UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-K



|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the Year Ended December 31, 2007

Or



| ̈ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

for the transition period from ____to____.

Commission File Number: 000-23739

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 pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:   ̈

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

Large accelerated filer   ̈                        Accelerated filer  ̈

Non-accelerated filer   ̈                        Small Reporting Company  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 26, 2007
was approximately $2,672,700.

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 April 8, 2008.

DOCUMENTS INCORPORATED BY REFERENCE:

None.









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Table of Contents



|         |  |                                                                                                               |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                               |  | Page
|PART I   |  |                                                                                                               |  |     
|ITEM 1.  |  | BUSINESS.                                                                                                     |  | 2   
|ITEM 1A. |  | RISK FACTORS                                                                                                  |  | 9   
|ITEM 1B. |  | UNRESOLVED STAFF COMMENTS                                                                                     |  | 18  
|ITEM 2.  |  | PROPERTIES.                                                                                                   |  | 18  
|ITEM 3.  |  | LEGAL PROCEEDINGS.                                                                                            |  | 19  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                                          |  | 19  
|         |  |                                                                                                              
|PART II  |  |                                                                                                               |  |     
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |  | 19  
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.                         |  | 21  
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                                                  |  | 28  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.                        |  | 28  
|ITEM 9A. |  | CONTROLS AND PROCEDURES                                                                                       |  | 28  
|         |  |                                                                                                              
|PART III |  |                                                                                                               |  |     
|ITEM 10. |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.                                                       |  | 29  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                                        |  | 32  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.               |  | 35  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE.                                        |  | 37  
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES.                                                                       |  | 37  
|         |  |                                                                                                              
|PART IV  |  |                                                                                                               |  |     
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES.                                                                      |  | 38  



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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 23 full-service steakhouse restaurants located in seven 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 $26.00 per guest
(including alcoholic beverages) and our 23 restaurants serve approximately 1.8 million meals annually. Our management believes that our emphasis on quality service and our concentration on fresh cut, high quality USDA grade steaks and prime
ribs distinguishes our restaurants from our competitors, presenting an opportunity for growth.

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).

Effective December 31, 2003, we confirmed a Plan of Reorganization (the Plan), which 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.

As per the Plan we paid to the Unsecured Creditors $1,030,000 within 30 days of the Effective Date of the Plan, and were scheduled to make periodic payments under a
$5,030,000 note payable. The note was non-interest-bearing and the last payment was due on or before December 2006. In addition, the general unsecured creditors were to receive 500,000 shares of common stock. However, on June 12, 2007, the
Company entered into a Forbearance Agreement with the Class 4 Creditor Trust. Under the Agreement, the Company was required to sell assets or secure financing to repay the Class 4 Creditors Trust in full by November 15, 2007 (with interest,
penalties and additional professional fees the total amount required to satisfy this obligation is currently approximately $4.8 million). The Company was, as a part of this repayment required to either make certain minimum payments or enter into
contracts for the sale of assets equal to: (1) $2 million by June 30, 2007; (2) another $1 million by August 31, 2007; (3) another $1 million by September 30, 2007 and (4) finally, another $1 million by
October 31, 2007, with the balance due by November 15, 2007. In order to facilitate these payments, the Company was prepared to sell virtually any of its units for a fair market value. The Company believes it is impractical to classify all
twenty-three (23) units as long-lived assets available for disposal by sale. Instead the Company classifies only those units that have satisfied all contractual contingencies as actually held for sale. To date, the Company has sold its
Williamsburg, Virginia restaurant for $1.2 million; its Cliffhouse and Troy restaurants are under contract to be sold for $0.6 million and $0.18 million, respectively.



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At each benchmark date, the Company has provided the
Creditors Trust contracts to satisfy the Forbearance Agreement conditions. The actual units under contract have changed as some have been cancelled, usually due to financial contingencies, SBA requirements and/or issues with liquor license
transfers and others have been added. The Company delivered sufficient contracts to satisfy its November 15thobligation. However, not all
transactions under contract were consummated and we have remaining obligations to the Class 5 Creditors Trust.

