8%.

Depreciation and amortization for the fifty-two week period ended December 31, 2005 increased slightly from $1.2 million for the fifty-two week
period ended December 31, 2004 to $1.3 million for the same period in 2005. The major reason for this change is a result of the capital spending on property, equipment and the POS system since mid-2004.

General and administrative expenses for the fifty-two week period ended December 31, 2005 decreased $0.2 million or 4.4% from $4.5 million for
the fifty-two week period ended December 31, 2004 to $4.3 million for the same period in 2005. General and administrative expenses as a percentage of net revenues was 8.4% for the fifty-two week period ended December 31, 2005 compared to
7.3% for the same period in 2004. The primary reasons for the increase as a percentage relationship to revenue (even though in absolute dollars general and administrative expenses declined) are higher legal and outside accounting fees associated
with resolving stock option deferred compensation issues and the restatement of prior period reports. Partially offsetting this increase was lower non-cash deferred compensation expense for employee stock options ($0.4 million) for the
fifty-two week period ended December 31, 2005 compared to $0.6 million for the same period in 2004. The Company granted the stock options in April, 2004 to help retain and attract management talent.

Total other income and interest expense, net, for the fifty-two week period ended December 31, 2005 decreased approximately $0.3 million or 26.9%
from $1.2 million for the fifty-two week period ended December 31, 2004 to almost $0.9 million for the same period in 2005. The decrease is principally due to increases in other income as the Workers Compensation premium rebate for the
fifty-two week period ended December 31, 2005 was significantly greater than the rebate for the same period in 2004.

Total
reorganization items, net, for the fifty-two week period ended December 31, 2005 was a slight loss of $21,000 as compared to a gain of $26,000 for the same period in 2004. The primary reason for the decrease was a bankruptcy related net
adjustment for sales tax of $47,000.

Net loss for the fifty-two week period ended December 31, 2005 decreased almost $0.2 million
from $0.6 million for the fifty-two week period ended December 31, 2004 to approximately $0.4 million for the same period in 2005. Net loss as a percentage of net revenues was 0.9% for the fifty-two week period ended December 31, 2005
compared to a net loss of 1.2% for the same period in 2004. The primary reason for this decrease as a percentage relationship to revenue was the increase of other income as the Workers Compensation



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##### Table of Contents

premium rebate for the fifty-two week period ended December 31, 2005 was significantly greater than the rebate for the same period in 2004. Also
contributing to the decrease was the positive effect of the net operating loss (NOL) on the tax provision, which resulted in a tax credit for the year ended December 31, 2005. Partially offsetting these decreases was the
disproportionate expenses of labor and direct operating costs versus the lower revenue.

52 Weeks Ended December 31, 2004 Compared to the 53 Weeks
Ended December 31, 2003

Revenues for the fifty-two week period ended December 31, 2004 decreased $22.6 million or 29.2% from
$77.8 million for the fifty-three week period ended December 31, 2003 to $55.1 million for the same period in 2004. The decrease is substantially attributable to the decrease in total operating units. Between the filing date of bankruptcy
and the end of 2004, 40 operating units were rejected, closed and/or sold. Partially offsetting the decrease in revenue was the same store sales for those core units that were open at the end of the year reflected an increase of 1.9% for the 52
weeks ended December 31, 2004 versus the same period in 2003.

Food and beverage costs for the fifty-two week period ended
December 31, 2004 decreased $9.7 million or 34.1% from $28.4 million for the fifty-three week period ended December 31, 2003 to $18.7 million for the same period in 2004. Food and beverage costs as a percentage of net revenues were 34.0%
for the fifty-two week period ended December 31, 2004 compared to 36.5% for the same period in 2003. Food and beverage costs as a percentage of net revenues for the core restaurants only were 33.6% for the fifty-two week period ended
December 31, 2004 compared to 35.0% for the same period in 2003. The major reason for this decrease was the effect of a mid-year major menu price increase coupled with a reengineering of the menu that increased the average entrée price
by almost 8% and (except for the core restaurants comparative) the sale of several unprofitable units in the first quarter of fiscal year 2004. Also the record high beef prices that affected the Company through most of fiscal year 2003 and the first
half of fiscal year 2004 declined somewhat in the summer and then stabilized.

Payroll and payroll related costs for the fifty-two week
period ended December 31, 2004 decreased $9.1 million or 32.9% from $27.7 million for the fifty-three week period ended December 31, 2003 to $18.6 million for the same period in 2004. The total payroll and payroll related costs as a
percentage of revenues were 33.9% for the fifty-two week period ended December 31, 2004 compared to 35.6% for the same period in 2003. The primary reason for this decrease as a percentage relationship to revenue is the effect of the menu price
increase coupled with a company-wide effort to maximize staff efficiencies and the sale of several unprofitable units in the first quarter of FY 2004. The total payroll and payroll related costs as a percentage of revenues for the core restaurants
were 33.8% for the fifty-two week period ended December 31, 2004 compared to 33.2% for the same period in 2003. The major reason for this increase as a percentage relationship to revenue is the impact of approximately 25% higher Workers
Compensation insurance and company-sponsored medical benefits. Partially offsetting these large increases was a company-wide effort to maximize staff efficiencies and reduce payroll dollars.

Direct operating costs include all other unit-level operating costs, the major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, rent, insurance and other occupancy costs. A substantial portion of these expenses is fixed or indirectly variable. Direct operating costs for the fifty-two week period ended December 31, 2004 decreased $8.6
million or 42.9% from $20.0 million for the fifty-three week period ended December 31, 2003 to $11.4 million for the same period in 2004. The costs as a percentage of net revenues were 20.8% for the fifty-two week period ended December 31,
2004 compared to 25.7% for the same period in 2003. The primary reason for this decrease as a percentage relationship to revenue is the effect of the menu price increase coupled with the sale of several unprofitable units in the first quarter of
fiscal year 2004. The costs as a percentage of net revenues for the core restaurants were 20.2% for the fifty-two week period ended December 31, 2004 compared to 20.8% for the same period in 2003. The primary reason for this decrease as a
percentage relationship to revenue is the effect of the menu price increase.



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Depreciation and amortization for the fifty-two week period ended December 31, 2004 decreased $0.6
million or 34.2% from $1.9 million for the fifty-three week period ended December 31, 2003 to $1.2 million for the same period in 2004. The main reason for this decrease is that between the filing date of bankruptcy and the end of 2004, 40
operating units were rejected, closed and/or sold, as well as the discontinuance of Pacific Basin Foods in Chapter 7.

General and
administrative expenses for the fifty-two week period ended December 31, 2004 decreased approximately $0.3 million or 5.3% from $4.7 million for the fifty-three week period ended December 31, 2003 to $4.5 million for the same period in
2004. General and Administrative expenses as a percentage of restaurant revenues was 7.7% for the fifty-two week period ended December 31, 2004 compared to 6.1% for the same period in 2003. The chief reasons for the increase as a percentage
relationship to revenue is higher legal and outside accounting fees associated with the reorganized company and fresh start accounting, as well as non-cash deferred compensation expense for employee stock options of $0.5 million the Company granted
to help retain and attract management talent. General and Administrative expenses as a percentage of restaurant revenues for the core restaurants (without non-cash compensation expense) was 7.3% for the fifty-two week period ended December 31,
2004 compared to 8.5% for the same period in 2003. The chief reason for this decrease as a percentage relationship to revenue is the positive effects of renewing the lease at the corporate office at a more favorable rate, as well as, renegotiating
maintenance contracts and leases for significant savings. Also contributing to the improvement was some minor reductions in force in the accounting area, i.e. Accounts Payable Supervisor, etc.

Total other income and interest expense, net, for the fifty-two week period ended December 31, 2004 decreased $1.2 million or 50.1% from $2.4
million for the fifty-three week period ended December 31, 2003 to $1.2 million for the same period in 2004. The decrease is principally due to the conversion of the Predecessor Companys short and long-term debt plus accrued interest to
the unsecured interest free creditors note of the Reorganized Company.

Total reorganization items, net, for the fifty-two week period
ended December 31, 2004 was a gain of $26,388 as most gains were taken prior to the effective date. Comparing to the fifty-three week period ended December 31, 2003 the net gain was $1.5 million which was the result of gains associated
with the rejection and or sale of 22 units that totaled $3.5 million partially offset by the high legal and professional fees specifically associated with the bankruptcy of approximately $2.0 million.

For the fifty-two week period ended December 31, 2004 there was no gain from discontinued operations. The gain from discontinued operations for the
fifty-three week period ended December 31, 2003 was $1.0 million. On October 11, 2002 Pacific Basin Foods ceased operations and filed for Chapter 7 with the United States Bankruptcy Court in Riverside, California. The Company had a net
liability of $1.0 million as of December 31, 2002. As Pacific Basin Foods has legally and practically ceased operations the net liability was recognized as one time income of discontinued operations, net of taxes.

Net loss for the fifty-two week period ended December 31, 2004 decreased $4.2 million from $4.9 million for the fifty-three week period ended
December 31, 2003 to $0.6 million for the same period in 2004. The decrease is principally due to in FY 2004 (for the most of the year) the Company was to down to the core (25) profitable restaurants versus FY 2003 which operating results
included 25 additional underperforming and/or unprofitable units. Also contributing to the improvement is the menu price increase, the reengineering of the menu and the reduction in the cost of beef in the second half of the year. Net income as a
percentage of restaurant revenues for the core restaurants were 0.6% for the fifty-two week period ended December 31, 2004 compared to a net loss of 1.8% for the same period in 2003. The chief reason for this decrease as a percentage
relationship to revenue were the menu price increase, the reengineering of the menu, the reduction in the cost of beef in the second half of the year, a company-wide effort to maximize staff efficiencies and reduce payroll dollars partially offset
by the impact of approximately 25% higher workmen compensation insurance and company sponsored medical benefits. Partially offsetting these improvements was a non-cash deferred compensation expense for employee stock options ($0.5 million) that the
Company granted to help retain and attract management talent.



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Liquidity and Capital Resources

Our principal source of liquidity is from our restaurant sales, which, as noted above, are primarily derived from cash or credit/debit cards. Principal uses of cash are operating expenses, which have been discussed in
the preceding sections and capital expenditures.

A comparison of our sources and uses of funds for 2005 and 2004 follow (in millions):



|                                                               |  |      |      |   |      |   |      |        |  |   |      |  
|-------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ------ |  | - | ---- | -
|                                                               |  | 2005 |      |   | 2004 |   |      | Change | 
|Net cash provided by (used in) continuing operating activities |  | $    | (0.0 | ) |      | $ | (0.7 | )      |  | $ | 0.7  |  
|Net cash provided by (used in) continuing investing activities |  | $    | (0.4 | ) |      | $ | 0.2  |        |  | $ | (0.6 | )
|Net cash provided by (used in) continuing financing activities |  | $    | 0.2  |   |      | $ | (1.0 | )      |  | $ | 1.2  |  
|                                                               |  |      |      |   |      |   |      |        |  |   |      |  
|Net increase (decrease) in cash and cash equivalents           |  | $    | (0.2 | ) |      | $ | (1.5 | )      |  | $ | 1.3  |  
|                                                               |  |      |      |   |      |   |      |        |  |   |      |  

On the Effective Date of the Plan, all then-outstanding equity securities of the pre-petition
company (the Predecessor Company), as well as substantial amounts of its pre-petition liabilities, were cancelled. The new authorized capitalization of the reorganized company on the Effective Date pursuant to the Plan consisted
of 15.0 million shares of new common stock and 5.0 million shares of new preferred stock. Upon the Effective Date, and pursuant to the terms of the Plan, the entire balance of the DIP credit facility became due and payable in the form of
90%, or 4.5 million shares, of our common stock issued to the former members of Steakhouse Investors, LLP or its assignees in consideration of the full release of our obligations under the DIP credit facility. All such shares were issued
without registration under the Securities Act of 1933 in reliance on the provision of Section 1145 of the Bankruptcy Code and Section 4(2) of the Securities Act of 1933. In addition, as part of the Plan, an independent creditor litigation
trust (Creditor Trust) was established for the benefit of our pre-petition creditors, and 500,000 shares of common stock are reserved for issuance to creditors in connection with obligations under the Plan.

We had a cash and cash equivalents balance of $0.5 million at December 31, 2005. During fiscal 2005, we maintained a current ratio of 0.22-to-1,
which arose from a working capital deficit of $9.7 million, which includes short-term debt ($6.0 million) resulting from the Plan. Currently, we are negotiating with the trustee for the unsecured creditors to either extend the terms of the
short-term debt, per the Plan, to more closely match the cash generated from operations or allow us to consolidate the debt. During 2005, we raised through the sale of common stock and warrants approximately $1.5 million for the reduction of debt
and working capital. (See Financial Note #14).

Off-Balance Sheet Arrangements

None.

Contractual Obligations

Our contractual obligations at December 31, 2005 were as follows:



|                                           |  |                                      |      |                 |   |           |  |           |     |                  |   |     |  |   |     
|------------------------------------------ |  | ------------------------------------ | ---- | --------------- | - | --------- |  | --------- | --- | ---------------- | - | --- |  | - | ----
|                                           |  | Payments Due by Period (in millions)
|Contractual Obligations                    |  | Total                                |      | Less than1 Year |   | 1-3 Years |  | 3-5 Years |     | More Than5 Years
|Due in Fiscal year                         |  |                                      |      | 2006            |   | 2007-2008 |  | 2009-2010 |     | After 2010      
|Long-term debt (including current portion) |  | $                                    | 8.6  |                 | $ | 5.9       |  | $         | 2.1 |                  | $ | 0.6 |  | $ | 0.0 
|Operating leases                           |  | $                                    | 24.3 |                 | $ | 2.5       |  | $         | 4.5 |                  | $ | 4.0 |  | $ | 13.3
|Capital leases                             |  | $                                    | 8.7  |                 | $ | 0.3       |  | $         | 0.7 |                  | $ | 0.9 |  | $ | 6.8 
|                                           |  |                                      |      |                 |   |           |  |           |     |                  |   |     |  |   |     
|Total                                      |  | $                                    | 41.6 |                 | $ | 8.7       |  | $         | 7.3 |                  | $ | 5.5 |  | $ | 20.1
|                                           |  |                                      |      |                 |   |           |  |           |     |                  |   |     |  |   |     



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Our long-term debt and operating leases are described in Financial Notes #8 and 12, respectively, of the
accompanying consolidated financial statements.

Our management believes that our current capital structure, which includes proceeds from
the private placement financing, is sufficient to meet our 2005 requirements.

New Accounting Pronouncements

In October 2005, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 13-1,
Accounting for Rental Costs Incurred during a Construction Period. The guidance requires rental costs for operating leases during the construction
period to be recognized as rental expense. The guidance permits either retroactive or prospective treatment for periods beginning after December 15, 2005. We currently comply
with this guidance and, therefore, the application of FSP 13-1 did not have a material effect on our consolidated financial statements.

In June 2005, the FASB reached a consensus on EITF 05-06, Determining the Amortization Period for Leasehold Improvements Purchased after
Lease Inception or Acquired in a Business Combination. The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease
be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods
beginning after June 29, 2005. We currently comply with this guidance and, therefore, the adoption of EITF 05-06 does not have a material impact on our consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and
Error CorrectionsA Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 requires retrospective application, or the latest practical date, as the preferred method to report a change in
accounting principle or correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not
expected to have a material impact on our consolidated financial statements.

In March 2005, the FASB issued
FASB Interpretation No. (FIN) 47, Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of
the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however the
timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when
an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. The adoption
of FIN 47 did not have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123,
Share-Based Payment. SFAS 123(R) is a revision of SFAS 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees. SFAS 123(R) requires all share-based payments to employees including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS
123(R) is effective at the beginning of the first annual period beginning after June 15, 2005. Under APB Opinion No. 25, no stock-based compensation cost has been reflected in our net income for grants of
stock options to employees. Beginning in the first quarter of 2006, we will recognize compensation expense in our financial statements based on the fair value of all share-based payments to employees. SFAS 123(R)
also changes the accounting for the tax effects of options, including the presentation of the tax effects on the consolidated statements of cash flows. The future impact of SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted. However, had SFAS 123(R) been adopted in prior periods, the effect would have approximated the SFAS 123 pro forma net income and earnings per share
disclosures, as reflected in Footnote 15 to our financial statements.



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In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 to provide
public companies additional guidance in applying the provisions of SAFS 123(R). Among other things, SAB 107 describes the staffs expectations in determining the assumptions that underline the fair value estimates and discusses the
interpretations of SFAS 123(R) with certain existing staff guidance. SAB 107 should be applied upon the adoption of SFAS 123(R).

Impact of Inflation

Our operating costs that may be affected by inflation consist principally of food, payroll and utility costs. A significant number of
our restaurant team members are paid at the federal minimum wage or, if higher, the applicable state minimum wage and, accordingly, legislated changes to the minimum wage rates affect our payroll costs. There has been legislation introduced to
increase the minimum wage in the U.S. Congress and in the legislatures of approximately one-half of the states in which we operate. It is impossible to predict which increases will be implemented. If such increases were implemented, we expect that
payroll costs, as a percent of sales, would increase.

We consider our current price structure to be very competitive. We consider this
factor, among others, when passing cost increases on to our customers. Sales prices were effectively increased by 4.8% in fiscal 2005, 4.0% in fiscal 2004 and 0.0% in fiscal 2003.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------- | -----------------------------------------------------------

Market Risk.  Our exposure to market risk is principally confined to cash in the bank, money market accounts, and notes payable, which have short maturities and, therefore, minimal and immaterial market risk.

Interest Rate Sensitivity.  As of December 31, 2005, we had cash in checking and money market accounts. Because of the short
maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of these assets.

Foreign Currency Exchange Risk.  We do not have any foreign currency exposure because we currently do not transact business in foreign currencies.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- | --------------------------------------------

The
response to this item is included in a separate section of this report. See Index to Consolidated Financial Statements on Page F-1.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
|------- | --------------------------------------------------------------------------------------

None



|ITEM 9A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives,
and our management necessarily is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating the



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effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K, have concluded that as of the
end of such period, our disclosure controls and procedures are effective to ensure that information we are required to disclose is timely reported. Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures
will detect or uncover all failures of persons within the Company and our subsidiaries to disclose material information otherwise required to be set forth in our periodic reports.

In order to address the previously disclosed material weaknesses, the company engaged additional outside consultants to evaluate the accounting and legal
implications of its attempted option terminations in the first quarter of 2005. There have been no other changes in our internal control over financial reporting identified in connection with the above-described evaluation that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
|-------- | ---------------------------------------------------

Our Bylaws provide for a Board consisting of no less than three and no more than seven members, the exact number within this range being determined by the Board. The number of directors is currently set at three. Each director holds office
until the next annual meeting of stockholders and until such directors successor is duly elected and qualified, or until such directors earlier death, resignation or removal.

The following table sets forth certain information regarding our directors and executive officers.



|                            |  |     |  |                                                                           
|--------------------------- |  | --- |  | --------------------------------------------------------------------------
|Name                        |  | Age |  | Position                                                                  
|A. Stone Douglass (1)       |  | 58  |  | Chairman of the Board, President, Chief Executive Officer and Secretary   
|Joseph L. Wulkowicz         |  | 55  |  | Vice President, Chief Financial Officer and Assistant Secretary           
|Susan Schulze-Claasen       |  | 51  |  | Executive Vice President, Chief Administrative Officer and General Counsel
|Edgar Tod Lindner (1)(2)(3) |  | 60  |  | Director                                                                  
|Thomas A. Edler (2)(3)      |  | 62  |  | Director                                                                  

---

|(1) | Member of the Nominating Committee.
|--- | -----------------------------------

|(2) | Member of the Compensation Committee.
|--- | -------------------------------------

|(3) | Member of the Audit Committee.
|--- | ------------------------------

The following is a brief
summary of the background of the Companys directors and executive officers. Each executive officer holds office until his successor is elected or qualified, or until his earlier death, resignation or removal.