Also, per the Plan we made scheduled
periodic payments under a $1,289,533 note payable to Rewards Network, our Secured Creditor. The note was interest bearing at 9.0% and the last payment was due on or before January 31, 2008. On July 11, 2007, the Company executed a
settlement agreement and full release with Rewards Network on the remaining balance of their Note Payable and related matters. As a result of this Agreement, the approximately $0.9 million balance due on the Note was considered void. Rewards Network
received cash equal to $171,216, after applying a $75,000 credit against current Guest Connect program obligations. From this cash, Rewards Network paid $50,000 of the Companys related legal fees, and eliminated any and all ($0.1 million) Food
and Beverage amounts due. In return, the Company would bring current (to June 30, 2007) all Guest Connect related fees (minus the credit), and remain in the Guest Connect program until the end of January 2008 and release any claims it may have
as a result of the summary judgment in the class action lawsuit entitled Bistro Executive, Inc. vs. Rewards Network, Inc.

On November 27,
2007, the Company signed a Management and Services Agreement with the owners of all of the equity interests of certain entities that own and operate a chain of six Dakota Steakhouses and Sirloin Saloons located in four New England states, pursuant
to which Steakhouse Partners will act as interim manager for the restaurant chain. The Management and Services Agreement will remain in place pending Steakhouse Partners ninety-day due diligence investigation of the restaurant chain, including
the operations and results of each of the six units, for the purposes of determining whether it is interested in acquiring the restaurant chain. Steakhouse Partners has been in negotiations with the owners of the restaurant chain regarding a
potential acquisition for over two years and the Company continues to negotiate terms and conditions of a proposed acquisition, subject to Steakhouse Partners satisfactory completion due diligence as well as other contingencies.

On December 28, 2007 the United States Bankruptcy Court for the Central District of California entered an order terminating the Chapter 11 Reorganization
Proceedings of Steakhouse Partners and subsidiaries, reserving jurisdiction over the implementation of the Forbearance Agreement. With this order Steakhouse Partners and subsidiaries, no longer have to provide periodic reports (either in writing or
in person) or pay trustee fees to the United States Bankruptcy Court for the Central District of California. The only exception is that the Creditors Trust may ask the Court for assistance ,if they believe the implementation of the Forbearance
Agreement isnt proceeding as plan.

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. 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 of the four 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.



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(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.

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 of reorganization, 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. 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 67.5% of our food revenue. Full
liquor, wine and bar service are available. Alcoholic beverage sales account for approximately 19.8% 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
steakhouse markets:

Hungry Hunter, Hunter Steakhouse and Mountain Jacks

We have 16 steakhouses operating under our registered trade names, Hungry Hunter, Hunter Steakhouse and Mountain Jacks, for which the average dinner check is approximately $27.50 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.



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Our 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 $37.00. 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.

Concept Restaurants

Paragon operates three concept (unique)
properties, with average checks ranging from approximately $27.00 to $33.00 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 entrées 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. On November 12, 2007 we accepted an offer to sell this unit for $0.6 million subject to a number of contingencies including successful transfer of the liquor
license.

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).

Strategy

Our goal is to enhance our position
in the steakhouse restaurant industry by building through internal growth (Carvers and local store marketing) and through the potential acquisition of steakhouse (step-up casual) restaurants. Key components of this strategy include leveraging
established brands, achieving operating efficiencies, cost savings through volume discounts on purchases, and efficiently penetrating new markets, as well as, disposing of underperforming units.



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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 seek to increase weekday customer counts with both print and electronic media. 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.

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. The POS
conversion (Aloha software) is underway which includes tools to view real time data. It also includes a full set of inventory controls and food cost measures that will insure we are buying, storing and producing in the most cost
efficient ways. The new POS system has cut training costs and reduced downtime while proving to be a very stable platform. We currently have seven units converted and plan to convert the four Carvers in 2008 depending on availability of funds.