A. STONE DOUGLASS.Mr. Douglass was appointed as our President, Chief Executive Officer and Secretary, and as one of our directors, effective
as of July 20, 2003, pursuant to the terms of a post-petition debtor-in-possession financing agreement entered into by us and pursuant to the order of the Bankruptcy Court, entered on August 13, 2003. He was named Chairman in
December 31, 2003. Mr. Douglass is an experienced merchant banker and distressed business management consultant. Mr. Douglass has over 30 years of experience in finance and managing public and private companies, including acting as
director and/or interim chief executive officer of companies reorganized in bankruptcy. Mr. Douglass is a Managing Director of Compass Partners, L.L.C., a merchant bank specializing in restructuring and bankruptcy reorganization.
Mr. Douglass is



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also Chairman of Ducks Nest Investments, Inc., a private investment and merchant bank. From July 2002 to May 2003, Mr. Douglass was Chief
Operating Officer of ACE Audiovisual, Inc., a commercial integrator of audiovisual products. From June 2001 to June 2002, Mr. Douglass was President of Inline Orthodontix, an orthodontic productions distribution company. From October 2000 to
August 2001, Mr. Douglass was President and Chief Executive Officer of VisionAmerica, Inc. (AMEX: VISN), an optometric physicians practice management company. From August 1998 to May 2001, Mr. Douglass was also President and Chief
Executive Officer of Apple Orthodontix, Inc. (AMEX: AOI), an orthodontic practice management company. Mr. Douglass also has served as a director of Neocork Technologies, Inc., since February 2004. Mr. Douglass earned a Bachelor of Science
degree in Business Management from Farleigh Dickinson University in 1970.

JOSEPH L. WULKOWICZ. Mr. Wulkowicz was appointed as
our Vice President and Chief Financial Officer and Assistant Secretary in December 2003 upon confirmation of the bankruptcy Plan. Since November 1999, Mr. Wulkowicz has served as Chief Financial Officer and Assistant Secretary of Paragon
Steakhouse Restaurants, Inc. Mr. Wulkowicz served as the Chief Financial Officer of McArthur/HTC International, a leading importer and marketer of sports and promotional products, from January 1997 through November 1999. Mr. Wulkowicz
earned a Masters in Business Administration in Finance from DePaul University Graduate School of Business in 1976.

SUSAN
SCHULZE-CLAASEN. Ms. Schulze-Claasen was appointed as our Vice President and General Counsel in December 2003 upon confirmation of the bankruptcy Plan, and was named Executive Vice President, Chief Administrative Officer and General Counsel
effective March 1, 2005. Ms. Schulze-Claasen has served as Vice PresidentGeneral Counsel and Assistant Secretary of Paragon Steakhouse Restaurants, Inc. since June 1985, and now serves as President. Ms. Schulze-Claasen holds a
Juris Doctorate from Valparaiso University, School of Law in 1979.

EDGAR TOD LINDNER.Mr. Lindner has been one of our
directors since February 1999. Mr. Lindner has been the DirectorPrivate Placements with Jane Capital Partners since April 2003. Prior to joining Jane Capital Partners, Mr. Lindner was the managing director of Pentech Capital Markets
Group since May 1999. Prior to joining Pentech Capital Markets Group, Mr. Lindner was a managing director of Ally Capital Group Inc., an investment-banking firm, from May 1996 to April 1999. Mr. Lindner also served as a director of Neocork
Technologies, Inc., from August 2002 until December 2003 and was reappointed to that board in March of 2005. Mr. Lindner received his Bachelor of Science in Finance and Banking from the University of Oregon in 1966.

THOMAS A. EDLER. Mr. Edler has been one of our directors since May 1998. Mr. Edler has been President and Chief Executive Officer of
Pacific Coast Advisers, Inc. since September 1999. In addition, Mr. Edler served as Senior Vice President of Capitol Bay Securities, a regional investment-banking firm, from May 1999 to January 2001. Mr. Edler received his Bachelor of
Science degree from Indiana University in 1966, with subsequent post-graduate studies at the University of Southern California in 1969. Mr. Edler served as an officer in the United States Air Force for four years immediately following college.

Committees of the Board of Directors

The Board of Directors has a standing Audit Committee, Compensation Committee and Nominating Committee.

The Audit Committee
reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including selecting our independent auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. Mr. Lindner and Mr. Edler are members of the Audit Committee and are non-employee directors.

The Compensation Committee reviews and approves the compensation and benefits of our key executive officers, administers our employee benefit plans and makes recommendations to the Board of Directors regarding such
matters. Mr. Lindner and Mr. Edler are members of the Compensation Committee.



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The Nominating Committee reviews and assesses the composition of the Board of Directors, assists in
identifying potential new candidates for director and nominates candidates for election to the Board of Directors. The Nominating Committee currently consists of Mr. Douglass and Mr. Lindner.

Audit Committee Financial Expert

Under rules of the
SEC, companies are required to disclose whether their audit committees have an audit committee financial expert as defined in Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934 (the Exchange
Act) and whether that expert is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Board of Directors has determined that Mr. Lindner is an audit committee financial
expert and is also independent.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than ten percent of our
common stock, to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Regulations promulgated by the SEC require the Company to disclose any reporting violations with respect to the 2005 fiscal year, which came to
our attention based on a review of the applicable filings required by the SEC to report the status of an officer or director, or the changes in beneficial ownership as submitted to us. Based solely on review of such forms we received, we believe
that all required reports for the 2005 fiscal year have been timely filed.

Code of Ethics

We adopted a written Code of Ethics (the Code of Ethics) that applies to our President and Chief Executive Officer and Chief Financial
Officer. A copy of the Code of Ethics is available on our website at www.paragonsteak.com and print copies are available to any shareholder that requests a copy. Any amendment to the Code of Ethics or any waiver of the Code of Ethics will be
disclosed on our website promptly following the date of such amendment or waiver.

Code of Conduct

We adopted a Code of Conduct that applies to all employees, including all executive officers and senior financial officers and directors. Print copies of
our Code of Conduct are available to any shareholder that requests a copy.



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##### Table of Contents

|ITEM 11. | EXECUTIVE COMPENSATION.
|-------- | -----------------------

Summary Compensation

The following table sets forth the compensation paid to or earned from us during each of our last three fiscal years by our President and Chief Executive
Officer and the two other most highly compensated executive officers whose total cash compensation for the year ended December 31, 2005 exceeded $100,000 (collectively referred to herein as the Named Executive Officers).



|                                                                                                     |  |                     |  |                             |                       |           |     |                                  |     |                                       |  |          
|---------------------------------------------------------------------------------------------------- |  | ------------------- |  | --------------------------- | --------------------- | --------- | --- | -------------------------------- | --- | ------------------------------------- |  | ---------
|                                                                                                     |  | Annual Compensation |  | Long-TermCompensationAwards
|Name and Principal Position                                                                          |  | Year                |  | Salary ($)                  |                       | Bonus ($) |     | Other AnnualCompensation ($) (4) |     | Securities Underlying Options (#) (5)
|A. Stone Douglass (1) President, Chief Executive Officer and Secretary                               |  | 200520042003        |  | $$$                         | 200,012200,01281,543  |           |  |                                  | $$$ | 34,38028,8009,186                     |  | 250,000
|                                                                                                     |  |                     |  |                             |                      
|Joseph Wulkowicz (2) Vice President and Chief Financial Officer                                      |  | 200520042003        |  | $$$                         | 156,800158,686130,007 |           |  |                                  | $$$ | 12,0009,7854,800                      |  | 100,000
|                                                                                                     |  |                     |  |                             |                      
|Susan Schulze-Claasen (3) Executive Vice President, Chief Administrative Officer and General Counsel |  | 200520042003        |  | $$$                         | 150,014155,186125,015 |           |  |                                  | $$$ | 12,00012,00012,000                    |  | 100,000

---

|(1) | Mr. Douglass commenced serving as our President, Chief Executive Officer and Secretary effective as of July 30, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Wulkowicz commenced serving as Vice President and Chief Financial Officer as of the effective date of the Plan of Reorganization, December 31, 2003. The salary and
other compensation for 2003 are for prior positions with us.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Ms. Schulze-Claasen commenced serving as Vice President and General Counsel as of the effective date of the Plan of Reorganization, December 31, 2003, and was named
Executive Vice President and Chief Administrative Officer and General Counsel effective March 1, 2005. The salary and other compensation for 2003 are for prior positions with us.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Other annual compensation for Mr. Douglass includes (i) an automobile allowance and (ii) a housing allowance ($26,880 in 2005, $21,300 in 2004 and $0 in 2003).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Stock options were granted under our 2004 Stock Incentive Plan on April 16, 2004. Each option becomes exercisable over a period of three years at the rate of one-third of the
shares subject to the options on the first, second and third anniversaries of the grant date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Options

There were no options to acquire shares of our common stock granted to or exercised by the Named Executive Officers during the fiscal year ended
December 31, 2005. The following table sets forth information concerning the fiscal year-end value of unexercised options held by each of the Named Executive Officers.



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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES



|                      |  |                                                                        |  |                                                                  |  |             |  |              
|--------------------- |  | ---------------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ----------- |  | -------------
|                      |  | Number of SecuritiesUnderlying UnexercisedOptions at December 31, 2005 |  | Value of In-the-MoneyUnexercised Options atDecember 31, 2005 (1)
|Name                  |  | Exercisable                                                            |  | Unexercisable                                                    |  | Exercisable |  | Unexercisable
|A. Stone Douglass     |  | 83,333                                                                 |  | 166,667                                                          |  |            |  |             
|                      |  |                                                                        |  |                                                                 
|Joseph Wulkowicz      |  | 33,333                                                                 |  | 66,667                                                           |  |            |  |             
|                      |  |                                                                        |  |                                                                 
|Susan Schulze-Claasen |  | 33,333                                                                 |  | 66,667                                                           |  |            |  |             

---

|(1) | Based on the December 31, 2005 closing price of $0.55 per share of our common stock as reported on the Pink Sheets; there were no exercisable, in-the-money options as of
December 31, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Director Compensation

No fees are paid to our non-employee directors. Directors may be reimbursed for any out-of-pocket expenses they incur in the performance of their responsibilities for us.

Under the terms of the 2004 Stock Incentive Plan, non-employee directors are eligible to receive options to purchase shares of our common stock. The two
non-employee directors were each granted options for 50,000 shares during 2004, becoming exercisable one year from the date of grant and exercisable at $1.11 per share. There were no options exercised as of December 31, 2005.

Employment Contracts, Termination of Employment and Change in Control Arrangements

We entered into a three-year employment agreement dated as of April 1, 2004 with Mr. Douglass to serve as our President and Chief Executive Officer. The agreement extends automatically for an additional year
at the end of the initial term and each anniversary thereafter unless 60-day prior notice of termination is provided by either Mr. Douglass or us. The agreement provides for a minimum annual salary of $200,000, and an annual bonus at the
discretion of the Board of Directors. In the event Mr. Douglasss employment period is terminated as a result of his death or permanent disability (as defined in the agreement) or pursuant to a change of control (as defined in the
agreement), Mr. Douglass will be entitled to receive his base salary of $200,000 through the date of termination and for the one-year period following the date of termination. In the event Mr. Douglasss employment is terminated by us
for a reason other than for cause (as defined in the agreement) or on account of a change of control, Mr. Douglass will be entitled to receive his base salary through the third anniversary date of his employment agreement. Additionally, the
agreement contains non-compete and non-solicitation provisions which provide the Mr. Douglass will not compete during the period in which he is either receiving compensation from us, or for one year after he has been terminated for cause.
Mr. Douglasss employment agreement also provides that during the term of his employment, we will nominate, and use our best efforts to elect, Mr. Douglass to serve as a member of our Board of Directors.

We entered into a three-year employment agreement dated as of April 1, 2004 with Mr. Wulkowicz to serve as Vice President and Chief Financial
Officer. The agreement extends automatically for an additional year at the end of the initial term and each anniversary thereafter unless 60-day prior notice of termination is provided by either Mr. Wulkowicz or us. The agreement provides for a
minimum annual salary of $155,000, and an annual bonus at the discretion of the Board of Directors. In the event Mr. Wulkowiczs employment period is terminated as a result of his death or permanent disability (as defined in the agreement)
or pursuant to a change of control (as defined in the agreement), Mr. Wulkowicz will be entitled to receive his base salary through the date of termination and for the period of one-year following the date of termination. In the event
Mr. Wulkowiczs employment is terminated by us for a reason other than for cause (as defined in the agreement) or other than a change of control, Mr. Wulkowicz will be entitled to receive the lesser of: (i) his base salary
through the third



34



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anniversary date of his employment agreement; and (ii) his base salary for a period of 12 months after the date of termination. Additionally, the
agreement contains a non-solicitation provision.

We entered into a three-year employment agreement dated as of April 1, 2004 with
Ms. Schulze-Claasen to serve as Vice President and General Counsel. She was appointed as our Executive Vice President, Chief Administrative Officer and General Counsel effective March 1, 2005. The agreement extends automatically for an
additional year at the end of the initial term and each anniversary thereafter unless 60-day prior notice of termination is provided by either Ms. Schulze-Claasen or us. The agreement provides for a minimum annual salary of $150,000, and an
annual bonus at the discretion of the Board. In the event Ms. Schulze-Claasens employment period is terminated as a result of her death or permanent disability (as defined in the agreement) or pursuant to a change of control (as defined
in the agreement), Ms. Schulze-Claasen will be entitled to receive her base salary through the date of termination and for the period of one-year following the date of termination. In the event Ms. Schulze-Claasens employment is
terminated by us for a reason other than for cause (as defined in the agreement) or other than a change of control, Ms. Schulze-Claasen will be entitled to receive the lesser of: (i) her base salary through the third anniversary date of
her employment agreement; and (ii) her base salary for a period of 12 months after the date of termination. Additionally, the agreement contains a non-solicitation provision.

Compensation Committee Interlocks and Insider Participation

The Board of Directors has established a
Compensation Committee, which is responsible for decisions regarding salaries, incentive compensation, stock options and other compensation-related matters regarding our executive officers and employees. During 2005, the Compensation Committee
members included Messrs. Lindner and Edler. During 2005, no member of the Compensation Committee was an employee or former employee of ours or any of our subsidiaries or had a relationship requiring disclosure by us under Item 404 of Regulation
S-K under the Exchange Act. None of our executive officers has served as a member of the compensation committee or board of directors of any entity that has or has had one or more executive officers who served as a member of our Compensation
Committee or our Board of Directors during 2005.

Board Compensation Committee Report on Executive Compensation

Executive Compensation Philosophy.  Our executive compensation philosophy, as identified in the employment contracts of our officers,
emphasizes two guiding principles. First, we provide a competitive executive compensation package that enables us to attract, motivate and retain talented executives. Second, we have aligned the financial interests of executives with long term
shareholder return, particularly through stock options.

Base Salary and Benefits.  Our officers receive base salaries as
compensation for their job performance, abilities, knowledge and experience. Apart from our contractual commitments, the Compensation Committee intends to maintain base salaries at competitive levels in the marketplace for comparable executive
ability and experience. The executives also participate in standard medical, dental and related benefit programs offered to Company employees and each receives a car allowance. The Committee reviews executive base salary and benefits packages
annually, and determines increases, if any, based on the officers contribution to corporate performance, competitive market conditions, and our salary practices with other employees.

Long Term Incentives.  Each officer has been issued options pursuant to our 2004 Stock Incentive Plan, which we believe provide an
excellent vehicle for rewarding performance by our executives and retaining their services for the future.

Compensation
Committee

Edgar Tod Lindner, Chairman

Thomas A. Edler



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Stock Performance Graph

The following graph compares on a cumulative basis the yearly percentage change, assuming dividend reinvestment, over the last twenty months (i.e., since shares of common stock of the reorganized company began
trading on the Pink Sheets) (a) the total shareholder return on our common stock (b) the total return on the Russell 2000 Index and (c) the total return on a peer group index. The peer group selected is: J. Alexander Corp.;
Landrys Restaurants, Inc.; Lone Star Steakhouse Inc.; O Charleys Inc; Rare Hospitality International Inc, and Ryans Restaurant Group Inc.

LOGO



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##### Table of Contents

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------

The following table sets forth, as of December 31, 2005, the beneficial ownership of our common stock with respect to: (i) each person who was
known by us to own beneficially more than 5% of the outstanding shares of our common stock; (ii) each director; (iii) each of our current named executive officers; and (iv) all directors and executive officers as a group. As of
December 31, 2005, we had 6,635,680 shares of common stock issued and outstanding, which was the only class of voting securities authorized or outstanding. Unless otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned. However, under the laws of some states, personal property owned by a married person may be community property which either spouse may manage and control, and we have no information as to whether
any shares shown in the following table are subject to such community property laws. Unless otherwise indicated, the address of each beneficial owner is c/o Steakhouse Partners, Inc. 10200 Willow Creek Road, San Diego, California 92131. The
information provided in this table is based on our records, information filed with the SEC and information provided to us.

The number of
shares beneficially owned by each entity, person, director or executive officer is determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares that the person has the right to acquire within 60 days of December 31, 2005 through the exercise of any stock
option or other right. Shares that a person has the right to acquire are deemed to be outstanding for the purpose of computing the percentage ownership of that person, but are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.



|                                                                       |  |                        |  |                  |  
|---------------------------------------------------------------------- |  | ---------------------- |  | ---------------- | -
|Name and Address of Beneficial Owner                                   |  | Number of Shares Owned |  | Percent of Class |  
|A. Stone Douglass (1)                                                  |  | 263,369                |  | 3.9              | %
|Joseph L. Wulkowicz (2)                                                |  | 33,333                 |  | 0.5              | %
|Susan Schulze-Claasen (2)                                              |  | 33,333                 |  | 0.5              | %
|Edgar Tod Lindner (3)                                                  |  | 50,000                 |  | 0.7              | %
|Thomas A. Edler (3)                                                    |  | 50,000                 |  | 0.7              | %
|All executive officers and directors as a group (5 persons)            |  | 430,035                |  | 6.4              | %
|                                                                       |  |                       
|5% Stockholders:                                                       |  |                        |  |                  |  
|Steven B. Sands (4) 90 Park Avenue, 39thFloor New York, NY 10016       |  | 1,035,000              |  | 15.6             | %
|                                                                       |  |                       
|Eye of the Round, LLC (5) 90 Park Avenue, 39thFloor New York, NY 10016 |  | 885,000                |  | 13.3             | %
|                                                                       |  |                       
|George Rich (6) 904 South Broadway Baltimore, MD 21231                 |  | 983,297                |  | 14.8             | %
|                                                                       |  |                       
|GRI Fund, LP (7) 904 South Broadway Baltimore, MD 21231                |  | 540,000                |  | 8.1              | %
|                                                                       |  |                       
|Pablo Garcia Fernandez 90 Park Avenue, 39thFloor New York, NY 10016    |  | 400,000                |  | 6.0              | %

---

|(1) | Includes 180,036 shares of common stock owned directly by Mr. Douglass and options to purchase 83,333 shares of common stock granted pursuant to our 2004 Stock Incentive Plan,
which are currently exercisable within 60 days of December 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | The named individuals beneficial ownership is of options to purchase 33,333 shares of common stock granted pursuant to our 2004 Stock Incentive Plan, which are currently
exercisable within 60 days of December 31, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The named individuals beneficial ownership is of options to purchase 50,000 shares of common stock granted pursuant to our 2004 Stock Incentive Plan, which are currently
exercisable within 60 days of December 31, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The shares referred to consist of 885,000 shares directly owned by Eye of the Round, LLC and 150,000 shares of common stock issuable upon exercise of a Common Stock Purchase
Warrant, dated December 30, 2003, issued to Critical Capital Growth Fund, LP in connection with the Plan of Reorganization. Mr. Sands disclaims beneficial ownership of all 1,035,000 shares. Based on Amendment No. 1 to Schedule 13G
dated January 31, 2005, Mr. Sands is (i) manager of Eye of the Round, LLC and (ii) chairman of the general partner of the general partner of Critical Capital Growth Fund, LP. Does not include warrants to purchase 63,000 shares of
common stock acquired by a registered broker-dealer with which Mr. Sands is registered, of which Mr. Sands also disclaims beneficial ownership.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Refers to 885,000 shares of common stock which are directly owned by Eye of the Round, LLC and included in Mr. Sands beneficial ownership under note (4) above. Does
not include 150,000 shares of common stock issuable upon exercise of a Common Stock Purchase Warrant, dated December 30, 2003, issued to Critical Capital Growth Fund, LP in connection with the Plan of Reorganization. Eye of the Round, LLC
disclaims beneficial ownership of such Common Stock Purchase Warrant. Also does not include warrants to purchase 63,000 shares of common stock acquired by a registered broker-dealer with which Mr. Sands is registered, of which Eye of the Round,
LLC disclaims beneficial ownership.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The shares referred to include 359,964 shares directly owned by George Rich and 540,000 shares directly owned by GRI Fund, LP. George Rich is the sole member and manager of
Stevenson Partners, LLC, which is the 1% general partner of GRI Fund, LP. George Rich disclaims beneficial ownership of shares owned by GRI Fund, LP. Also includes options to purchase 83,333 shares of common stock granted to Mr. Rich pursuant
to our 2004 Stock Incentive Plan which are currently exercisable within 60 days of December 31, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Refers to 540,000 shares which are directly owned by GRI Fund, LP and included in Mr. Richs beneficial ownership under note (6) above. Does not include 359,964
shares directly owned by George Rich and options to purchase 250,000 shares of common stock granted to Mr. Rich pursuant to our 2004 Stock Incentive Plan which are currently are not exercisable. George Rich is the sole member and manager of
Stevenson Partners, LLC, which is the 1% general partner of GRI Fund, LP. GRI Fund, LP disclaims beneficial ownership of shares owned by George Rich, including the options to purchase our common stock.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The equity compensation plan information required by this item is incorporated by reference to Part II, Item 5. Market for Registrants Common
Equity, above.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------

In
August 2003, Steakhouse Investors, LLC, a Delaware limited liability company (Steakhouse Investors) provided us with $5,000,000 in debtor in possession financing (the DIP Loan). The DIP Loan was evidenced by a
$5 million promissory note payable by us (the Note). A. Stone Douglass, our Chairman and Chief Executive Officer, made a $200,000 capital contribution in, and served as manager of, Steakhouse Investors. GRI Fund, LP, currently one
of our principal stockholders, made a $600,000 capital contribution in Steakhouse Investors. George Rich, the sole member and manager of Stevenson Partners, LLC, which is the 1% general partner of GRI Fund, L.P., made a $400,000 capital contribution
in Steakhouse Investors. Eye of the Round, LLC, currently one of our principal stockholders, served as member-manager of SB Steakhouse Partners, LLC (SBSP). SBSP made a $3,850,000 capital contribution in Steakhouse Investors.

Prior to the Effective Date of our Plan, Steakhouse Investors made a pro rata in kind distribution of the Note to its members, including
Mr. Douglass, GRI Fund, LP and SBSP. SBSP, in turn, made a pro rata in kind distribution of its portion of the Note to its members, including to Eye of the Round, LLC. Upon the Effective



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Date of the Plan, and pursuant to the terms of the Plan, the entire balance of the DIP Loan became due and payable in the form of 90%, or 4,500,000 shares,
of our common stock in consideration of the full and complete release of our obligations under the DIP Loan, other than interest. Accordingly, on March 22, 2004, we issued 4,500,000 shares of common stock to the holders of the Note, including
(i) 180,036 shares to Mr. Douglass, (ii) 899,964 shares to GRI Fund, LLP (including 359,064 shares to George Rich individually) and (iii) 885,000 shares to Eye of the Round, LLC.

Critical Capital Growth Fund, LP (CCGF) is a private Small Business Administration licensed equity fund. Based on Amendment No. 1
to Schedule 13G dated January 31, 2005, Mr. Sands is (i) manager of Eye of the Round, LLC and (ii) chairman of the general partner of the general partner of CCGF. Pursuant to and accordance with the terms and conditions of the
Plan, we delivered a $1,535,000 principal amount unsecured promissory note to CCGF, dated October 19, 2003 (the CCGF Note). The CCGF note is payable in full over a period of six years. Interest only will be paid over the
first three years, and the principal will be paid over the remaining three years. Additionally, we issued to CCGF a Common Stock Purchase Warrant, dated December 30, 2003, exercisable into 150,000 shares of our common stock at an initial
exercise price of $1.11 (the CCGF Warrant). The CCGF Warrant became exercisable, either in whole or in part, after April 1, 2005.

On December 23, 2005, George Rich was granted options to purchase 250,000 shares of our common stock under our 2004 Stock Incentive Plan in exchange for his services to us as an adviser. Such options become
exercisable over a period of two years at the rate of one half of the options on the first and second anniversaries of the grant date.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

Audit and Audit Related
Fees

Mayer Hoffman McCann P.C. (MHM) was our independent accountant for the fiscal years ended December 31,
2005 and December 31, 2004. MHM replaced Singer Lewak Greenbaum & Goldstein LLP (SLGG), who audited our financial statement as of December 31, 2003 (for the reorganized company) and December 30, 2003 (for
the predecessor company, debtor-in possession). Services provided to us by MHM with respect to the fiscal years ended December 31, 2005 and December 31, 2004 consisted of the audit of our consolidated financial statements and limited
reviews of our Quarterly Reports on Form 10-Q for the interim periods included therein (after the second quarter of fiscal 2004) totaling $207,793 for 2005 and $107,000 for 2004.

Services provided by SLGG in 2005 consisted of limited review of our Annual Report on Form 10-K for the year ended December 31, 2004 totaling
$25,582. Services provided to us by SLGG with respect to the fiscal year ended December 30/31, 2003 (predecessor company/reorganized company) consisted of the audit of our consolidated financial statements and limited reviews of our Quarterly
Reports on Form 10-Q for the interim periods included therein totaling $102,500. Services provided by SLGG subsequent to December 31, 2003 consisted of limited reviews of our Quarterly Reports on Form 10-Q for the interim periods ended
June 29, 2003 and March 30, 2003 totaling $37,000.

Tax Fees

SLGG has provided services to us with respect to the preparation of corporate income tax returns or tax planning matters. Tax fees were $16,000 for 2005 and $15,000 for 2004. MHM did not provide any services to us
with respect to tax matters.

All Other Fees

MHM did not provide any services with respect to any matters other than described above.



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Pre-Approval Policies and Procedures

The Audit Committee meets periodically to review and approve the scope of the services to be provided to us by our independent accountant, as well to review and discuss any issues that may arise during an engagement.
Any non-audit services provided to us would have to be approved by the Audit Committee. There are currently no such additional services performed. The Audit Committee considers various issues with respect to the services to be provided by its
independent accountant, including the complexity of any engagement, its expected cost, the knowledge and expertise of the independent accountants staff, any complex accounting or disclosure issues, new accounting pronouncements, and the
capability of the Companys financial staff.

The Audit Committee is responsible for appointing, setting compensation for and
overseeing the work of the independent registered public accounting firm. The Audit Committee has established a policy requiring its pre-approval of all audit and permissible non-audit services provided by the independent registered public
accounting firm, except for de minimis non-audit services that may be performed without pre-approval under applicable law. The Audit Committee has sole authority to make such approvals, although such approval may be delegated to any Committee member
so long as the approval is presented to the full Committee at a later time.

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|-------- | -------------------------------------------

The
following documents are filed as part of this report:



|1. | The Consolidated Financial Statements commencing on page F-1.
|-- | -------------------------------------------------------------



|2. | The Financial Statement Schedule on page F-38.
|-- | ----------------------------------------------



40



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##### Table of Contents

The following documents are filed as exhibits to this report:



|               |  |                                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                       
|               | 
|2.1            |  | Agreement and Plan of Merger dated November 17, 2005 by and among Steakhouse Partners, Inc., RGI Acquisition Corp. and Roadhouse Grill, Inc. (incorporated by reference to Form 8-K filed
November 22, 2005).                                                                                                                     
|               | 
|2.2            |  | Amendment No. 1 to the Agreement and Plan of Merger dated March 1, 2006 by and among Steakhouse Partners, Inc., RGI Acquisition Corp. and Roadhouse Grill, Inc. (incorporated by reference to
Form 8-K filed March 6, 2006).                                                                                                      
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation Pursuant to Reorganization (incorporated by reference to Form 10-K filed on April 12, 2005).                                                                                                                                                                                    
|               | 
|3.2            |  | Amended and Restated Bylaws (incorporated by reference to Form 10-K filed on April 12, 2005).                                                                                                                                                                                                                                     
|               | 
|4.1            |  | Form of Private Placement Common Stock Purchase Warrant (incorporated by reference to Form 8-K filed on January 24, 2005).                                                                                                                                                                                                        
|               | 
|4.2            |  | Form of April 2005 Common Stock Purchase Warrant (incorporated by reference to Form 10-K filed on April 12, 2005).                                                                                                                                                                                                                
|               | 
|4.3            |  | Amended and Restated Common Stock Purchase Warrant issued to Critical Capital Growth Fund, L.P., dated December 30, 2003 (incorporated by reference to Form 10-K filed on April 12,
2005).                                                                                                                                        
|               | 
|4.4            |  | Form of Common Stock certificate.                                                                                                                                                                                                                                                                                                 
|               | 
|10.1           |  | Merger Agreement dated August 31, 1998 by and among Steakhouse Partners, Inc. as successor and Tri-Core Steakhouse, Inc., on the one hand, and Paragon Steakhouse Restaurants, Inc. and Kyotaru
Co. Ltd., on the other hand (incorporated by reference to Form 8-K filed on September 14, 1998).                                  
|               | 
|10.2           |  | First Amendment, dated September 14, 1998, to Merger Agreement, dated August 31, 1998, by and among Steakhouse Partners, Inc. and Tri-Core Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on the other hand (incorporated by reference to Form 8-K filed on January 5, 1999). 
|               | 
|10.3           |  | Second Amendment, dated September 25, 1998, to Merger Agreement, dated August 31, 1998, by and among Steakhouse Partners, Inc. and Tri-Core Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on the other hand (incorporated by reference to Form 8-K filed on January 4, 1999).
|               | 
|10.4           |  | Third Amendment, dated December 7, 1998, to Merger Agreement, dated August 31, 1998, by and among Steakhouse Partners, Inc. and Tri-Core Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on the other hand (incorporated by reference to Form 8-K filed on January 4, 1999).   
|               | 
|10.5           |  | Unsecured Promissory Note dated October 19, 2003 executed by Steakhouse Partners, Inc. and Paragon Steakhouse Restaurants, Inc. in favor of Critical Capital Growth Fund, L.P. (incorporated by
reference to Form 10-K filed on April 12, 2005).                                                                                  
|               | 
|10.6           |  | Form of Private Placement Registration Rights Agreement (incorporated by reference to Form 8-K filed on January 24, 2005).                                                                                                                                                                                                        
|               | 
|10.7           |  | 2004 Stock Incentive Plan (incorporated by reference to Schedule 14C Information Statement filed on January 5, 2005).                                                                                                                                                                                                             
|               | 
|10.8#          |  | Form of Stock Option Agreement for options granted under 2004 Stock Incentive Plan.                                                                                                                                                                                                                                               



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|               |  |                                                                                                                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                      
|               | 
|10.9           |  | Form of April 2005 Registration Rights Agreement (incorporated by reference to Form 10-K filed on April 12, 2005).                                                                                                                                                                               
|               | 
|10.10#         |  | A. Stone Douglass Employment Agreement (incorporated by reference to Form 10-Q filed on May 17, 2004).                                                                                                                                                                                           
|               | 
|10.11#         |  | Susan Schulze-Claasen Employment Agreement (incorporated by reference to Form 10-Q filed on May 17, 2004).                                                                                                                                                                                       
|               | 
|10.12#         |  | Joseph L. Wulkowicz Employment Agreement (incorporated by reference to Form 10-Q filed on May 17, 2004).                                                                                                                                                                                         
|               | 
|14.1           |  | Code of Ethics (incorporated by reference to Form 10-K filed on April 28, 2004).                                                                                                                                                                                                                 
|               | 
|16.1           |  | Letter from Former Accountants responding to Form 8-K filed on January 28, 2005 (incorporated by reference to Form 8-K filed on January 28, 2005).                                                                                                                                               
|               | 
|16.2           |  | Letter from Former Accountants responding to Form 8-K/A filed on February 7, 2005 (incorporated by reference to Form 8-K/A filed on February 7, 2005).                                                                                                                                           
|               | 
|21.1           |  | List of Subsidiaries of Steakhouse Partners, Inc. (incorporated by reference to Form 10-K filed on April 12, 2005).                                                                                                                                                                              
|               | 
|24.1           |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                  
|               | 
|31.1           |  | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                          
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                              
|               | 
|32.1           |  | Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                          
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                              
|               | 
|99.1           |  | Form 8-K announcing termination, effective March 14, 2006, of the Agreement and Plan of Merger, dated November 17, 2005, as amended, by and among Steakhouse Partners, Inc., RGI Acquisition
Corp. and Roadhouse Grill, Inc. (incorporated herein by reference to Form 8-K filed March 17, 2006.)

---

|# | Indicates management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------



42



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##### Table of Contents

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: April 5, 2006



|                                                                                                                    |  |  |  |                                                                                                   
|------------------------------------------------------------------------------------------------------------------- |  |  |  | --------------------------------------------------------------------------------------------------
|STEAKHOUSE PARTNERS, INC.                                                                                           |  |  |  | STEAKHOUSE PARTNERS, INC.                                                                         
|                                                                                                                    |  | 
|/s/    A. STONE DOUGLASS                                                                                            |  |  |  | /s/    JOSEPH L. WULKOWICZ                                                                        
|A. STONE DOUGLASS                                                                                                   |  |  |  | JOSEPH L. WULKOWICZ                                                                               
|President, Chief Executive Officer, and Chairman of the Board of Directors (Serving as principal executive
officer) |  |  |  | Vice President and Chief Financial Officer (Serving as principal financial and accounting officer)

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints A. Stone Douglass and Joseph L. Wulkowicz, and
each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

In accordance with the requirements of the Exchange Act, this report is signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.



|                  |  |                                                                            |  |      |  |  |  |              
|----------------- |  | -------------------------------------------------------------------------- |  | ---- |  |  |  | -------------
|Name and
Capacity |  |                                                                            |  | Date
|                  |  |                                                                            |  |     
|                  |  | /s/    A. STONE DOUGLASS                                                   |  |      |  |  |  | April 5, 2006
|Name:             |  | A. Stone Douglass                                                          |  |      |  |  |  |              
|Title:            |  | President, Chief Executive Officer, and Chairman of the Board of Directors |  |      |  |  |  |              
|                  |  |                                                                            |  |     
|                  |  | /s/    THOMAS A. EDLER                                                     |  |      |  |  |  | April 5, 2006
|Name:             |  | Thomas A. Edler                                                            |  |      |  |  |  |              
|Title:            |  | Director                                                                   |  |      |  |  |  |              
|                  |  |                                                                            |  |     
|                  |  | /s/    EDGAR TOD
LINDNER                                                   |  |      |  |  |  | April 5, 2006
|Name:             |  | Edgar Tod Lindner                                                          |  |      |  |  |  |              
|Title:            |  | Director                                                                   |  |      |  |  |  |              



43



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

REORGANIZED COMPANY

FOR THE YEARS
ENDED

DECEMBER 31, 2005, 2004 AND 2003



---

##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONTENTS

December 31, 2005



|                                                                                                                                                    |  |       
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------
|                                                                                                                                                    |  | Page  
|                                                                                                                                                    | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                             |  | F-1   
|                                                                                                                                                    | 
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                   |  |       
|                                                                                                                                                    | 
|Consolidated Balance Sheet for Reorganized Company as of December 31, 2005 and 2004                                                                 |  | F-23 
|                                                                                                                                                    | 
|Consolidated Statement of Operations for Reorganized Company as of December 31, 2005, 2004 and 2003 and Predecessor Company as of December 30, 2003 |  | F-45 
|                                                                                                                                                    | 
|Consolidated Statement of Stockholders Equity (Deficit) for Reorganized Company as of December 31, 2005, 2004 and 2003                             |  | F-6   
|                                                                                                                                                    | 
|Consolidated Statement of Cash Flows for Reorganized Company as of December 31, 2005, 2004 and 2003 and Predecessor Company as of December 30, 2003 |  | F-78 
|                                                                                                                                                    | 
|Notes to Consolidated Financial Statements                                                                                                          |  | F-937
|                                                                                                                                                    | 
|SUPPLEMENTAL INFORMATION                                                                                                                            |  |       
|                                                                                                                                                    | 
|Valuation and Qualifying AccountsSchedule II                                                                                                       |  | F-38  



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Steakhouse Partners, Inc. and Subsidiaries

San Diego, California

We have audited the accompanying consolidated balance sheets of Steakhouse Partners, Inc. and its subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended. We have also audited the financial statement schedule of valuation and qualifying accounts.
These consolidated financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit. The financial
statements of the Company as of December 31, 2003, were audited by other auditors whose report dated March 16, 2004, on those statements included an explanatory paragraph that described the Company as having maintained a current ratio of
0.31:1 and 0.25:1, for December 31, 2003 and December 31, 2002 (Predecessor Company, Debtor-in-Possession) respectively and, in addition, that the Company had a working capital deficit of approximately $9,000,000 and $12,400,000
respectively, as discussed in Note 4 to the financial statements.

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 the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2005 and 2004
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Steakhouse Partners, Inc. and its subsidiaries as of December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the
information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 4 to the consolidated financial statements, the Company has been unable to earn a profit during any year. The Company also maintained a current ratio of 0.22:1 and 0.23:1 for December 31, 2005 and 2004,
respectively. Additionally, the Company had a working capital deficit of approximately $9,700,000 and 8,800,000 in 2005 and 2004, respectively. Those conditions raise substantial doubt about its ability to continue as a going concern.
Managements plans regarding those matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    Mayer Hoffman McCann P.C.

San Diego, California

March 7, 2006



F-1



---

##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Reorganized Company as of Year End
December 31, 2005 and 2004

(in thousands)



|                                                                          |  |                  |        |                  |   |       
|------------------------------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                                                          |  | December 31,2005 |        | December 31,2004
|ASSETS                                                                    |  |                  |        |                  |   |       
|Current assets                                                            |  |                  |        |                  |   |       
|Cash and cash equivalents                                                 |  | $                | 449    |                  | $ | 716   
|Accounts receivable, net of allowance for doubtful accounts of $0 and $14 |  |                  | 754    |                  |   | 268   
|Inventories                                                               |  |                  | 950    |                  |   | 907   
|Prepaid expenses and other current assets                                 |  |                  | 471    |                  |   | 707   
|                                                                          |  |                  |        |                  |   |       
|Total current assets                                                      |  |                  | 2,624  |                  |   | 2,598 
|Property, plant, and equipment, net                                       |  |                  | 10,292 |                  |   | 11,188
|Liquor licenses                                                           |  |                  | 688    |                  |   | 688   
|Deposits and other assets                                                 |  |                  | 330    |                  |   | 200   
|Tradenames                                                                |  |                  | 13,921 |                  |   | 13,921
|Goodwill                                                                  |  |                  | 2,879  |                  |   | 2,879 
|                                                                          |  |                  |        |                  |   |       
|Total assets                                                              |  | $                | 30,734 |                  | $ | 31,474
|                                                                          |  |                  |        |                  |   |       



F-2



---

##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Reorganized Company as of Year End December 31, 2005 and 2004

(in thousands, except share and per share amounts)

LIABILITIES AND STOCKHOLDERS EQUITY



|                                                                                                                  |  |                  |        |   |                  |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                  |  | December 31,2005 |        |   | December 31,2004 |  
|Liabilities                                                                                                       |  |                  |        |   |                  |   |        |  
|Current liabilities                                                                                               |  |                  |        |   |                  |   |        |  
|Current portion of long term debt                                                                                 |  | $                | 5,925  |   |                  | $ | 3,725  |  
|Current portion of capital lease                                                                                  |  |                  | 309    |   |                  |   | 258    |  
|Accounts payable                                                                                                  |  |                  | 2,877  |   |                  |   | 3,204  |  
|Accrued expenses                                                                                                  |  |                  | 294    |   |                  |   | 1,384  |  
|Unearned revenue                                                                                                  |  |                  | 1,703  |   |                  |   | 1,646  |  
|Reserve for self insurance claims                                                                                 |  |                  | 103    |   |                  |   | 124    |  
|Sales and property taxes payable                                                                                  |  |                  | 55     |   |                  |   | 48     |  
|Accrued payroll costs                                                                                             |  |                  | 1,031  |   |                  |   | 1,045  |  
|                                                                                                                  |  |                  |        |   |                  |   |        |  
|Total current liabilities                                                                                         |  |                  | 12,297 |   |                  |   | 11,434 |  
|Long term debt, net of current portion                                                                            |  |                  | 2,695  |   |                  |   | 5,660  |  
|Long term capital lease                                                                                           |  |                  | 8,429  |   |                  |   | 8,738  |  
|Deferred rent                                                                                                     |  |                  | 223    |   |                  |   | 131    |  
|                                                                                                                  |  |                  |        |   |                  |   |        |  
|Total liabilities                                                                                                 |  |                  | 23,644 |   |                  |   | 25,963 |  
|                                                                                                                  |  |                  |        |   |                  |   |        |  
|Stockholders equity (deficit)                                                                                    |  |                  |        |   |                  |   |        |  
|Common stock, $0.001 par value 15,000,000 shares authorized 6,635,680 and 5,000,000 shares issued and outstanding |  |                  | 7      |   |                  |   | 5      |  
|Additional paid-in capital                                                                                        |  |                  | 8,758  |   |                  |   | 7,596  |  
|Deferred compensation                                                                                             |  |                  | (585   | ) |                  |   | (1,455 | )
|Accumulated deficit                                                                                               |  |                  | (1,090 | ) |                  |   | (635   | )
|                                                                                                                  |  |                  |        |   |                  |   |        |  
|Total stockholders equity                                                                                        |  |                  | 7,090  |   |                  |   | 5,511  |  
|                                                                                                                  |  |                  |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                                                        |  | $                | 30,734 |   |                  | $ | 31,474 |  
|                                                                                                                  |  |                  |        |   |                  |   |        |  