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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 our vice president of
operations, who each supervise five to ten 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 monitors 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 2007 and 2006, we had a major meat vendor that accounted for approximately $4.6 million (13%) and $5.0 million (11%) of our total purchases in each year
respectively. We did not have any supplier concentrations 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. 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.

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.



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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 us. 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 we do. 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. The amount of these programs is estimated to cost less than $0.1
million per year.

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 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.



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Employees

At
January 8, 2008, we employed approximately 1,132 individuals, of which 131 occupy executive, managerial or clerical positions, and 1,001 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,
2007, we had no operations outside the continental United States.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

Forward-Looking Information

You should consider each of the following factors as well as the other information in this Annual Report in evaluating our business and our prospects. 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 consider immaterial may also impair our business operations. If any of the following risks actually occur,
our business and financial results could be harmed. In that case, the trading price of our common stock could decline. You should also refer to the other information set forth in this Annual Report, including our financial statements and the related
notes.

Risk factors that may affect future results and financial condition

We have recently defaulted on a material portion of our debt obligations. As a result, our lenders may foreclose on our assets and we may be unable to continue as a
going concern.

On June 12, 2007, we entered into a Forbearance Agreement with our Class 4 Creditor Trust in response to our default under our
obligations to these creditors. Under the Forbearance Agreement, we were required to contract for the sale of assets or secure financing in the following amounts: (i) $2 million by June 30, 2007, (ii) an additional $1 million by
August 31, 2007, (iii) an additional $1 million by September 30, 2007 and (iv) an additional $1 million by October 31, 2007, with the balance due by November 15, 2007. The approximate aggregate amount of payments under
the agreement, including interest, penalties and fees, is currently approximately $4.8 million.

In order to facilitate these payments, we have sold our
Williamsburg, Virginia restaurant for $1.2 million, our Cliffhouse and Troy restaurants are under contract to be sold for $0.6 million and $0.18 million, respectively. Also, we are seeking to sell additional properties. We cannot assure you that
these sales will be completed.

At each benchmark date, we provided the Creditors Trust contracts to satisfy our obligations under the Forbearance
Agreement. However, not all transactions under contract were consummated and we have remaining obligations to the Class 4 Creditor Trust.

There is no
guarantee that we will satisfy our obligations to the Class 4 Creditor Trust. If we fail to meet our obligations under the Forbearance Agreement, the Class 4 Creditor Trust may foreclose on our assets, which would likely result in our inability to
continue as a going concern. In such event, you likely would lose the entire amount of your investment in us.



- 9 -



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Our independent registered public accounting firm issued a going concern opinion on our financial statements,
questioning our ability to continue as a going concern.

Our independent registered public accounting firms opinion on our 2007 financial
statements includes an explanatory paragraph indicating substantial doubt about our ability to continue as a going concern. Since our inception, we have operated with limited operating capital, and we continue to face immediate and substantial cash
needs. We have limited cash resources and will need to raise additional capital through public or private financings or other arrangements in order to meet current commitments and continue development of our business. We cannot assure you that
additional capital will be available to us when needed, if at all, or, if available, will be obtained on terms attractive to us. Failure to raise additional capital when needed could cause us to cease our operations.

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

In February 2002, we and Paragon (our only wholly owned subsidiary) 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.

If we are unable to obtain additional funds in the immediate future, we may have to curtail or suspend all
of our operations, which could adversely affect our financial condition, results of operations and prospects.

We need additional financing to fund our
operations. If we are unable to obtain additional funds in a timely manner or on acceptable terms to fund our operations, it will seriously affect our ability to meet the objectives of our Plan, and we may not be able to continue as a going concern.
Our ability to obtain financing will depend, in part, on factors beyond our control, such as the status of various debt and equity markets. In particular, currently tight lending conditions in the U.S. credit markets may make it more time consuming
and expensive for us to obtain financing, if we can obtain financing at all.

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

We do not have sufficient cash reserves to maintain our operations and fund our obligations, including, without
limitation, our obligations under the Forbearance Agreement. We may need to seek additional financing. If adequate funds are not available on acceptable terms, we may be unable to fund our plan of reorganization and may be required to sell core
assets or dissolve the business and we may not be able to continue as a going concern. If we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interest and the newly issued securities may
have rights superior to those of our common stock. If we issue or incur debt to raise funds, we may be subject to limitations on our operations.



- 10 -



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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 following approximate
amounts: $5.7 million for the fiscal year ended December 31, 2007, $1.8 million for the fiscal year ended December 31, 2006; $0.5 million for the fiscal year ended December 31, 2005; $0.6 million for the fiscal year ended
December 31, 2004; and $4.9 million for the fiscal year ended December 31, 2003. 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 would otherwise 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.

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.

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 and Carvers restaurants menus, or by specific events such as the recently
confirmed cases of mad cow disease by the Canadian government in August 2006, the recent recall by a California meat company of 143 million pounds of beef or foot/mouth disease outbreak which occurred in the United
Kingdom in 2001. 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 on 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 our restaurants 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.



- 11 -



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

The uncertainty surrounding the U.S. economy may cause our customers to reduce their level of discretionary spending. We believe that a decrease in discretionary spending
would 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 would 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 and recalls, 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 the acquisition of existing properties. Our ability to open additional restaurants will depend upon our ability to 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 the success of the Plan 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 our number of 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.



- 12 -



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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, including our potential
acquisition of seven steakhouses in New England. 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;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | 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 approximately $4.6 million (13%) and $5.0 million (11%) of our total purchases in 2007 and 2006 respectively. 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 dependably providing us with high quality supplies, at volume discounted prices, our
business could be harmed.

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 that 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.



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

The recent increases in the state statutory minimum wage and the federal minimum wage increases will 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 Subsidiarys
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 our 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.

The names Hungry Hunter, Mountain Jacks and Carvers represent our core concept
restaurants. The termination of our right to use these names 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 23 restaurants. Due to this relatively small number of restaurants, poor financial performance at any one 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 broader geographic 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.
| | - |  | ---------------------------------------------------------------------------------



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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. Further, the United States Congress is considering changes to Federal immigration laws. Changes to these laws may adversely affect our operations by increasing our compliance and oversight obligations and making it more
expensive and difficult for us to hire qualified employees.

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 such as the recent recall by a California meat company of 143 million pounds of beef, 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 at our restaurants 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 regulations 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.



- 15 -



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In the event we are unable to remedy any deficiency we identify in our system of internal controls over financial
reporting, or if our internal controls are not effective, our business and our stock price could suffer.

Under Section 404 of the Sarbanes-Oxley
Act, or Section 404, management is required to assess the adequacy of our internal controls, remediate any deficiency that may be identified, validate that controls are functioning as documented and implement a continuous reporting and
improvement process for internal controls. As part of this continuous process, we may discover deficiencies that require us to improve our procedures, processes and systems in order to ensure that our internal controls are adequate and effective and
that we are in compliance with the requirements of Section 404. If any deficiency we may find from time to time is not adequately addressed, or if we are unable to complete all of our testing and any remediation in time for compliance with the
requirements of Section 404 and the SEC rules there under, we would be unable to conclude that our internal controls over financial reporting are effective, which could adversely affect investor confidence in our internal controls over
financial reporting.

Risks Related To Our Common Stock

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

Our common stock is currently quoted on the OTC Bulletin Board. The fact that our common stock is not listed on a major exchange is likely to make trading more difficult
for broker-dealers, stockholders 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 resulting from future financings, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the 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 have the resources to continue our normal operations.



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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 penny stock. 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.

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.



- 17 -



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Approximately 38% of our outstanding common stock is held by five stockholders, which will limit your ability to
influence corporate matters.

A substantial portion 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 our outstanding shares of common stock. 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.

The following table sets forth the location of our existing Hungry Hunter, Hunter Steakhouse, and Mountain Jacks restaurants as of March 15, 2008:



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

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 Raleigh, North Carolina

Our executive offices are located at 10200 Willow Creek Road, San Diego, California 92131. Our executive offices
have a two-year lease expiring in May 2009 at very competitive rates with an option to renew for another year. Our telephone number is (858) 689-2333. We believe that there is space available to satisfy our current and anticipated needs.