F-3



---

##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Reorganized Company for the Year Ended
December 31, 2005, 2004, 2003

and Predecessor Company (Debtor-in-Possession)

for the Year Ended December 30, 2003

(in thousands, except per share amounts)



|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------------- | ----------------- | - | ------ | ----------------- |  | ----------------- | - |  | - | ------ | -
|                                                                                               |  | Reorganized Company |        | Predecessor Company |                  
|                                                                                               |  | December 31, 2005   |        |                     | December 31, 2004 |   |        | December 31, 2003 |  | December 30, 2003 |  
|Revenues, net                                                                                  |  | $                   | 52,001 |                     |                   | $ | 54,505 |                   |  | $                 |  |  | $ | 77,758 |  
|Disposed restaurants                                                                           |  |                     |       |                     |                   |   | 565    |                   |  |                   |  |  |   |       |  
|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Revenues, net                                                                                  |  |                     | 52,001 |                     |                   |   | 55,070 |                   |  |                   |  |  |   | 77,758 |  
|                                                                                               |  |                     |        |                    
|Cost of sales                                                                                  |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Food and beverage                                                                              |  |                     | 17,016 |                     |                   |   | 18,261 |                   |  |                   |  |  |   | 28,396 |  
|Disposed restaurants                                                                           |  |                     |       |                     |                   |   | 449    |                   |  |                   |  |  |   |       |  
|Payroll and payroll related costs                                                              |  |                     | 17,726 |                     |                   |   | 18,309 |                   |  |                   |  |  |   | 27,704 |  
|Disposed restaurants                                                                           |  |                     |       |                     |                   |   | 289    |                   |  |                   |  |  |   |       |  
|Direct operating costs (includes asset impairment of $51, $0, and $0,)                         |  |                     | 11,234 |                     |                   |   | 11,194 |                   |  |                   |  |  |   | 20,008 |  
|Disposed restaurants                                                                           |  |                     |       |                     |                   |   | 235    |                   |  |                   |  |  |   |       |  
|Depreciation and amortization                                                                  |  |                     | 1,283  |                     |                   |   | 1,225  |                   |  |                   |  |  |   | 1,877  |  
|Disposed restaurants                                                                           |  |                     |       |                     |                   |   | 10     |                   |  |                   |  |  |   |       |  
|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Total cost of sales                                                                            |  |                     | 47,259 |                     |                   |   | 49,972 |                   |  |                   |  |  |   | 77,985 |  
|Gross profit (loss)                                                                            |  |                     | 4,742  |                     |                   |   | 5,098  |                   |  |                   |  |  |   | (227   | )
|                                                                                               |  |                     |        |                    
|General and administrative (includes non cash compensation of $388, $500, and $0 respectively) |  |                     | 4,348  |                     |                   |   | 4,459  |                   |  |                   |  |  |   | 4,711  |  
|                                                                                               |  |                     |        |                    
|Legal settlement                                                                               |  |                     |       |                     |                   |   | 35     |                   |  |                   |  |  |   |       |  
|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Income (loss) before other income (expense)                                                    |  |                     | 394    |                     |                   |   | 604    |                   |  |                   |  |  |   | (4,938 | )
|Other income (expense)                                                                         |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Miscellaneous income                                                                           |  |                     | 386    |                     |                   |   | 132    |                   |  |                   |  |  |   | 179    |  
|Interest expense                                                                               |  |                     | (1,257 | )                   |                   |   | (1,324 | )                 |  |                   |  |  |   | (2,567 | )
|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Total other income (expense)                                                                   |  |                     | (871   | )                   |                   |   | (1,192 | )                 |  |                   |  |  |   | (2,388 | )
|Loss before reorganization items, provision for income taxes, and Discontinuing operations     |  |                     | (477   | )                   |                   |   | (588   | )                 |  |                   |  |  |   | (7,326 | )
|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Reorganization items                                                                           |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Professional fees                                                                              |  |                     | (47    | )                   |                   |   | (28    | )                 |  |                   |  |  |   | (1,968 | )
|Gain on rejection and sale of property, plant and equipment, net                               |  |                     |       |                     |                   |   | 54     |                   |  |                   |  |  |   | 3,516  |  
|Fresh Start Adjustment                                                                         |  |                     | 26     |                     |                   |   |       |                   |  |                   |  |  |   |       |  
|                                                                                               |  |                     |        |                     |                   |   |        |                   |  |                   |   |  |   |        |  
|Total reorganization items                                                                     |  |                     | (21    | )                   |                   |   | 26     |                   |  |                   |  |  |   | 1,548  |  



F-4



---

##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Reorganized Company for the Year Ended December 31, 2005, 2004, 2003

and Predecessor Company (Debtor-in-Possession)

for the Year Ended
December 30, 2003

(in thousands, except per share amounts)



|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|------------------------------------------------------------------- |  | ------------------- | ----- | ------------------ | ---------------- | - | ----- | ---------------- |  | ---------------- | - |  | - | ------ | -
|                                                                    |  | Reorganized Company |       | PredecessorCompany |                 
|                                                                    |  | December 31, 2005   |       |                    | December 31,2004 |   |       | December 31,2003 |  | December 30,2003 |  
|Loss before provision for income taxes and discontinuing operations |  |                     | (498  | )                  |                  |   | (562  | )                |  |                  |  |  |   | (5,778 | )
|Provision for income taxes                                          |  |                     | (43   | )                  |                  |   | 73    |                  |  |                  |  |  |   | 130    |  
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Loss before discontinued operations                                 |  |                     | (455  | )                  |                  |   | (635  | )                |  |                  |  |  |   | (5,908 | )
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Income from discontinued operations                                 |  |                     |      |                    |                  |   |      |                  |  |                  |  |  |   | 1,057  |  
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Net Loss                                                            |  | $                   | (455  | )                  |                  | $ | (635  | )                |  | $                |  |  | $ | (4,851 | )
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Earnings (loss) per share                                           |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Basic                                                               |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Loss from continuing operations                                     |  |                     | (0.08 | )                  |                  |   | (0.13 | )                |  |                  |  |  |   | (1.74  | )
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Earnings from discontinuing operations                              |  |                     |      |                    |                  |   |      |                  |  |                  |  |  |   | 0.31   |  
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Basic loss per share                                                |  | $                   | (0.08 | )                  |                  | $ | (0.13 | )                |  | $                |  |  | $ | (1.43  | )
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Diluted                                                             |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Loss from continuing operations                                     |  |                     | (0.08 | )                  |                  |   | (0.13 | )                |  |                  |  |  |   | (1.74  | )
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Earnings from discontinuing operations                              |  |                     |      |                    |                  |   |      |                  |  |                  |  |  |   | 0.31   |  
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Diluted loss per share                                              |  | $                   | (0.08 | )                  |                  | $ | (0.13 | )                |  | $                |  |  | $ | (1.43  | )
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Weighted average shares                                             |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Basic                                                               |  |                     | 5,966 |                    |                  |   | 5,000 |                  |  |                  |  |  |   | 3,387  |  
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  
|Diluted                                                             |  |                     | 5,966 |                    |                  |   | 5,000 |                  |  |                  |  |  |   | 3,387  |  
|                                                                    |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |   |        |  



F-5



---

##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Reorganized Company for
the Year Ended

December 31, 2005, 2004 and 2003

(in thousands, except shares)



|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|------------------------------------- |  | ------------ |  | ------ | ------------------------- | - |  | --------------------- | ----- | - | ------------------- | - | ------ | ----- |  | - | ------ | - |  | - | ----- | -
|                                      |  | Common Stock |  |        | AdditionalPaid-In Capital |   |  | Deferred Compensation |       |   | Accumulated Deficit |   |        | Total | 
|                                      |  | Shares       |  | Amount |                           |   |  |                       |      
|Reorganized Company                   |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Conversion of DIP financing to:       |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Common Stock                          |  | 4,500,000    |  |        | 5                         |   |  |                       | 4,996 |   |                     |   |        |       |  |   |        |   |  |   | 5,001 |  
|Committed Stock                       |  | 500,000      |  |        | 555                       |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   | 555   |  
|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Balance, December 31, 2003            |  | 5,000,000    |  | $      | 560                       |   |  | $                     | 4,996 |   |                     | $ |       |       |  | $ |       |   |  | $ | 5,556 |  
|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Issuance of warrants in lieu of fees  |  |              |  |        |                           |   |  |                       | 90    |   |                     |   |        |       |  |   |        |   |  |   | 90    |  
|Stock Options                         |  |              |  |        |                           |   |  |                       | 1,955 |   |                     |   | (1,955 | )     |  |   |        |   |  |   |      |  
|Committed Stock Reclass               |  |              |  |        | (555                      | ) |  |                       | 555   |   |                     |   |        |       |  |   |        |   |  |   |      |  
|Amortization of Deferred Compensation |  |              |  |        |                           |   |  |                       |       |   |                     |   | 500    |       |  |   |        |   |  |   | 500   |  
|Net Loss                              |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   | (635   | ) |  |   | (635  | )
|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Balance, December 31, 2004            |  | 5,000,000    |  | $      | 5                         |   |  | $                     | 7,596 |   |                     | $ | (1,455 | )     |  | $ | (635   | ) |  | $ | 5,511 |  
|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Private Placement Memorandum          |  | 700,000      |  |        | 1                         |   |  |                       | 861   |   |                     |   |        |       |  |   |        |   |  |   | 862   |  
|Issuance of Common Stock              |  | 935,680      |  |        | 1                         |   |  |                       | 783   |   |                     |   |        |       |  |   |        |   |  |   | 784   |  
|Amortization of Deferred Compensation |  |              |  |        |                           |   |  |                       | (482  | ) |                     |   | 870    |       |  |   |        |   |  |   | 388   |  
|Net Loss                              |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   | (455   | ) |  |   | (455  | )
|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  
|Balance, December 31, 2005            |  | 6,635,680    |  | $      | 7                         |   |  | $                     | 8,758 |   |                     | $ | (585   | )     |  | $ | (1,090 | ) |  | $ | 7,090 |  
|                                      |  |              |  |        |                           |   |  |                       |       |   |                     |   |        |       |  |   |        |   |  |   |       |  



F-6



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

Reorganized Company for the Year Ended
December 31, 2005, 2004, 2003

and Predecessor Company (Debtor-in-Possession)

for the Year Ended December 30, 2003

(in thousands)



|                                                                                                                   |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ----- | ------------------ | ---------------- | - | ----- | ---------------- |  | ---------------- | - |  | ------ | -
|                                                                                                                   |  | Reorganized Company |       | PredecessorCompany |                 
|                                                                                                                   |  | December 31,2005    |       |                    | December 31,2004 |   |       | December 31,2003 |  | December 30,2003 |  
|Cash flows from operating activities                                                                               |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |        |  
|Net income (loss) from continuing operations                                                                       |  | $                   | (455  | )                  |                  | $ | (635  | )                |  | $                |  |  | (5,909 | )
|Net income (loss) from discontinuing operations                                                                    |  |                     |      |                    |                  |   |      |                  |  |                  |  |  | 1,057  |  
|Adjustment to reconcile net loss from continuing operations to net cash provided by (used in) operating activities |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |        |  
|Depreciation and amortization (including $51 of asset impairment)                                                  |  |                     | 1,334 |                    |                  |   | 1,235 |                  |  |                  |  |  | 1,877  |  
|Gain on disposal of rejected leases                                                                                |  |                     |      |                    |                  |   |      |                  |  |                  |  |  | (1,116 | )
|Gain on sale of property, plant and equipment through bankruptcy                                                   |  |                     |      |                    |                  |   |      |                  |  |                  |  |  | (2,400 | )
|Reserve for uncollectible deposits and other assets                                                                |  |                     |      |                    |                  |   |      |                  |  |                  |  |  | 303    |  
|Forgiveness of debt                                                                                                |  |                     |      |                    |                  |   |      |                  |  |                  |  |  | (1,057 | )
|Fresh Start Adjustment                                                                                             |  |                     | 51    |                    |                  |   |      |                  |  |                  |  |  |       |  
|Issuance of warrants in lieu of interest                                                                           |  |                     |      |                    |                  |   |      |                  |  |                  |  |  | 60     |  
|Amortization of stock options issued below FMV to employees                                                        |  |                     | 388   |                    |                  |   | 500   |                  |  |                  |  |  |       |  
|(Increase) decrease in operating assets                                                                            |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |        |  
|Accounts receivable                                                                                                |  |                     | (486  | )                  |                  |   | (220  | )                |  |                  |  |  | 762    |  
|Inventories                                                                                                        |  |                     | (43   | )                  |                  |   | 392   |                  |  |                  |  |  | 428    |  
|Prepaid expenses and other current assets                                                                          |  |                     | 628   |                    |                  |   | (12   | )                |  |                  |  |  | 572    |  
|Deposits and other assets                                                                                          |  |                     | (130  | )                  |                  |   | (106  | )                |  |                  |  |  | 21     |  
|Increase (decrease) in operating liabilities                                                                       |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |        |  
|Accounts payable                                                                                                   |  |                     | (429  | )                  |                  |   | (889  | )                |  |                  |  |  | 275    |  
|Accrued expenses                                                                                                   |  |                     | (932  | )                  |                  |   | (232  | )                |  |                  |  |  | 851    |  
|Unearned revenue                                                                                                   |  |                     | 57    |                    |                  |   | (263  | )                |  |                  |  |  | (454   | )
|Reserve for self insurance claims                                                                                  |  |                     | (21   | )                  |                  |   | (47   | )                |  |                  |  |  | 175    |  
|Sales and property taxes payable                                                                                   |  |                     | (40   | )                  |                  |   | (538  | )                |  |                  |  |  | (394   | )
|Accrued payroll costs                                                                                              |  |                     | (14   | )                  |                  |   | 27    |                  |  |                  |  |  | (1,048 | )
|Deferred rent                                                                                                      |  |                     | 92    |                    |                  |   | 82    |                  |  |                  |  |  |       |  
|                                                                                                                   |  |                     |       |                    |                  |   |       |                  |  |                  |   |  |        |  
|Net cash used in continuing operating activities                                                                   |  |                     | 0     |                    |                  |   | (706  | )                |  |                  |  |  | (5,997 | )



F-7



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

Reorganized Company for the Year Ended December 31, 2005, 2004, 2003

and Predecessor Company (Debtor-in-Possession)

for the Year Ended
December 30, 2003

(in thousands)



|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------------ | ---------------- | - | ------ | ---------------- |  | ---------------- | ----- |  | - | ------ | -
|                                                                                                                                 |  | Reorganized Company |        | PredecessorCompany |                 
|                                                                                                                                 |  | December 31,2005    |        |                    | December 31,2004 |   |        | December 31,2003 |  | December 30,2003 |      
|Cash flows from investing activities                                                                                             |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Change in restricted cash                                                                                                        |  |                     |       |                    |                  |   |       |                  |  |                  |      |  |   | 42     |  
|Purchases of property, plant, and equipment                                                                                      |  |                     | (417   | )                  |                  |   | (436   | )                |  |                  |      |  |   | (189   | )
|Proceeds from the sale of property, plant and equipment                                                                          |  |                     |       |                    |                  |   | 620    |                  |  |                  |      |  |   | 1,827  |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Net cash (used in) provided by continuing investing activities                                                                   |  |                     | (417   | )                  |                  |   | 184    |                  |  |                  |      |  |   | 1,680  |  
|                                                                                                                                 |  |                     |        |                   
|Cash flows from financing activities                                                                                             |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Proceeds from issuance of debt                                                                                                   |  |                     |       |                    |                  |   | 200    |                  |  |                  |      |  |   | 5,000  |  
|Proceeds from issuance stock                                                                                                     |  |                     | 1,446  |                    |                  |   |       |                  |  |                  |      |  |   |       |  
|Principal payments on debt and capital leases                                                                                    |  |                     | (1,296 | )                  |                  |   | (1,168 | )                |  |                  |      |  |   | (1,228 | )
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Net cash provided by (used in) continuing financing activities                                                                   |  |                     | 150    |                    |                  |   | (968   | )                |  |                  |      |  |   | 3,772  |  
|Net decrease in cash and cash equivalents                                                                                        |  |                     | (267   | )                  |                  |   | (1,490 | )                |  |                  |      |  |   | (545   | )
|Cash and cash equivalents, beginning of the year                                                                                 |  |                     | 716    |                    |                  |   | 2,205  |                  |  |                  | 2,205 |  |   | 2,750  |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Cash and cash equivalents, end of year                                                                                           |  | $                   | 449    |                    |                  | $ | 715    |                  |  | $                | 2,205 |  |   | 2,205  |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Non-cash investing and financing transactions                                                                                    |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Issuance of common stock for conversion of debt                                                                                  |  | $                   | 200    |                    |                  |   |       |                  |  |                  |      |  |   |       |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Financing of insurance payment through note payable                                                                              |  | $                   | 391    |                    |                  | $ | 396    |                  |  | $                | 275   |  | $ | 275    |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Supplemental disclosures of cash flow information                                                                                |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Interest paid                                                                                                                    |  | $                   | 1,257  |                    |                  | $ | 1,219  |                  |  | $                | 1,668 |  | $ | 1,668  |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Income taxes paid                                                                                                                |  | $                   | 33     |                    |                  | $ |       |                  |  |                  |      |  |   |       |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Supplemental disclosures of cash flow information for reorganization expenses paid in connection with the Chapter 11
proceedings |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  
|Professional fees paid for services                                                                                              |  | $                   | 806    |                    |                  | $ | 554    |                  |  | $                | 1,968 |  | $ | 1,968  |  
|                                                                                                                                 |  |                     |        |                    |                  |   |        |                  |  |                  |       |  |   |        |  



F-8



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005

NOTE 1COMPANY BACKGROUND AND OPERATIONS

Steakhouse Partners, Inc. (Steakhouse), a Delaware corporation, was incorporated on June 3, 1996 under the name Texas Looseys Steakhouse & Saloon, Inc. On December 19, 1996, the Board
of Directors adopted a resolution to change its name to Galvestons Steakhouse Corp. Up until December 21, 1998, Galvestons Steakhouse Corp. owned two steakhouse restaurants and operated two others in Southern California,
which together formerly comprised all of the restaurants known as Texas Looseys Chili Parlor & Saloon (Texas Looseys).

Galvestons Steakhouse Corp. first acquired two Texas Looseys restaurants on August 19, 1996 pursuant to an Asset Purchase Agreement, dated April 10, 1996, which was subsequently amended on
November 1, 1998, and closed escrow on the remaining two Texas Looseys restaurants on May 1, 1999.

On December 21,
1998, Galvestons Steakhouse Corp. acquired Paragon Steakhouse Restaurants, Inc. and subsidiaries (Paragon of Michigan, Inc., Paragon of Nevada, Inc., and Paragon of Wisconsin, Inc.) (collectively, PSR) through its
acquisition of all of the outstanding capital stock of PSR. PSR owns and operates restaurants located primarily throughout California, Arizona, and the Great Lakes Region. PSR also owned Pacific Basin Foods, Inc. (PBF), a company
which was engaged in purchasing and selling food and other restaurant supplies to PSR and nonaffiliated companies. As discussed in Note 3, on October 11, 2002, PBF filed for protection under Chapter 7 of the United States Bankruptcy Court. PBF
ceased operations effective as of the filing date.

During the year ended December 31, 1999, Galvestons Steakhouse Corp.s
name was changed to Steakhouse Partners, Inc. (Steakhouse Partners, Inc. and its subsidiaries PSR and PBF are referred to herein collectively as the Company.)

On December 31, 2003, the effective date of the Companys Plan of Reorganization (the Plan), all of the outstanding
preferred stock, common stock, stock options, and warrants of the Company before confirmation were canceled and Steakhouse Investors, LLP (Steakhouse Investors) received 90% of the new common stock of the reorganized company in
exchange for a full and complete release of the Companys obligations under the DIP agreement other than interest.

NOTE 2BANKRUPTCY FILINGS

General

On February 15, 2002,
Steakhouse filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Central District of California (the Bankruptcy
Court).

On February 19, 2002, PSR also filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court.

The February 15, 2002 filing was made in response to certain notes aggregating $1.7 million, which the Company was
unable to pay (see Notes 9 and 11).

Plan Investors

On August 13, 2003, the Predecessor Company obtained and received Court approval for a $5.0 million senior secured convertible debtor-in-possession financing facility (the DIP Credit Facility)
from Steakhouse



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Investors for payment of permitted pre-petition claims, working capital needs, letter of credit and other general corporate purposes. The DIP Credit Facility
required that the Predecessor Company maintain certain financial covenants. In addition, under the agreement, the Predecessor Company was required to accrue interest at a rate of 6% per annum, which was capitalized on each payment date and
added to the outstanding principal until confirmation. Upon confirmation of the plan, the DIP Credit Facility was converted into 90% of the new common stock of the Reorganized Company in exchange for a full and complete release of the Predecessor
Companys obligations under the DIP Credit Facility agreement other than interest.

Confirmation of Plan of Reorganization

The Company commenced a balloting and solicitation process with respect to the Plan of Reorganization (as hereinafter defined), which
concluded December 3, 2003.

On December 31, 2003 (the Effective Date) the Predecessor Company emerged from
reorganization proceedings (hereinafter, the Reorganized Company) under Chapter 11 of the federal bankruptcy laws pursuant to the terms of the Plan of Reorganization.

Upon confirmation of the Plan of Reorganization on the Effective Date, the entire balance of the DIP facility, including accrued interest, became due and
payable to Steakhouse Investors. Accordingly, Steakhouse Investors received 4.5 million shares, or 90%, of the new common stock of the Reorganized Company, in exchange for a full and complete release of the Predecessor Companys
obligations under the DIP Credit Facility agreement, other than interest. The outstanding preferred stock, common stock, stock options, and warrants of the Predecessor Company before confirmation were all canceled.

Discharge of Liabilities

On the Effective Date, all
then-outstanding equity securities of the Predecessor Company, as well as substantial amounts of its pre-petition liabilities, were cancelled. The new authorized securities of the Reorganized Company on the Effective Date pursuant to the Plan of
Reorganization, consisted of 15.0 million shares of new common stock and 5.0 million shares of new preferred stock. All of the shares of the new common stock issued on the Effective Date were or will be distributed pursuant to the Plan of
Reorganization in satisfaction of pre-petition claims, except for 4.5 million shares issued to Steakhouse Partners in exchange for $5.0 million DIP Credit Facility.

All such shares were issued without registration under the Securities Act of 1933 in reliance on the provision of Section 1145 of the Bankruptcy Code and Section 4(2) of the Securities Act of 1933. In
addition, as part of the Plan of Reorganization an independent creditor litigation trust (Creditor Trust) was established for the benefit of the Predecessor Companys pre-petition creditors.

The Companys financial affairs were completely restructured under circumstances, whereby Steakhouse Investors exchanged its $5,000,000
super-priority administrative claim for 90% of the newly issued common stock in the reorganized company. In addition, all of the Companys pre-petition liabilities were completely restructured upon confirmation of the Bankruptcy Plan, whereby
the Company will be obligated to pay the following obligations:

1. Priority tax claim in the amount of approximately $1.9 million will be
paid over a four-year period from the Effective Date with interest payable at 6% per annum. In 2005, the Bankruptcy Court amended this claim and stipulated the amount at approximately $1.8 million. (See Financial Note #8).



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



2. Secured claims in the amount of approximately $2.2 million will be paid as follows: (a) $1.5
million will be paid in full over a period of six years. Interest only will be paid over the first three years, and the principal will be paid over the remaining three years and (b) $0.6 million will be deemed paid upon the transfer of all of
the assets and lease rights of one of the Companys restaurants in Torrance, California. On December 31, 2003, the Effective Date, the Company emerged from bankruptcy. All of the assets and lease rights of the Torrance, California,
restaurant were transferred in satisfaction of such secured claim. (See Financial Note #8).

3. Unsecured claims in the amount of
approximately $8.7 million to $12.7 million will be paid as follows: (a) general unsecured claims in the amount of $8.0 million to $12.0 million will be paid an estimated recovery of 50% to 70%. Each allowed claim will receive its pro rata
share of $1.0 million within 30 days of the effective date of the Bankruptcy Plan and payments under an approximate $5.0 million note payable, which will be paid in the amount of $0.5 million on each April, August, and December of each year for the
next three years. In addition, on December 31, 2006, the remaining unpaid balance of approximately $0.5 million becomes due. The note is non-interest-bearing and due on or before December 2006. Currently, the Company and the Trustee for the
unsecured creditors are negotiating extending the payments over a longer period of time so the payments conform more closely to available cash flow. In addition, the general, unsecured creditors will receive their pro rata share of 0.5 million
shares of common stock, representing 10% of the new common stock of the Company and (b) convenience claims in the amount of approximately $0.7 million will be paid an estimated recovery of 50%. (See Financial Note #8)

Accounting Impact

According to Statement of Position
(SOP) 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, the financial statements of an entity in a Chapter 11 reorganization proceeding should distinguish transactions and events that
are directly associated with the reorganization from those operations of the ongoing business as it evolves. Accordingly, SOP 90-7 requires the following financial reporting and accounting treatment:



| |  |  | Balance SheetThe balance sheet separately classifies liabilities subject to compromise from liabilities not subject to compromise.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Statement of OperationsPursuant to SOP 90-7, revenues and expenses, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of
the business are reported in the statement of operations separately. Professional fees are expensed as incurred.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Statement of Cash FlowsReorganization items are reported separately within the operating, investing, and financing categories of the statement of cash flows with respect to
the financial statements, or details of operating cash receipts and payments resulting from the reorganization are disclosed in a supplementary schedule.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Upon emergence from bankruptcy, Steakhouse Partners implemented fresh-start accounting under the provisions of SOP 90-7. Under SOP 90-7, the reorganization fair value of Steakhouse Partners was allocated to its assets
and liabilities, its accumulated deficit was eliminated, and its new equity was issued according to the Plan of Reorganization as if it were a new reporting entity.



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Fresh-Start Accounting

The Reorganized Company adopted the provisions of fresh-start accounting as of December 31, 2003. In accordance with fresh-start accounting, all
assets and liabilities were recorded at their respective fair market values upon emergence from Chapter 11. Such fair values represented the Companys estimates based on independent appraisals and valuations. Immaterial differences between
estimated pre-petition liabilities assumed by the Reorganized Company and the final settlement amounts are recognized as they occur. As the Predecessor Companys emergence from bankruptcy was December 31, 2003, and the end of the
Predecessor Companys fiscal year was December 30, 2003, there are no operations in the Reorganized Company presented as of December 31, 2003.

To facilitate the calculation of the enterprise value of the Reorganized Company, the Company developed a set of financial projections. Based on these financial projections and with the assistance of a financial
advisor, the enterprise value was determined by the Company, using various valuation methods, including (i) a comparison of the Company and its projected performance to the market values of comparable companies, (ii) a review and analysis
of several recent transactions of companies in similar industries to the Company, and (iii) a calculation of the present value of the future cash flows under the projections. The estimated enterprise value is highly dependent upon achieving the
future financial results set forth in the projections as well as the realization of certain other assumptions which are not guaranteed.

SOP 90-7 requires an allocation of the reorganization equity value in conformity with procedures specified by APB 16, Business Combinations, as amended by SFAS 141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net assets (goodwill) was $2.9 million and $18.9 million as of December 31, 2004 and 2003, respectively. As an adjustment to the fair value of net assets
and offset to goodwill, the Company had its Tradenames (Intangibles) valued by an outside firm. As of December 31, 2004, that value was $13.9 million. Also as an offset to goodwill, the Company had its total gift certificate liability valued by
an outside firm. As of December 31, 2004, that liability was reduced by $2 million.

Goodwill rollforward:



|                                                                                     |  |   |             |  
|------------------------------------------------------------------------------------ |  | - | ----------- | -
|Balance 12/31/03                                                                     |  | $ | 18,881,786  |  
|Fresh Start Adjustments:                                                             |  |   |             |  
|Assets                                                                               |  |   | 35,146      |  
|Gift Certificate Liability                                                           |  |   | (2,022,641  | )
|Tradenames                                                                           |  |   | (13,921,000 | )
|Accounts Payable and Other Accruals                                                  |  |   | (132,763    | )
|Additional liability(attorney fees) related to the company bankruptcy reorganization |  |   | 658,501     |  
|Gain on Disposal of restaurants                                                      |  |   | (619,713    | )
|                                                                                     |  |   |             |  
|Balance 12/31/04                                                                     |  | $ | 2,879,316   |  
|                                                                                     |  |   |             |  



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##### Table of Contents

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



The following table reflects the reorganization adjustments to the consolidated balance sheet as of
December 31, 2003:



|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|---------------------------------------------- |  | ---------------------------------- | ---------- | --------------- | - | -------- | ------------------------- |  | - | ---------------------------------- | - |  | - | ----------
|                                               |  | PredecessorCompanyDecember 30,2003 |            | Reorgan-ization |   |          | Fresh StartAccounting (f) |  |   | ReorganizedCompanyDecember 31,2003
|ASSETS                                         |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|Current assets                                 |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|Cash and cash equivalents                      |  | $                                  | 2,205,221  |                 | $ |         |                           |  | $ |                                   |   |  | $ | 2,205,221 
|Accounts receivable, net                       |  |                                    | 67,909     |                 |   |         |                           |  |   |                                   |   |  |   | 67,909    
|Inventories, net                               |  |                                    | 1,298,203  |                 |   |         |                           |  |   |                                   |   |  |   | 1,298,203 
|Prepaid expenses and other current assets      |  |                                    | 497,416    |                 |   |         |                           |  |   |                                   |   |  |   | 497,416   
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|Total current assets                           |  |                                    | 4,068,749  |                 |   |         |                           |  |   |                                   |   |  |   | 4,068,749 
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|                                               |  |                                    |            |                
|                                               |  | PredecessorCompanyDecember 30,2003 |            | Reorgan-ization |   |          | Fresh StartAccounting (f) |  |   | ReorganizedCompanyDecember 31,2003
|Property, plant, and equipment                 |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|Building                                       |  | $                                  | 2,020,748  |                 | $ |         |                           |  | $ | (2,020,748                         | ) |  | $ |          
|Machinery and equipment                        |  |                                    | 2,121,433  |                 |   |         |                           |  |   | 596,067                            |   |  |   | 2,717,500 
|Leasehold improvement                          |  |                                    | 688,351    |                 |   |         |                           |  |   | (688,351                           | ) |  |   |          
|Capital leases                                 |  |                                    | 13,682,442 |                 |   |         |                           |  |   | (3,817,568                         | ) |  |   | 9,864,874 
|Smallwares                                     |  |                                    | 949,999    |                 |   |         |                           |  |   | (949,999                           | ) |  |   |          
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|                                               |  |                                    | 19,462,973 |                 |   |         |                           |  |   | (6,880,599                         | ) |  |   | 12,582,374
|Less accumulated depreciation and amortization |  |                                    | 6,352,419  |                 |   |         |                           |  |   | (6,352,419                         | ) |  |   |          
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|                                               |  |                                    | 13,110,554 |                 |   |         |                           |  |   | (528,180                           | ) |  |   | 12,582,374
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|Other assets                                   |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|Liquor license                                 |  |                                    |           |                 |   |         |                           |  |   | 688,000                            |   |  |   | 688,000   
|Deposits and other assets                      |  |                                    | 103,407    |                 |   |         |                           |  |   |                                   |   |  |   | 103,407   
|Cashrestricted under collateral agreements    |  |                                    | 480,496    |                 |   | (480,496 | )(d)                      |  |   |                                   |   |  |   |          
|Goodwill                                       |  |                                    |           |                 |   |         |                           |  |   | 18,881,786                         |   |  |   | 18,881,786
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           
|TOTAL ASSETS                                   |  | $                                  | 17,763,206 |                 | $ | (480,496 | )                         |  | $ | 19,041,606                         |   |  | $ | 36,324,316
|                                               |  |                                    |            |                 |   |          |                           |  |   |                                    |   |  |   |           



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|----------------------------------------------- |  | ---------------------------------- | ----------- | - | --------------- | - | ----------- | ------------------------- |  | - | ---------------------------------- | - |  | - | ----------
|                                                |  | PredecessorCompanyDecember 30,2003 |             |   | Reorgan-ization |   |             | Fresh StartAccounting (f) |  |   | ReorganizedCompanyDecember 31,2003
|LIABILITIES NOT SUBJECT TO COMPROMISE           |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Current liabilities                             |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Current portion of long-term debt               |  | $                                  | 5,137,118   |   |                 | $ | (5,000,000  | )(b)                      |  | $ |                                   |   |  | $ | 2,058,222 
|                                                |  |                                    |             |   |                 |   | (137,118    | ) (a)                     |  |   |                                    |   |  |   |           
|                                                |  |                                    |             |   |                 |   | 2,058,222   | (a)                       |  |   |                                    |   |  |   |           
|Current portion of capital lease                |  |                                    |            |   |                 |   | 258,918     | (c)                       |  |   |                                   |   |  |   | 258,918   
|Accounts payable                                |  |                                    | 3,144,654   |   |                 |   | 1,427,935   | (a)                       |  |   |                                    |   |  |   | 4,572,589 
|Accrued expenses                                |  |                                    | 1,596,858   |   |                 |   | (1,407,167  | )(d)                      |  |   |                                   |   |  |   | 189,691   
|Unearned revenue                                |  |                                    | 3,932,122   |   |                 |   |            |                           |  |   |                                   |   |  |   | 3,932,122 
|Reserve for self insurance claims               |  |                                    | 578,904     |   |                 |   | (578,904    | )(d)                      |  |   |                                    |   |  |   | 72,716    
|                                                |  |                                    |             |   |                 |   | 72,716      | (a)                       |  |   |                                    |   |  |   |           
|Sales and property taxes payable                |  |                                    | 585,299     |   |                 |   |            |                           |  |   |                                   |   |  |   | 585,299   
|Accrued payroll costs                           |  |                                    | 1,473,853   |   |                 |   |            |                           |  |   |                                   |   |  |   | 1,473,853 
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Total current liabilities                       |  |                                    | 16,448,808  |   |                 |   | (3,305,398  | )                         |  |   |                                    |   |  |   | 13,143,410
|Long term debt, net of current portion          |  |                                    | 1,341,313   |   |                 |   | (1,341,313  | )(a)                      |  |   |                                   |   |  |   | 7,906,213 
|                                                |  |                                    |             |   |                 |   | 7,906,213   | (a)                       |  |   |                                    |   |  |   |           
|Long term capital lease, net of current portion |  |                                    |            |   |                 |   | 9,605,956   | (c)                       |  |   |                                   |   |  |   | 9,605,956 
|Deferred rent                                   |  |                                    |             |   |                 |   | 113,182     | (e)                       |  |   |                                   |   |  |   | 113,182   
|Deferred tax liability                          |  |                                    | 119,411     |   |                 |   | (119,411    | )(d)                      |  |   |                                   |   |  |   |          
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Total liabilities not subject to compromise     |  |                                    | 17,909,532  |   |                 |   | 12,859,229  |                           |  |   |                                   |   |  |   | 30,768,761
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Liabilities subject to compromise               |  |                                    | 25,540,623  |   |                 |   | (25,540,623 | )(a)(c)                   |  |   |                                   |   |  |   |          
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|                                                |  |                                    |             |  
|                                                |  | PredecessorCompanyDecember 30,2003 |             |   | Reorganization  |   |             | Fresh StartAccounting (f) |  |   | ReorganizedCompanyDecember 31,2003
|STOCKHOLDERS DEFICIT                           |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Predecessor Company preferred stock,Series B    |  | $                                  | 1,000       |   |                 | $ |            |                           |  | $ | (1,000                             | ) |  | $ |          
|Predecessor Company preferred stock,Series C    |  |                                    | 1,750       |   |                 |   |            |                           |  |   | (1,750                             | ) |  |   |          
|Predecessor Company common stock                |  |                                    | 33,865      |   |                 |   |            |                           |  |   | (33,865                            | ) |  |   |          
|Reorganized Company common stock                |  |                                    |            |   |                 |   | 4,500       | (b)                       |  |   |                                   |   |  |   | 4,500     
|Reorganized Company committed stock             |  |                                    |            |   |                 |   | 555,555     | (a)                       |  |   |                                   |   |  |   | 555,555   
|Predecessor Company treasury stock              |  |                                    | (175,000    | ) |                 |   |            |                           |  |   | 175,000                            |   |  |   |          
|Predecessor Company additional paid-in capital  |  |                                    | 12,100,750  |   |                 |   | 4,995,500   | (b)                       |  |   | (12,100,750                        | ) |  |   | 4,995,500 
|Reorganized Company additional paid-in capital  |  |                                    |            |   |                 |   |            |                           |  |   |                                   |   |  |   |          
|Accumulated deficit                             |  |                                    | (37,649,314 | ) |                 |   | (6,645,343  | )(a)                      |  |   | (31,003,971                        | ) |  |   |          
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|Total stockholders deficit                     |  |                                    | (25,686,949 | ) |                 |   | 12,200,898  |                           |  |   | 19,041,606                         |   |  |   | 5,555,555 
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           
|TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT     |  | $                                  | 17,763,206  |   |                 | $ | 480,496     |                           |  | $ | 19,041,606                         |   |  | $ | 36,324,316
|                                                |  |                                    |             |   |                 |   |             |                           |  |   |                                    |   |  |   |           



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



---

|(a) | To record the discharge of pre-petition liabilities in the amount of $25.5 million the restructured pre-petition liabilities converted into notes payable in the amount of $9.9
million, in accordance with the Plan of Reorganization.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | To record the conversion of DIP Financing in the amount $5.0 million to 4.5 million shares of common stock upon emergence from bankruptcy, in accordance with the Plan of
Reorganization.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | To reclassify the capital lease obligations of the retained restaurants upon emergence from bankruptcy in the amount of $9.9 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(d) | To record discharge of post-petition accrued liabilities which were restructured in accordance with the Plan of Reorganization in the amount of $1.9 million and to write-off
cash-restricted under collateral agreements as collectability is in doubt.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | To straight-line rent of the retained restaurants.
|--- | --------------------------------------------------

|(f) | To adjust the carrying value of assets, liabilities, and stockholders equity to fair value, in accordance with fresh-start accounting.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

NOTE 3DISCONTINUED OPERATIONS

The Pacific
Basin Foods (PBF) subsidiary was a wholesale food distributor serving the restaurant industry. Its principal clients were Paragon and several small regional chains. As Paragon downsized and reduced the total number of restaurants
serviced by PBF, the volume required to maintain its economic feasibility also diminished.

On October 11, 2002 (the Filing
Date), the Predecessor Companys wholly owned subsidiary, PBF, filed for protection under Chapter 7 of the United States Bankruptcy Court (Bankruptcy Court) in the Central District of California, located in
Riverside. The subsidiary ceased operations effective as of the Filing Date. In February 2003, the Bankruptcy Court approved the Chapter 7 Liquidation for PBF.

The results of operations of PBF have been classified as discontinued operations in the accompanying consolidated statements of operations for the fiscal years ended 2003 and 2002. The assets and liabilities of the
discontinued operations at fiscal year ended 2002 consisted of the following:



|                                             |  |   |            |  
|-------------------------------------------- |  | - | ---------- | -
|Accounts receivable                          |  | $ | 57,989     |  
|Inventories                                  |  |   | 30,574     |  
|Prepaid expenses and other assets            |  |   | 43,562     |  
|Property, plant, and equipment, net          |  |   | 53,866     |  
|Other assets                                 |  |   | 114,366    |  
|                                             |  |   |            |  
|Total assets of discontinued operations      |  | $ | 300,357    |  
|                                             |  |   |            |  
|Accounts payable                             |  | $ | 1,134,030  |  
|Accrued expenses                             |  |   | 149,128    |  
|Capital lease obligations                    |  |   | 74,662     |  
|                                             |  |   |            |  
|Total liabilities of discontinued operations |  | $ | 1,357,820  |  
|                                             |  |   |            |  
|NET LIABILITIES OF PBF IN LIQUIDATION        |  | $ | (1,057,463 | )
|                                             |  |   |            |  

During February 2003, the Predecessor Company finalized the liquidation of PBF. In connection with
final liquidation the Company recorded a gain in the amount of $1,057,463 during the year ended December 31, 2003, as the liabilities exceeded the assets.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



NOTE 4GOING CONCERN

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As
shown in the financial statements, during the years ended December 31, 2005 and 2004 (Reorganized Company) and December 30, 2003 (Predecessor Company, Debtor-in-Possession), the Company maintained a current ratio of 0.22-to-1, 0.23-to-1
and 0.25-to-1, respectively. In addition, during the years ended December 31, 2005 and 2004 (Reorganized Company) and December 30, 2003 (Predecessor Company, Debtor-in-Possession), the Company had a working capital deficit of approximately
$9.7 million, $8.8 million and $12.4 million, respectively. In fiscal 2005, the Company successfully completed the first phase (minimum) of a Private Placement Memorandum for approximately $1.4 million. If the Company is unable to generate profits
and unable to obtain additional financing for its working capital requirements, it may have to curtail its business sharply or cease business altogether.

The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The
Companys continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to restructure its current financing, to obtain additional financing, and ultimately to attain
profitability.

Management has evaluated its current operations, and it has focused the Companys efforts and developed plans to
generate operating income to continue the Companys operations through the year ending December 31, 2006.

Managements
plans include the following:

1. Improving the Companys financial performance through cost-reduction and restructuring of
administrative overhead.

2. Refinancing the Plan of Reorganizations Short Term Debt with Long Term Obligations.

3. Raising money through placements of its equity securities.

NOTE 5SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following discussion addresses the Companys most critical
accounting policies, which are those that are most important to the portrayal of the Companys financial condition and results and that require significant judgment.

Principles of Consolidation

The Companys consolidated financial statements include the
accounts of Steakhouse and its subsidiaries, PSR and PBF. Significant intercompany amounts and transactions have been eliminated in consolidation.

Fiscal Year-End

The Company reports its operations on a 52-53 week fiscal year ending on the Tuesday closest to
December 31. For financial statement purposes, the Company reports all years as ending December 31 (the fiscal year end). As a result of the Companys emergence from bankruptcy on December 31, 2003, the



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Predecessor Companys financial statements were reported on the last day of the fiscal year, which was December 30, 2003, and the Reorganized
Companys financial statements were reported on December 31, 2003.

Revenue Recognition

Revenues are generally recognized when services are rendered.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and in banks and credit card receivables. The
Company maintains its cash deposits at numerous banks located throughout the United States deposits at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risk on cash and cash equivalents.

Accounts Receivable

Accounts receivable consist primarily of amounts due from customers and credit card receivables. The Company has provided for an allowance for doubtful
accounts, which management believes to be sufficient to account for all uncollectible amounts. Trade receivables are evaluated on an item-by-item basis and written off if deemed uncollectible.

Inventories

Inventories, consisting principally of
food, beverages, and restaurant supplies, are valued at the lower of cost (first-in, first-out) or market.

Property, Plant, and Equipment

Property, plant, and equipment, including leasehold improvements, are recorded at cost, less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets as follows:

Buildings 20
years

Furniture, fixtures, and equipment 5 years

Improvements to leased property are amortized over the lesser of the life of the lease or the life of the improvements. Amortization expense on assets acquired under capital leases is included with depreciation and
amortization expense on owned assets.

Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals
are included in the results of operations.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. In evaluating long-lived assets for impairment, a number
of factors are considered:



| | A) | Restaurants sales trends;
| | -- | -------------------------



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



| | B) | Local competition;
| | -- | ------------------



| | C) | Changing demographic profiles;
| | -- | ------------------------------



| | D) | Local economic conditions;
| | -- | --------------------------



| | E) | New laws and government regulations that adversely effect sales and profits; and
| | -- | --------------------------------------------------------------------------------



| | F) | The ability to recruit and train skilled restaurant employees.
| | -- | --------------------------------------------------------------

If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. During 2005 fiscal year, the Company recorded an impairment charge of
$51,000 to reduce the fair value of the furniture, fixtures and equipment, located at its Troy, Michigan, location to net realizable values.

Self-Insurance

In the past the Company was self-insured for certain losses related to general liability and workers
compensation. The Company maintained stop loss coverage with third party insurers to limit its total exposure. The self-insurance liability represents an estimate of the ultimate cost of old claims incurred as of the balance sheet date. The
estimated liability is based upon analysis of historical data and actuarial estimates, and is reviewed by the Company on a quarterly basis to ensure that the liability is appropriate. If for any reason in the final settlement of these old claims,
the results differ from our estimates, our financial results could be impacted.

Goodwill

In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141
superseded APB Opinion No. 16, Business Combinations. The provisions of SFAS 141 require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001; provide specific criteria for
the initial recognition and measurement of intangible assets apart from goodwill; and, require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS 141 also requires
that upon adoption of SFAS 142, certain intangible assets be reclassified into or out of goodwill based on certain criteria. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets, and is effective for fiscal years beginning after
December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets
and require that such assets be tested annually for impairment (and in interim periods if events or circumstances indicate that the related carrying amount may be impaired), require that reporting units be identified for purposes of assessing
potential impairments, and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

SFAS
142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess.

Identifiable Intangible Assets

The identifiable intangible assets consist of the tradenames (Carvers, Hungry Hunters, Hunters Steakhouse, Mountain Jacks, Carvers
Creek, Cliffhouse, The Whaling Company and Tippecanoe Place) valued at approximately $13.9 million. The Company has determined the tradenames to have an indefinite useful life and therefore is not amortizing the balance. In accordance with FAS 142,
the Company will review the useful life each reporting period, and will test the asset for impairment at least annually, or more frequently if there are indications that the asset is impaired. No impairment existed as of December 31, 2005.

Unearned Revenue

The Company sells
gift cards and recognizes a liability, which is included in unearned revenue, for gift cards outstanding until the gift cards is redeemed or considered to be unredeemable. These gift cards do not carry an expiration date, so if all outstanding gift
cards are redeemed at once, our financial results (cash) would be impacted.

Deferred Rent

The leases on various facilities include certain rent relief and scheduled increasing monthly payments thereafter. In accordance with accounting
principles generally accepted in the United States of America, the Company has accounted for these leases to provide for even charges to operations over the lives of the leases.

Stock-Based Compensation

SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, an amendment of SFAS No. 123, provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation.

SFAS No. 123, Accounting for Stock-Based Compensation, establishes and encourages the use of the fair value based method of accounting
for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of grant and is recognized over the periods in which the related services are rendered.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



The Company is required to disclose the pro forma effect of accounting for stock options based on the
fair value method. The Company uses the Black-Scholes option-pricing model to calculate the fair value of options. The table below represents a reconciliation of the Companys pro forma net income giving effect to the estimated compensation
expense related to stock options that would have been reported if the Company utilized the fair value:



|                                                                                                                                     |  |                     |       |   |                    |   |       |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ----- | - | ------------------ | - | ----- | ---- |  | - | ------ | -
|                                                                                                                                     |  | Reorganized Company |       |   | PredecessorCompany |  
|                                                                                                                                     |  | 2005                |       |   | 2004               |   |       | 2003 | 
|                                                                                                                                     |  | (in thousands)      |      
|Net loss as reported                                                                                                                 |  | $                   | (455  | ) |                    | $ | (635  | )    |  | $ | (4,851 | )
|Add: Stock based employee compensation expense determined under intrinsic method for all awards, net of related tax effect           |  |                     | 388   |   |                    |   | 409   |      |  |   |       |  
|Deduct: Stock based employee compensation expense determined under fair value based method for all awards, net of related tax
effect |  |                     | (560  | ) |                    |   | (453  | )    |  |   | (192   | )
|PRO FORMA NET LOSS                                                                                                                   |  | $                   | (627  | ) |                    | $ | (679  | )    |  | $ | (5,043 | )
|                                                                                                                                     |  |                     |      
|Basic loss per common share                                                                                                          |  |                     |       |   |                    |   |       |      |  |   |        |  
|As reported (Basic & Diluted)                                                                                                        |  | $                   | (0.08 | ) |                    | $ | (0.13 | )    |  | $ | (1.43  | )
|Pro forma (Basic & Diluted)                                                                                                          |  | $                   | (0.10 | ) |                    | $ | (0.14 | )    |  | $ | (1.49  | )

For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value
of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: (1) The Reorganized Company (a) for the year ended December 31, 2005 used:
dividend yield of 0%, expected volatility of 82%, risk-free interest rate of 4.0%, and expected life of three years, and (b) for the year ended December 31, 2004 used: dividend yield of 0%, expected volatility of 50%, risk-free interest
rate of 2.9%, and expected life of three years; (2) The Predecessor Company for the years ended 2003 and 2002 used: dividend yield of 0%, expected volatility of 50%, risk-free interest rate of 6.3%, and expected life of five years. (Note:
Effective with confirmation of the Plan of Reorganization on December 31, 2003, all existing stock options, stock option plans, and warrants were canceled.) The Black-Scholes option valuation model was developed for use in estimating the fair
value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the
Predecessor Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Fair Value of
Financial Instruments

For certain of the Companys financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for notes payable also approximate fair value because current interest rates offered to the Company for
debt of similar maturities are substantially the same.

Advertising and Promotional Costs

Advertising and promotional costs are charged to expense as incurred. Advertising and promotional costs for the fiscal years ended 2005 and 2004
(Reorganized Company), and 2003 (Predecessor Company, Debtor-in-Possession), were $0.7 million, $0.9 million, and $1.7 million respectively.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Direct Operating Costs

Direct operating costs consist of those direct costs associated with operating the restaurant locations, exclusive of depreciation and amortization expense.

Income Taxes

The Company utilizes SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

Net Loss Per Share

The Company utilizes SFAS No. 128, Earnings per Share. Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have
been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. As such, basic and diluted loss per share
is the same.

Estimates

The
preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting
Pronouncement

In October 2005, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 13-1,
Accounting for Rental Costs Incurred during a Construction Period. The guidance requires rental costs for operating leases during the construction period to be recognized as rental expense. The guidance permits either retroactive or prospective
treatment for periods beginning after December 15, 2005. We currently comply with this guidance and, therefore, the application of FSP 13-1 did not have a material effect on our consolidated financial statements.

In June 2005, the FASB reached a consensus on EITF 05-06, Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception
or Acquired in a Business Combination. The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term
that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. We currently comply with this guidance and, therefore, the adoption of EITF
05-06 does not have a material impact on our consolidated financial statements.

In May 2005, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 154, Accounting Changes and Error CorrectionsA Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



requires retrospective application, or the latest practical date, as the preferred method to report a change in accounting principle or correction of an
error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. (FIN) 47, Accounting for Conditional Asset Retirement
Obligations. FIN 47 clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN
47 are those for which an entity has a legal obligation to perform an asset retirement activity; however the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity.
FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have
a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123, Share-Based Payment. SFAS
123(R) is a revision of SFAS 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires all share-based payments to employees including grants of employee stock
options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective at the beginning of the first annual period beginning after June 15, 2005. Under APB Opinion No. 25, no stock-based compensation cost has been
reflected in our net income for grants of stock options to employees. Beginning in the first quarter of 2006, we will recognize compensation expense in our financial statements based on the fair value of all share-based payments to employees. SFAS
123(R) also changes the accounting for the tax effects of options, including the presentation of the tax effects on the consolidated statements of cash flows. The future impact of SFAS 123(R) cannot be predicted at this time because it will depend
on levels of share-based payments granted. However, had SFAS 123(R) been adopted in prior periods, the effect would have approximated the SFAS 123 pro forma net income and earnings per share disclosures, as reflected in Footnote 15 to our financial
statements.

In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 to provide public companies
additional guidance in applying the provisions of SAFS 123(R). Among other things, SAB 107 describes the staffs expectations in determining the assumptions that underline the fair value estimates and discusses the interpretations of SFAS
123(R) with certain existing staff guidance. SAB 107 should be applied upon the adoption of SFAS 123(R).

NOTE 6PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following (in thousands):



|                                                   |  |                  |        |                  |   |                  |  |   |       
|-------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ---------------- |  | - | ------
|                                                   |  | December 31,2005 |        | December 31,2004 |   | December 31,2003
|Leasehold improvements                             |  | $                | 210    |                  | $ | 140              |  |   |      
|Furniture, fixtures, and equipment                 |  |                  | 3,391  |                  |   | 3,038            |  |   | 2,717 
|Leased property and buildings under capital leases |  |                  | 9,226  |                  |   | 9,226            |  |   | 9,865 
|                                                   |  |                  |        |                  |   |                  |  |   |       
|                                                   |  |                  | 12,827 |                  |   | 12,404           |  |   | 12,582
|Less accumulated depreciation and amortization     |  |                  | 2,535  |                  |   | 1,216            |  |   |      
|                                                   |  |                  |        |                  |   |                  |  |   |       
|TOTAL                                              |  | $                | 10,292 |                  | $ | 11,188           |  | $ | 12,582
|                                                   |  |                  |        |                  |   |                  |  |   |       



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Depreciation and amortization expense was $1.3 million, $1.2 million and $0 for the fiscal years
ended December 2005, 2004 and 2003, respectively. Depreciation includes amortization of property and buildings under capital leases of approximately $0.6 million, $0.6 million and $0 for the fiscal years ended 2005, 2004 and 2003, respectively.
During fiscal year 2005, the Company recorded an impairment charge of $51,000 to reduce the fair value of the furniture, fixtures and equipment, located at its Troy, Michigan, location to net realizable values.

On February 15, 2002, Steakhouse filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (see Note 2).
Under Chapter 11, the Company had the right to reject any leases entered into by the Company before the bankruptcy filing date. As of the fiscal years ended 2003 and 2002 (Predecessor Company, Debtor-in-Possession), the Company has rejected six and
fifteen operating leases, respectively, related to closed and/or poorly performing restaurants.

As of the fiscal years ended 2003 and
2002, (Predecessor Company, Debtor-in-Possession) the property, plant, and equipment associated with such leases had a net book value of $1.5 million and $1.7 million, respectively, deferred rent liabilities of approximately $0.4 million and $0.5
million, respectively, capital lease obligations of $2.2 million and $2.7 million, respectively. The Company recorded a net gain during the fiscal years ended 2003 and 2002 of $1.1 million and $1.3 million, respectively, in connection with these
rejected leases.

As of the fiscal years ended 2003 and 2002, the Company had negotiated the sales of nine and three restaurant leases,
respectively, and related property, plant, and equipment for gross proceeds of $1.8 million and $1.1 million. As of the fiscal years ended 2003 and 2002, the property, plant, and equipment associated with such leases had net book values of $1.3
million and $0.7 million, deferred rent liabilities of $0.1 million and $0.4 million, respectively and capital lease obligations of $2.1 million and $0, respectively. The Predecessor Company recorded a net gain during the fiscal years ended 2003 and
2002 of $2.4 million and $0.8 million respectively, in connection with such sales.

During 2004, the Reorganized Company completed the sale
of four restaurant leases and related property, plant and equipment for gross proceeds of $0.6 million. The sale of these restaurants was conducted through the Companys bankruptcy proceeding and was not finalized until February 2004. As a
result of the Companys adoption of fresh start accounting as of December 31, 2003, the gain realized by the Company in connection with this transaction has been recorded as a reduction of goodwill.

NOTE 7PREDECESSOR COMPANY NOTE RECEIVABLE

To
obtain a letter of credit for $2.6 million required by one of the Predecessor Companys lessors, the Predecessor Company placed a $500,000 deposit with the third party procurer of the letter of credit on November 8, 1998. The Predecessor
Company in turn was able to secure its deposit with the third party procurer of the letter of credit with a non-negotiable promissory note that is non-interest-bearing. In exchange for the letter of credit, the Company was required to pay to the
third party procurer approximately $0.1 million and annually issue warrants to purchase 20,000 shares of common stock on the anniversary date of the letter of credit, pro rata for each year the letter of credit was outstanding. Any money drawn on
the letter of credit would have incurred an interest charge of 12% per annum, and repayment of the amount drawn down and interest charges are due within 90 days.

In exchange for certain services rendered by an investor related to the letter of credit, the Predecessor Company was required to pay the investor $42,000 and issue annually warrants to purchase 13,600 shares of
common stock on the anniversary date of the letter of credit, pro rata for each year the letter of credit was outstanding.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



The letter of credit matured in five years from the date of issuance and was callable after two years
from the date of issuance by the Predecessor Company upon payments of amounts due to the issuer. The Predecessor Company reduced the note receivable by $74,670 and $118,000 during each of the fiscal years ended 2003 and 2002, respectively. The
remaining balance as of fiscal year ended 2003 was $0.

As of the Effective Date of the Plan of Reorganization, the letter of credit was
rejected and all associated warrants were cancelled.

NOTE 8NOTES PAYABLE

Notes payable consisted of the following (in thousands):



|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |       |                  |   |                  |  |   |      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | ---------------- | - | ---------------- |  | - | -----
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  | December 31,2005 |       | December 31,2004 |   | December 31,2003
|Priority Tax Claim $1,921, $1,921 and $1,797 for 2003, 2004 and 2005, respectively, paid over a four-year period from the Effective Date with
interest payable at 6% per annum                                                                                                                                                                                                                                   |  | $                | 1,049 |                  | $ | 1,557            |  | $ | 1,921
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |      
|Secured Claim $1,535 paid over a six-year period, only interest (6%) to be paid over the first three years and the principal to be amortized
over the remaining three years.                                                                                                                                                                                                                                     |  |                  | 1,474 |                  |   | 1,459            |  |   | 1,535
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |      
|Unsecured Claims $8,000 to $12,000 will be paid an estimated recovery of 50% to 70%. Each allowed claim will receive its pro rata share of
$1,000 within 30 days of the effective date of the Bankruptcy Plan and payments under a $5,030 notes payable, which will be paid in the amount of $500 on each April, August and December for the next three years. Any unpaid principal is due on
December 31, 2006. |  |                  | 4,855 |                  |   | 4,855            |  |   | 5,030
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |      
|Note payable, dated June 1, 2005, bearing interest at 5.0% per annum with an original principal of $299. The note requires ten monthly
payments of $30 through March 2006.                                                                                                                                                                                                                                       |  |                  | 61    |                  |   | 24               |  |   | 61   
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |      
|Note payable to Sanders Constructions Co, dated July 8, 2005, bearing interest at 8.0% per annum with an original principal of $6, paid over
one year period.                                                                                                                                                                                                                                                    |  |                  | 4     |                  |   |                 |  |   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |      
|Note payable from related party, bearing interest at 11% per annum with an original principal of $80. The note requires monthly payments of $1
and is due on August 1, 2009                                                                                                                                                                                                                                      |  |                  |      |                  |   |                 |  |   | 72   
|Note payable, bearing interest at 9% per annum with an original principal of $1,290. The note requires monthly payments starting
May 1, 2005 and is due on or before January 1, 2008                                                                                                                                                                                                                             |  |                  | 1,177 |                  |   | 1,290            |  |   | 1,345
|Convertible note, non-interest bearing, converted to common stock in 2005                                                                                                                                                                                                                                                                                                                                        |  |                  |      |                  |   | 200              |  |   |     
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |       |                  |   |                  |  |   |      
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  | 8,620 |                  |   | 9,385            |  |   | 9,964
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |       |                  |   |                  |  |   |      
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                             |  |                  | 5,925 |                  |   | 3,725            |  |   | 2,058
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |       |                  |   |                  |  |   |      
|LONG-TERM PORTION                                                                                                                                                                                                                                                                                                                                                                                                |  | $                | 2,695 |                  | $ | 5,660            |  | $ | 7,906
|                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                  |       |                  |   |                  |  |   |      



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Notes payable future payments:



|              |  |      |       |      |   |       |  |      |     |      |   |            |  |       |    |  |   |  |   |      
|------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ---------- |  | ----- | -- |  | - |  | - | -----
|              |  | 2006 |       | 2007 |   | 2008  |  | 2009 |     | 2010 |   | Thereafter |  | TOTAL
|Notes Payable |  | $    | 5,925 |      | $ | 1,494 |  | $    | 627 |      | $ | 540        |  | $     | 34 |  |  |  | $ | 8,620

NOTE 9PREDECESSOR COMPANY CONVERTIBLE DEBT

The Predecessor Company issued convertible debt, as summarized below, payable to various individuals, which was convertible at the option of the holder
into the Predecessor Companys common stock. Interest at 6% per annum was payable on a quarterly basis. If the note holders had elected to convert their debt to common stock, the conversion price for each share would have been equal 85% of
the average closing price of the Predecessor Companys common stock for the five days preceding the conversion date. There were no conversions to common stock during the fiscal years ended 2003 and 2002.

The terms associated with each series for the fiscal years ended 2003 and 2002 were as follows (in thousands):



|                                       |  |      |       |      |   |      
|-------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                       |  | 2003 |       | 2002
|6% notes, due June 3, 2001             |  | $    | 600   |      | $ | 600  
|6% notes, due July 15, 2001            |  |      | 400   |      |   | 400  
|6% notes, due July 23, 2001            |  |      | 100   |      |   | 100  
|                                       |  |      |       |      |   |      
|                                       |  |      | 1,100 |      |   | 1,100
|Less amounts subject to compromise     |  |      | 1,100 |      |   | 1,100
|                                       |  |      |       |      |   |      
|TOTAL AMOUNT NOT SUBJECT TO COMPROMISE |  | $    |      |      | $ |     
|                                       |  |      |       |      |   |      

In accordance with accounting principles generally accepted in the United States of America, the
discount on the conversion feature of the above notes, arising from the 85% conversion feature, was considered to be interest expense and was recognized in the statement of operations during the period from the issuance of the debt to the time at
which the debt becomes convertible.

The Predecessor Company was in default on these obligations, as the Predecessor Company did not make
payments as the notes came due.

Upon emergence, all convertible debt of the Predecessor Company was reclassified as an Unsecured Claim.

NOTE 10PREDECESSOR COMPANY SECURED EXCHANGEABLE NOTES

On September 29, 1998, the Predecessor Company issued a secured exchangeable note of approximately $0.7 million, maturing on September 28, 2003. Interest on the note was at 14.375% per annum based on a
360-day year and accrued from the date of the note and was payable upon exchange of the note into common stock. The coupon rate of the note increased by 2.25% every 360 days, up to a maximum of 25%. At fiscal year end, the interest rate was 25%. The
note could have been exchanged for the Predecessor Companys common stock at an exchange price equal to $4.65 or the average of the four low trades in the primary market for trading of the Predecessor Companys common stock over the 22
trading days immediately proceeding the exchange date, reduced by an exchange discount.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



This note also provided warrants for the purchase of 73,125 shares of the Predecessor Companys
common stock at any time during the period commencing on the date of the note through September 28, 2003 at an exercise price per share equal to $5.28. The warrants could have been exercised whole or in part.

On December 21, 1998, the Predecessor Company issued a secured exchangeable note of $1.4 million, maturing on September 28, 2003. Interest on
the note was at 12% per annum based on a 360-day year and accrued from the date of the note and was payable upon exchange of the note into common stock. The coupon rate of the note increased by 2.25% every 360 days up to a maximum of 25%. At
fiscal year ended 2002, the interest rate was 23.25%. The note could have been exchanged for the Predecessor Companys common stock at an exchange price equal to $5.50 or the average of the four low trades in the primary market for trading of
the Predecessor Companys common stock over the 22 trading days immediately proceeding the exchange date, reduced by an exchange discount.

This note also provided warrants for the purchase of outstanding shares of the Predecessor Companys common stock at any time during the period commencing on the date of the note through September 28, 2003 at an exercise price per
share equal to $5.28. The warrants could have been exercised whole or in part.

In connection with the bankruptcy filing, the secured
exchangeable notes were reclassified to liabilities subject to compromise.

Upon emergence, all secured notes of the Predecessor Company
were classified as Unsecured Claims as part of Plan of Reorganization.

NOTE 11PREDECESSOR COMPANY DEFERRED GAIN ON SALE-LEASEBACK

During November 2001, PSR completed a sale-leaseback transaction on one of its restaurants for $0.9 million. In connection with the transaction, the
buyer was required to remit $600,000 of the proceeds to an escrow account to be used for future improvements on the restaurant by the Predecessor Company. This amount was included in cashrestricted under collateral agreements.

The Predecessor Company recorded a deferred gain in the amount of $0.9 million on the transaction and amortized the gain over the life of the lease in
accordance with SFAS No. 28, Accounting for Sales with Leasebacks. As of the fiscal year ended 2003, the Predecessor Company entered into a compromising agreement to dispose the restaurant. As such, part of the deferred gain in the
amount of $0.6 million was offset against the proceeds in the escrow account, while the remaining $0.3 million was recognized as income from reorganization items.

NOTE 12COMMITMENTS AND CONTINGENCIES

Leases

The Predecessor Company leased land and building sites for its restaurant operations. These leases had initial terms generally ranging from 10 to 35 years and, in certain instances, provide for renewal options ranging
from five to 25 years. Certain of these leases required additional (contingent) rental payments by the Predecessor Company if sales volumes at the related restaurants exceed specified levels. Most of these lease agreements required payments of
taxes, insurance, and maintenance costs by the Predecessor Company.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



The Predecessor Company also leased restaurant and transportation equipment under operating and
capital leases. Those leases had initial terms generally ranging from four to seven years and required a fixed monthly payment or, in the case of transportation equipment, additional payments on a per mile basis.

The Reorganized Company has assumed all leases with the same terms as the Predecessor Company that have not been rejected as of December 31, 2003.
The Reorganized Company has assumed and operated 25 unit leases as of December 31, 2005.

Future minimum lease payments for all leases
with initial or remaining terms of one year or more at December 31, 2005 were as follows (in thousands):



|                                  |  |                 |        |               |   |       
|--------------------------------- |  | --------------- | ------ | ------------- | - | ------
|Year Ending December 31,          |  | OperatingLeases |        | CapitalLeases
|2006                              |  | $               | 2,498  |               | $ | 1,284 
|2007                              |  |                 | 2,417  |               |   | 1,285 
|2008                              |  |                 | 2,175  |               |   | 1,285 
|2009                              |  |                 | 2,058  |               |   | 1,295 
|2010                              |  |                 | 1,944  |               |   | 1,297 
|Thereafter                        |  |                 | 13,305 |               |   | 10,549
|                                  |  |                 |        |               |   |       
|                                  |  | $               | 24,397 |               | $ | 16,995
|Less amount representing interest |  |                 |        |               |   | 8,257 
|                                  |  |                 |        |               |   |       
|                                  |  |                 |        |               |   | 8,738 
|Less current portion              |  |                 |        |               |   | 309   
|                                  |  |                 |        |               |   |       
|LONG-TERM PORTION                 |  |                 |        |               | $ | 8,429 
|                                  |  |                 |        |               |   |       

In order to guarantee its subsidiarys performance under several leases, the Predecessor
Company was obligated to post a letter of credit in the amount of $2.6 million in favor of the master lessor. Two of the Predecessor Companys officers arranged for a third party to purchase the letter of credit in consideration of a loan to
the third party of $0.5 million to be repaid without interest upon the expiration of the line of credit term. The Predecessor Company guaranteed the officers performance under this agreement. Additional payments of approximately $0.1 million
and $42,000 were also due annually to the third party and his broker, respectively, upon renewal of the line of credit, pursuant to the arrangement with the third party. Subsequent to fiscal year end 2003, the Predecessor Companys contractual
obligation to post a letter of credit was not assumed in the Bankruptcy Plan approved by the United States Bankruptcy Court effective December 31, 2003.

Under Chapter 11, the Predecessor Company had the right to reject any lease entered into by the Predecessor Company before the bankruptcy filing date. During the fiscal years ended 2002 and 2003, the Predecessor
Company rejected fifteen and six operating leases, respectively. The liabilities related to these leases at fiscal year end 2003 are included in liabilities subject to compromise or accounts payable based on the nature of the claim. The rejected
leases have been excluded from the above schedule of future minimum payments.

At the time of its bankruptcy filing, the Predecessor
Company was a party to certain lease agreements with P.S. Realty Partners, L.P. On July 1, 2002, the Predecessor Company entered into a settlement agreement with the landlord, whereby several lease terms were modified or shortened. This
settlement was approved by the Bankruptcy Court on July 1, 2002.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



For the fiscal years ended 2005, 2004, and 2003, rent expense was $2.6 million, $2.6 million, and
$4.7 million, respectively, excluding rent expense incurred by the Predecessor Companys wholly owned subsidiary, PBF. Rent expense incurred by PBF for the fiscal years ended 2003 was $0.

Self Insurance

The Predecessor Company has
self-insured retention insurance programs for general liability and employee health plans with varying deductibles and certain maximum coverage under the Companys risk management program. Amounts estimated to be payable with respect to
existing claims for which the Predecessor Company is liable under its self-insured retention have been accrued as liabilities.

The
Predecessor Company is also required to maintain cash deposits securing future payments under the programs and has entered into an arrangement with the insurance companies, whereby they have placed cash deposits into money market funds controlled by
the insurance companies and granted the insurance companies a security interest in the cash deposits. These deposits were included in cash-restricted under collateral agreements. Estimated liabilities related to self-insurance were $1.2 million and
$1.0 million at fiscal years ended 2003 and 2002, respectively. As a result of the bankruptcy filing, the Predecessor Company reclassified $0.6 million and $0.6 million for the fiscal years ended 2003 and 2002, respectively, of the self-insurance
reserve to liabilities subject to compromise as such amounts represented pre-petition liabilities. Included in the estimated liability is the amount estimated to be payable with respect to existing claims for workers compensation during the
period the Predecessor Company was self-insured for workers compensation.

Upon emergence from the bankruptcy, the Reorganized
Company has determined that the collectability of cash-restricted under collateral agreement is in doubt and has written the balance off. In addition, the Company has written-off most liabilities related to self-insurance according to the Plan of
Reorganization. There are several claims the Company still has potential liability for, and as of December 31, 2005, the maximum liability could be $112,000. However, the Company has received several proposed settlements that would reduce total
liability to approximately $73,000 and at this point the claims are fully reserved.

Supplier Concentration

During 2005, the Company had a major vendor that accounted for approximately $5.0 million (11%) of the Companys total purchases. At
December 31, 2005, the amount payable to this vendor was approximately $0.2 million. The Company did not have any supplier concentrations in 2004. While the Company believes other suppliers are available if the vendor unexpectedly stops
supplying the product, the Company could experience an interruption in its ability to supply its customers.

Litigation

During the fiscal year ended 2001, the Predecessor Company settled a lawsuit filed by several ex-employees of the Predecessor Company in the amount of
$0.8 million, which was included in other income (expense). In addition, as of the fiscal year ended 2001, the Predecessor Company had made payments on the settlement of $600,000, leaving an unpaid balance of $200,000. As of December 31, 2003,
under the final Plan of Reorganization, the remaining unpaid balance of $200,000 became an unsecured claim and will be paid as discussed in Note 2.

On July 5, 2002, the Predecessor Company entered into a settlement agreement with IDine, whereby the Company will pay IDine $2,047,429 upon confirmation of the Reorganization Plan by the Court, and IDine will



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



dismiss its prior claims. The Predecessor Company has accrued $2,047,429 for this settlement, which is included in long-term debt in the accompanying
consolidated balance sheet at fiscal year ended, 2002. In connection with this settlement the Company recorded a gain in the amount of $960,000, which represents the difference between the original liability due and the liability due after
settlement. During the fiscal year ended 2003, the Predecessor Company made payments in the amount of $702,095 to IDine, reducing the note payable as of fiscal year ended 2003 to $1,345,334. The remaining balance has been included as notes payable
of the Reorganized Company in the accompanying financial statements.

The Company is periodically a defendant in cases involving personal
injury and other matters that arise in the normal course of business. While any pending or threatened litigation has an element of uncertainty, the Company believes that the outcome of any pending lawsuits or claims, individually or combined, will
not materially affect the financial condition or results of operations.

As a result of the bankruptcy filings all pending litigation and
claims against the Company was stayed, and no party may take any action to realize its pre-petition claims, except pursuant to an order of the Bankruptcy Court.

Employment Agreements

On April 16, 2004, the Companys Board of Directors confirmed the appointments of Thomas A.
Edler and Tod Lindner as members of the Compensation and Audit Committees, and adopted a Code of Ethics. The Board of Directors also ratified the decisions of the Compensation Committee to enter into employment agreements with three executives for
three-year terms and adopted the 2004 Stock Option Incentive Plan, subject to shareholder approval.

The employment agreements with the
three executive officers require annual gross salary payments of $200,000, $156,000 and $150,000 respectively, for the three executives each of whom may be terminated without cause. However, in the event any agreement is terminated without cause,
the Company is obligated to pay twelve months salary to the executive. The employment agreements also provide a set number of stock options subject to shareholder approval of the 2004 Stock Incentive Plan and an annual bonus for specific performance
criteria, subject to the approval of the Compensation Committee of the Board of Directors.

NOTE 13LIABILITIES SUBJECT TO COMPROMISE

Under bankruptcy law, actions by creditors to collect indebtedness the Predecessor Company owes prior to the Petition Date are stayed
and certain other pre-petition contractual obligations may not be enforced against the debtors. The Predecessor Company received approval by the Court to pay certain pre-petition liabilities, including employee salaries and wages, benefits, produce
costs and other utilities. All pre-petition liabilities have been classified as liabilities subject to compromise in the consolidated balance sheet.

Adjustment to the claims may result from negotiations, payments authorized by the court order, additional rejection of executor contracts including leases, or other events. Pre-petition liabilities were outstanding
until the bankruptcy process was completed, whereby the ultimate number and amount of allowable claims was ascertained, as discussed in Note 2.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Liabilities subject to compromise at December 30, 2003 consisted of the following (in
thousands):



|                                                        |  |   |       
|------------------------------------------------------- |  | - | ------
|Convertible debt (see note 10)                          |  | $ | 1,100 
|Secured exchange note (see note 11)                     |  |   | 2,000 
|Notes payable (see note 9)                              |  |   | 2,525 
|Accounts payable (see note 2discharge of liabilities)  |  |   | 5,796 
|Reserve for self insurance (see note 13self insurance) |  |   | 581   
|Capital lease obligations (see note 13leases)          |  |   | 9,865 
|Deferred gain on sale-leaseback (see note 12)           |  |   |      
|Deferred rent (see note 2)                              |  |   | 1,284 
|Other accrued liabilities (see note 2)                  |  |   | 2,389 
|                                                        |  |   |       
|TOTAL                                                   |  | $ | 25,541
|                                                        |  |   |       

The following is a reconciliation of the changes in Liabilities subject to compromise for the
period from the Petition Date through December 30, 2003:



|                                                                                                      |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Balance, Petition Date                                                                                |  | $ | 38,205 |  
|Court order authorizing payments of salaries and benefit, utilities, and payments to critical vendors |  |   | (2,275 | )
|Payments on workers compensation and general liability                                                |  |   | (183   | )
|Adjustments to workers compensation and general liability accrual                                     |  |   | 75     |  
|Payments on capital leases obligation                                                                 |  |   | (500   | )
|Adjustments due to closed, rejected, or sold leases                                                   |  |   | (8,305 | )
|Adjustment to deferred gain on sale-leaseback                                                         |  |   | (873   | )
|Settlement of IDine contract                                                                          |  |   | (782   | )
|Other                                                                                                 |  |   | 178    |  
|                                                                                                      |  |   |        |  
|BALANCE, END OF PERIOD                                                                                |  | $ | 25,541 |  
|                                                                                                      |  |   |        |  

NOTE 14 STOCKHOLDERS EQUITY

Predecessor Company

Effective with confirmation of the Plan of Reorganization on December 31,
2003, all existing preferred, common stock, warrants and accumulated deficit were canceled.

Reorganized Company

Preferred Stock

The Reorganized Company has
authorized 5.0 million shares of preferred stock, which may be issued from time to time in one or more series by the Board of Directors. In addition, the Board is authorized to set the rights, preference, privileges, and restrictions of these
shares, including dividends rights, conversion rights, voting rights, and liquidation preferences. These shares may have rights senior to those of the Companys common stock holders. As of December 31, 2005, the Company did not have any
preferred shares outstanding.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Common Stock and Warrants

As of the Effective date (December 31, 2003) of the Joint Plan of Reorganization, the Debtor-in-Possession financing as provided for by Steakhouse Investors, LLC converted to 90% of the common stock, or 4,500,000
shares, and the balance of the common stock was set aside to the trustee of the unsecured creditors or 0.5 million shares as partial payment of their claims.

As of the Effective Date (December 31, 2003) of the Joint Plan of Reorganization, the Company granted a warrant to purchase 150,000 shares of common stock to its secured claim note holder. The warrant was granted in
consideration of the Companys secured claim note holder extending the payment terms of its secured claim in the amount of $1,535,000. The warrant (i) is exercisable after February 1, 2005 (ii) has an exercise price of $1.11 per
share (iii) and expires six years from the date of issuance. The Company has valued the warrants at $90,000, which represent the fair market value of consideration received. The value of the warrants has been recorded as a deferred financing
cost, which will be amortized over six years, the extended payment terms of the note. In 2005, the Company amortized $15,000, in 2004 $13,750 and in 2003 $0.

On January 19, 2005, in a transaction exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act and Regulation D promulgated thereunder, the Company
completed an initial closing with respect to the sale, pursuant to the Private Placement Memorandum, of 700,000 shares of common stock and common stock purchase warrants (the Warrants) to purchase 350,000 shares of common stock,
at an initial exercise price of $2.00 per share (the Exercise Price), for an aggregate of $1,050,000 of gross proceeds (the Private Placement). Following the delivery of the Companys audited financial
statements for the year ended December 31, 2005 (Fiscal 2005), the Exercise Price of the Warrants will be subject to increase or decrease based on the Companys earnings from recurring operations before interest
payments, income tax, depreciation and amortization (EBITDA) for Fiscal 2005. The Exercise Price will be adjusted as follows upon the date of exercise: (i) increased by 5% (but in no event will the Exercise Price exceed
$2.50) for every $100,000 by which EBITDA for Fiscal 2005 exceeds $3.5 million (the EBITDA Threshold) and (ii) decreased by 10% (but in no event will the Exercise Price be less than $1.00) for every $100,000 by which Fiscal
2005 EBITDA is below the EBITDA Threshold.

In connection with the common stock offering described above, The Company paid to an advisor
engaged in connection with such offerings (the Agent) commissions of $94,500 (nine percent (9%) of the gross proceeds raised in such offerings) and issued to the Agent five (5) year warrants to purchase 63,000 shares of
common stock (the Agent Warrant Shares) at an exercise price of $2.00 per share. The Company also granted to the Agent certain registration rights with respect to the Agent Warrant Shares.

The Company is required to disclose the pro forma effect of warrants based on the fair value method. The value of the warrants using the Black-Scholes
pricing model is $46,215. The weighted-average assumptions to derive that value are: dividend yield of 0%, expected volatility of 35%, risk-free interest rate 3.4%, and expected life of five years.

On April 7, 2005 in a transaction exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act
and Regulation D promulgated there under, the Company issued to an investor 173,915 shares of common stock and warrants (the April Warrants) to purchase 86,958 shares of common stock (the April Warrant Shares),
at an initial exercise price of $2.00 per share (the April Exercise Price), in full and complete satisfaction of the Companys obligation to pay such investor $200,002.25. Following the delivery of the Companys audited
financial statements for Fiscal 2005, the April Exercise Price of the April Warrants will be subject to increase or decrease based on our EBITDA for Fiscal 2005. The April



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Exercise Price will be adjusted as follows upon the date of exercise: (i) increased by 5% (but in no event will the April Exercise Price exceed $2.50)
for every $100,000 by which EBITDA for Fiscal 2005 exceeds $3.5 million and (ii) decreased by 10% (but in no event will the Exercise Price be less than $1.00) for every $100,000 by which Fiscal 2005 EBITDA is below the EBITDA Threshold.

On September 30, 2005, in a transaction exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of
such Act and Regulation D promulgated there under, the Company completed an initial closing with respect to the sale of 761,765 shares of common stock for an aggregate of $647,500 of gross proceeds (the Offering). The Shares contain
certain price protection provisions. The Shares were issued with restricted security legends.

In connection with the Common Stock offering
described above, the Company paid to an advisor engaged in connection with such offerings (the Agent) commissions of $58,275 (nine percent (9%) of the gross proceeds raised in such offerings) and issued to the Agent five
(5) year warrants to purchase 68,559 shares of common stock (the Agent Warrant Shares) at an exercise price of $1.0625 per share. The Company also granted to the Agent certain registration rights with respect to the Agent Warrant
Shares.

The Company is required to disclose the pro forma effect of warrants based on the fair value method. The value of the warrants
using the Black-Scholes pricing model is $13,239. The weighted-average assumptions to derive that value are: dividend yield of 0%, expected volatility of 50%, risk-free interest rate 4.2%, and expected life of five years.

Stock Options

The 2004 Stock Incentive Plan (the
Incentive Plan) was approved by our Board of Directors in April 2004 and by our shareholders in January 2005. The Incentive Plan was intended to attract and retain persons eligible to participate in the Incentive Plan, to motivate
Participants to achieve long-term Company goals and to further align participants interest with those of the Companys other stockholders. There were initially 1.5 million shares available for grant under the Incentive Plan. The
number of shares available under the Incentive Plan may automatically increase, at the discretion of the Board, by a number equal to the lesser of (i) 25% of the fully diluted total number of shares of common stock then outstanding, or
(ii) 2,000,000 shares. Options vest over a period determined by the Board of Directors for up to ten years from the date of grant. The exercise price of options granted under the Incentive Plan are determined by the Board of Directors, provided
that the exercise price is not less than fair market value of the Reorganized Companys common stock on the date of grant.



|                                 |  |                           |   |  |                     |   |  |                                           |     
|-------------------------------- |  | ------------------------- | - |  | ------------------- | - |  | ----------------------------------------- | ----
|                                 |  | Shares Availablefor Grant |   |  | Options Outstanding |   |  | Weighted Average Exercise Price Per Share
|Authorized for grant             |  | 1,500,000                 |   |  |                    |   |  |                                           |    
|Outstanding at December 31, 2004 |  | (1,330,000                | ) |  | 1,330,000           |   |  | $                                         | 1.11
|Granted                          |  | (385,000                  | ) |  | 385,000             |   |  | $                                         | 1.11
|Exercised                        |  |                          |   |  |                    |   |  |                                           |    
|Forfeited                        |  | 305,000                   |   |  | (305,000            | ) |  | $                                         | 1.11
|                                 |  |                           |   |  |                     |   |  |                                           |     
|Balance at December 31, 2005     |  | 90,000                    |   |  | 1,410,000           |   |  | $                                         | 1.11
|                                 |  |                           |   |  |                     |   |  |                                           |     

The weighted average fair value of each option granted during the years ended December 31,
2005 and 2004 was $0.13 and $1.62, respectively. As of December 31, 2005, there were options outstanding with respect to 1,410,000 shares of common stock with a weighted average remaining life of 8.96 years, of which options with respect to
492,582 shares are exercisable at December 31, 2005.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



As of April 2004, the Company granted options to purchase in the aggregate 975,000 shares of common
stock to employees with an exercise price of $1.11 per share. One-third of the options become exercisable on the last day of each year starting April 1, 2005. The Company recorded deferred compensation charge of $1.4 million, in connection with
the issuance as the exercise price of the stock options was less than the fair market value of the Companys stock price as of the date of grant. The Company will amortize the deferred compensation charge over the vesting period of the options.
The Company expensed approximately $344,000 in 2005, $400,000 in 2004 and $0 in 2003.

As of April 2004, the Company granted options to
purchase 100,000 shares of common stock to two members of its board of directors with an exercise price of $1.11 per share. The options become exercisable on April 1, 2005. The Company recorded deferred compensation charge of $144,000 in
connection with the issuance as the exercise price of the stock options was less than the fair market value of the Companys stock price as of the date of grant. The Company will amortize the deferred compensation charge over the vesting period
of the options. The Company expensed approximately $44,000 in 2005, $100,000 in 2004 and $0 in 2003.

As of February 2005, the Company
granted options to purchase in the aggregate 25,000 shares of common stock to an employee with an exercise price of $1.11 per share. One-third of the options become exercisable on the last day of each year starting February 23, 2006. The
Company did not record a deferred compensation charge in connection with the issuance as the exercise price of the stock options was equal to or greater than the fair market value of the Companys stock price as of the date of grant.

As of December 2005, the Company granted options to purchase 250,000 shares of common stock to one of its stockholders for services to be
rendered over a period of two years. The options have an exercise price of $1.11 per share. One-third of the options were vested immediately upon grant with the remaining two-thirds vesting on the last day of each year starting March 1, 2006.
The Company uses the fair value method to measure the value of stock-based compensation issued to non-employees in accordance with SFAS 123 and EITF Issue No. 96-18. In accordance with such pronouncements all transactions in which goods or
services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, which ever is more reliable measurable. In
connection with the issuance, the Company determined that the fair value of the stock options granted was a more reliable measure of value than the value of consideration received.

The fair value of the options using the Black-Scholes pricing model is $25,000. The weighted-average assumptions to derive that value are: dividend yield
of 0%, expected volatility of 66%, risk-free interest rate of 4.0%, and an expected life of two years.

NOTE 15REORGANIZED COMPANY AND PREDECESSOR
COMPANY STOCK-BASED COMPENSATION

Predecessor Company

Effective with confirmation of the Plan of Reorganization on December 31, 2003, all stock options, stock option plans, and warrants were canceled.

Reorganized Company

The Incentive Plan (See Note 14) was established by the Company to attract and
retain persons eligible to participate in the Incentive Plan, to motivate Participants to achieve long-term Company goals and to further



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



align participants interest with those of the Companys other stockholders. The Incentive Plan was adopted as of April 1, 2004, subject to
the approval by the Companys stockholders within 12 months after such adoption date. Stockholder approval was obtained in January 2005. There were initially 1.5 million shares available under the Incentive Plan. The number of shares
available under the Incentive Plan may automatically increase, at the discretion of the Board, by a number equal to the lesser of (i) 25% of the fully diluted total number of shares of common stock then outstanding, or
(ii) 2.0 million shares. Options vest over a period of time as determined by the Board of Directors for up to 10 years from the date of grant. The exercise price of options granted under the Incentive Plan are determined by the Board of
Directors, provided that the exercise price is not less than fair market value of the Reorganized Companys common stock on the date of grant. Since the Reorganized Companys common stock did not start trading under its new symbol STPK.PK
until May 3, 2004, the Board of Directors determined the exercise price to be the same as the price of the converted DIP loan shares to equity per the Plan of Reorganization or $1.11 as the fair market value.

NOTE 16INCOME TAXES

Significant components of
the provision for taxes based on income for the fiscal years ended 2005, 2004 and 2003 were as follows (in thousands):



|              |  |                    |     |                    |      |   |      |  |   |     |  
|------------- |  | ------------------ | --- | ------------------ | ---- | - | ---- |  | - | --- | -
|              |  | ReorganizedCompany |     | PredecessorCompany |     
|              |  | 2005               |     |                    | 2004 |   | 2003 | 
|Current       |  |                    |     |                    |      |   |      |  |   |     |  
|Federal       |  | $                  |    |                    |      | $ |     |  | $ |    |  
|State         |  |                    | (43 | )                  |      |   | 23   |  |   | 132 |  
|              |  |                    |     |                    |      |   |      |  |   |     |  
|              |  |                    | (43 | )                  |      |   | 23   |  |   | 132 |  
|              |  |                    |     |                    |      |   |      |  |   |     |  
|Deferred      |  |                    |     |                    |      |   |      |  |   |     |  
|Federal       |  |                    |    |                    |      |   |     |  |   |    |  
|State         |  |                    |    |                    |      |   |     |  |   | (2  | )
|              |  |                    |     |                    |      |   |      |  |   |     |  
|              |  |                    |    |                    |      |   |     |  |   | (2  | )
|              |  |                    |     |                    |      |   |      |  |   |     |  
|PROVISION FOR |  |                    |     |                    |      |   |      |  |   |     |  
|INCOME TAXES  |  | $                  | (43 | )                  |      | $ | 23   |  | $ | 130 |  
|              |  |                    |     |                    |      |   |      |  |   |     |  

A reconciliation of the provision for income tax expense with the expected income tax computed by
applying the federal statutory income tax rate to income before provision for income taxes for the fiscal years ended 2005, 2004, and 2003 was as follows:



|                                                            |  |                    |    |  |       |    |  |       |   
|----------------------------------------------------------- |  | ------------------ | -- |  | ----- | -- |  | ----- | --
|                                                            |  | Fiscal Years Ended |   
|                                                            |  | 2005               |    |  | 2004  |    |  | 2003  |   
|Income tax provision computed at federal statutory tax rate |  | 34.0               | %  |  | 34.0  | %  |  | 34.0  | % 
|State taxes, net of federal benefit                         |  | 5.3                |    |  | (10.6 | )  |  | (2.3  | ) 
|Increase in valuation reserve and other                     |  | (39.8              | )  |  | (29.7 | )  |  | (34.4 | ) 
|                                                            |  |                    |    |  |       |    |  |       |   
|TOTAL                                                       |  | (0.5               | )% |  | (6.3  | )% |  | (2.7  | )%
|                                                            |  |                    |    |  |       |    |  |       |   



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



Significant components of the Companys deferred tax assets and liabilities for federal income
taxes consisted of the following at the fiscal years ended 2005 and 2004 (in thousands):



|                               |  |                    |        |   |      |   |        |  
|------------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | -
|                               |  | Fiscal Years Ended |       
|                               |  | 2005               |        |   | 2004 |  
|Deferred tax assets            |  |                    |        |   |      |   |        |  
|Net operating losses           |  | $                  | 2,057  |   |      | $ | 2,062  |  
|Tax credit carry-forwards      |  |                    | 921    |   |      |   |       |  
|Asset valuation reserves       |  |                    |       |   |      |   |       |  
|Property, plant, and equipment |  |                    |       |   |      |   |       |  
|Other                          |  |                    | 1,827  |   |      |   | 2,597  |  
|                               |  |                    |        |   |      |   |        |  
|Total deferred tax assets      |  |                    | 4,805  |   |      |   | 4,659  |  
|                               |  |                    |        |   |      |   |        |  
|Deferred tax liabilities       |  |                    |        |   |      |   |        |  
|Property, plant, and equipment |  |                    | (2,220 | ) |      |   | (2,216 | )
|Other                          |  |                    | (196   | ) |      |   | (86    | )
|                               |  |                    |        |   |      |   |        |  
|Total deferred tax liabilities |  |                    | (2,416 | ) |      |   | (2,302 | )
|                               |  |                    |        |   |      |   |        |  
|                               |  |                    | (2,389 | ) |      |   | 2,357  |  
|Valuation allowance            |  |                    | 2,389  |   |      |   | (2,357 | )
|                               |  |                    |        |   |      |   |        |  
|NET DEFERRED TAX LIABILITY     |  | $                  |       |   |      | $ |       |  
|                               |  |                    |        |   |      |   |        |  

The Company has net operating loss carry-forwards of approximately $5.5 million for federal and
$2.3 million for state, which will expire through 2025.

In addition, the Company has Federal credit carry-forwards of about $1.0 million,
which will expire through 2025.

The reorganization of the Company on the Effective Date constituted an ownership change under
Section 382 of the Internal Revenue Code. An ownership change generally occurs if certain persons or groups increase their aggregate ownership percentage in a corporations stock by more than 50 percentage points in the shorter of any
three-year period or the period beginning the day after the day of the last ownership change. Section 382 may apply to limit the Reorganized Companys future ability to any remaining NOLs and tax credits generated before the
ownership change and certain subsequently recognized built-in losses and deductions, if any, existing as of the date of the ownership change.



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



NOTE 17QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following tables list the Companys quarterly financial information for the fiscal years ended 2005, 2004, and 2003 (in thousands, except per
share amounts):



|                                                             |  |              |        |               |   |        |              |  |   |               |   |           |   |        |  |   |        |  
|------------------------------------------------------------ |  | ------------ | ------ | ------------- | - | ------ | ------------ |  | - | ------------- | - | --------- | - | ------ |  | - | ------ | -
|                                                             |  | 2005         |       
|                                                             |  | FirstQuarter |        | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |   | TotalYear |  
|Revenues                                                     |  | $            | 13,303 |               | $ | 13,288 |              |  | $ | 12,063        |   |           | $ | 13,347 |  | $ | 52,001 |  
|Gross profit (loss)                                          |  | $            | 1,415  |               | $ | 1,253  |              |  | $ | 775           |   |           | $ | 1,299  |  | $ | 4,742  |  
|Income (loss) before other income (expense)                  |  | $            | 286    |               | $ | 159    |              |  | $ | (329          | ) |           | $ | 278    |  | $ | 394    |  
|                                                             |  |              |        |               |  
|Net income (loss)                                            |  | $            | 153    |               | $ | (36    | )            |  | $ | (673          | ) |           | $ | 101    |  | $ | (455   | )
|Basic earnings (loss) per share from continuing operations   |  | $            | 0.03   |               | $ | (0.01  | )            |  | $ | (0.11         | ) |           | $ | 0.01   |  | $ | (0.08  | )
|                                                             | 
|                                                             |  | 2005         |       
|                                                             |  | FirstQuarter |        | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |   | TotalYear |  
|Diluted earnings (loss) per share from continuing operations |  | $            | 0.03   |               | $ | (0.01  | )            |  | $ | (0.11         | ) |           | $ | 0.01   |  | $ | (0.08  | )
|                                                             |  |              |        |               |  
|Common stock trading range                                   |  |              |        |               |   |        |              |  |   |               |   |           |   |        |  |   |        |  
|High                                                         |  | $            | 2.000  |               | $ | 1.400  |              |  | $ | 1.040         |   |           | $ | 0.700  |  | $ | 2.000  |  
|Low                                                          |  | $            | 1.050  |               | $ | 1.030  |              |  | $ | 0.600         |   |           | $ | 0.500  |  | $ | 0.500  |  



|                                                             |  |              |        |   |               |   |        |              |  |   |               |   |           |   |        |  |   |        |  
|------------------------------------------------------------ |  | ------------ | ------ | - | ------------- | - | ------ | ------------ |  | - | ------------- | - | --------- | - | ------ |  | - | ------ | -
|                                                             |  | 2004         |       
|                                                             |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |   | TotalYear |  
|Revenues                                                     |  | $            | 14,159 |   |               | $ | 14,318 |              |  | $ | 12,767        |   |           | $ | 13,826 |  | $ | 55,070 |  
|Gross profit (loss)                                          |  | $            | 1,145  |   |               | $ | 1,268  |              |  | $ | 992           |   |           | $ | 1,693  |  | $ | 5,098  |  
|Income (loss) before other income (expense)                  |  | $            | 129    |   |               | $ | 58     |              |  | $ | (135          | ) |           | $ | 552    |  | $ | 604    |  
|                                                             |  |              |        |   |              
|Net income (loss)                                            |  | $            | (113   | ) |               | $ | (293   | )            |  | $ | (515          | ) |           | $ | 286    |  | $ | (635   | )
|Basic earnings (loss) per share from continuing operations   |  | $            | (0.02  | ) |               | $ | (0.06  | )            |  | $ | (0.11         | ) |           | $ | 0.06   |  | $ | (0.13  | )
|                                                             | 
|                                                             |  | 2004         |       
|                                                             |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |   | TotalYear |  
|Diluted earnings (loss) per share from continuing operations |  | $            | (0.02  | ) |               | $ | (0.06  | )            |  | $ | (0.11         | ) |           | $ | 0.06   |  | $ | (0.13  | )
|Diluted (loss) per share                                     |  | $            | (0.02  | ) |               | $ | (0.06  | )            |  | $ | (0.11         | ) |           | $ | 0.06   |  | $ | (0.13  | )
|Common stock trading range                                   |  |              |        |   |               |   |        |              |  |   |               |   |           |   |        |  |   |        |  
|High                                                         |  | $            | 0.000  |   |               | $ | 2.750  |              |  | $ | 2.750         |   |           | $ | 2.120  |  | $ | 2.750  |  
|Low                                                          |  | $            | 0.000  |   |               | $ | 2.300  |              |  | $ | 1.150         |   |           | $ | 2.000  |  | $ | 0.000  |  



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005



|                                                               |  |              |        |   |               |   |        |              |  |   |               |   |  |           |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | ------------ |  | - | ------------- | - |  | --------- | ------ | - |  | - | ------ | -
|                                                               |  | 2003         |       
|                                                               |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |   |  | TotalYear |       
|Revenues                                                       |  | $            | 19,881 |   |               | $ | 18,048 |              |  | $ | 16,177        |   |  | $         | 23,652 |   |  | $ | 77,758 |  
|Gross profit (loss)                                            |  | $            | 796    |   |               | $ | 609    |              |  | $ | 187           |   |  | $         | (1,819 | ) |  | $ | (227   | )
|Loss before other income (expense)                             |  | $            | (643   | ) |               | $ | (396   | )            |  | $ | (707          | ) |  | $         | (3,192 | ) |  | $ | (4,938 | )
|Income (loss) from reorganization items                        |  | $            | 1,033  |   |               | $ | 864    |              |  | $ | 118           |   |  | $         | (467   | ) |  | $ | 1,548  |  
|Income (loss) from discontinued operations                     |  | $            | 1,057  |   |               | $ |       |              |  | $ |              |   |  | $         |       |   |  | $ | 1,057  |  
|Net income (loss)                                              |  | $            | 879    |   |               | $ | (162   | )            |  | $ | (1,015        | ) |  | $         | (4,553 | ) |  | $ | (4,851 | )
|Basic earnings (loss) per share from continuing operations     |  | $            | (0.05  | ) |               | $ | (0.05  | )            |  | $ | (0.30         | ) |  | $         | (1.34  | ) |  | $ | (1.74  | )
|                                                               | 
|                                                               |  | 2003         |       
|                                                               |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |   |  | TotalYear |       
|Basic earnings (loss) per share from discontinued operations   |  | $            | 0.31   |   |               | $ |       |              |  | $ |              |   |  | $         |       |   |  | $ | 0.31   |  
|Basic (loss) per share                                         |  | $            | 0.26   |   |               | $ | (0.05  | )            |  | $ | (0.30         | ) |  | $         | (1.34  | ) |  | $ | (1.43  | )
|Diluted earnings (loss) per share from continuing operations   |  | $            | (0.05  | ) |               | $ | (0.05  | )            |  | $ | (0.30         | ) |  | $         | (1.34  | ) |  | $ | (1.74  | )
|Diluted earnings (loss) per share from discontinued operations |  | $            | 0.31   |   |               | $ |       |              |  | $ |              |   |  | $         |       |   |  | $ | 0.31   |  
|Diluted (loss) per share                                       |  | $            | 0.26   |   |               | $ | (0.05  | )            |  | $ | (0.30         | ) |  | $         | (1.34  | ) |  | $ | (1.43  | )
|Common stock trading range                                     |  |              |        |   |               |   |        |              |  |   |               |   |  |           |        |   |  |   |        |  
|High                                                           |  | $            | 0.000  |   |               | $ | 0.000  |              |  | $ | 0.000         |   |  | $         | 0.000  |   |  | $ | 0.000  |  
|Low                                                            |  | $            | 0.000  |   |               | $ | 0.000  |              |  | $ | 0.000         |   |  | $         | 0.000  |   |  | $ | 0.000  |  

NOTE 18SUBSEQUENT EVENTS (Unaudited)

On November 17, 2005, the Company announced that it had signed a definitive merger agreement (the Merger Agreement) to acquire all
of the outstanding common stock of Roadhouse Grill, Inc. Roadhouse Grill is a Pompano Beach, Florida based chain, which operates 59 full service, casual dining restaurants in Florida and nine other states. The definitive merger agreement was subject
to, among other conditions, the Companys ability to obtain financing sufficient to complete the acquisition. Originally the acquisition was expected to close by mid February 2005. On March 1, 2006 the Company announced that the Merger
Agreement had been amended to allow either party terminate the Merger Agreement, and on March 17, 2006, the Company announced that the Merger Agreement had been terminated.



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##### Table of Contents

SUPPLEMENTAL INFORMATION

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

VALUATION AND
QUALIFYING ACCOUNTSSCHEDULE II

Reorganized Company for the Year Ended December 31, 2005, 2004, 2003

(in thousands)



|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|-------------------------------------------------------- |  | ------------------------ | ----- | ----------------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ---
|                                                         |  | Balance,Beginningof Year |       | AdditionsCharged toOperations |   | DeductionsfromReserve |  |   | Balance,Endof Year
|Allowance for doubtful Accounts                          |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2005                                        |  | $                        |      |                               | $ |                      |  | $ |                   |   |  | $ |   
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2004                                        |  | $                        | 133   |                               | $ |                      |  | $ | (119               | ) |  | $ | 14 
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2003                                        |  | $                        | 155   |                               | $ | 68                    |  | $ | (90                | ) |  | $ | 133
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|Reserve for impairment of property, plant, and equipment |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2005                                        |  | $                        |      |                               | $ | 51                    |  | $ |                   |   |  | $ | 51 
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2004                                        |  | $                        |      |                               | $ |                      |  | $ |                   |   |  | $ |   
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2003                                        |  | $                        | 6,582 |                               | $ |                      |  | $ | (6,582             | ) |  |   |   
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|Reserve for advances to Officers                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2005                                        |  | $                        |      |                               | $ |                      |  | $ |                   |   |  | $ |   
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2004                                        |  | $                        |      |                               | $ |                      |  | $ |                   |   |  | $ |   
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    
|December 31, 2003                                        |  | $                        | 617   |                               | $ | 277                   |  | $ | (894               | ) |  | $ |   
|                                                         |  |                          |       |                               |   |                       |  |   |                    |   |  |   |    



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