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

We are 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, we believe that the outcome of any pending lawsuits or claims, individually or
combined, will not materially affect the financial condition or results of operation.



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

None.

PART II



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

Market Information

Our common stock is traded on the OTC Bulletin
Board under the symbol STPK.OB.

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:



|                             |  |      |      |     |   |     
|---------------------------- |  | ---- | ---- | --- | - | ----
|Year ended December 31, 2006 |  | High |      | Low
|First Quarter                |  | $    | 1.00 |     | $ | 0.38
|Second Quarter               |  |      | 0.70 |     |   | 0.50
|Third Quarter                |  |      | 0.55 |     |   | 0.30
|Fourth Quarter               |  |      | 0.60 |     |   | 0.26



|                             |  |      |      |     |   |     
|---------------------------- |  | ---- | ---- | --- | - | ----
|Year ended December 31, 2007 |  | High |      | Low
|First Quarter                |  | $    | 0.39 |     | $ | 0.30
|Second Quarter               |  |      | 0.55 |     |   | 0.31
|Third Quarter                |  |      | 0.30 |     |   | 0.04
|Fourth Quarter               |  |      | 0.12 |     |   | 0.05

Holders

As of
April 1, 2008 there were approximately 93 record holders of our common stock.

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 of reorganization.



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Equity Compensation Plan Information

Information about our equity compensation plans at December 31, 2007 that were either approved or not approved by our stockholders was as follows:



|                                                           |  |                                                                                              |  |                                                                                   |      |                                                                                                                                        |        
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------- | -------
|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) |  | 1,700,000                                                                                    |  | $                                                                                 | 0.91 |                                                                                                                                        | 300,000
|Equity compensation plans not approved by security holders |  | 0                                                                                            |  |                                                                                   | 0    |                                                                                                                                        | 0      
|                                                           |  |                                                                                              |  |                                                                                   |      |                                                                                                                                        |        
|Total                                                      |  | 1,700,000                                                                                    |  | $                                                                                 | 0.91 |                                                                                                                                        | 300,000
|                                                           |  |                                                                                              |  |                                                                                   |      |                                                                                                                                        |        



|(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 2.0 million shares authorized for issuance under the Option Plan. The number of shares available
under the Option Plan may automatically increase on January 1 of each year (starting in 2005), 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. The Board determined not to increase the number of shares authorized for
issuance under the Option Plan on January 1, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 Charleys Inc; Rare Hospitality International Inc, and Ryans Restaurant Group Inc.



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LOGO



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

This Annual Report on Form 10-K contains forward-looking statements. These statements relate to future events or future financial performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or continue,
the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Although we believe that expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. We are under no obligation to update any forward-looking statements after the filing of this Annual Report to conform such statements to actual results or to changes
in our expectations.

The following discussion of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise
interested parties of the factors which affect our business, including without limitation the disclosures made under the caption Risk Factors in Item 1A of Part I of this Annual Report. Risk factors that could cause actual results
to differ from those contained in the forward-looking statements include but are not limited to: risks related to our operating expenses; our inability to meet our obligations to our creditors, including with out limitation, our obligations under
the Forbearance Agreement; sales and operations; anticipated cash needs; our operating strategy and growth strategy; needs for additional financing; ability to attract customers; anticipated trends and challenges in our business; the adequacy of our
facilities; the impact of economic conditions on our customers and our business; the benefits, risks and synergies that could be achieved from our acquisitions; the impact of competitive products and pricing; our ability to negotiate with third
parties; our failure to obtain additional funds in a timely manner or on acceptable terms; losses incurred from inception; failure to obtain additional capital needed for expansion; insufficient cash reserves to maintain and fund our operations;
loss of key personnel; our ability to attract key employees; changing consumer preferences and discretionary spending patterns; changes in general economic and political conditions effecting consumer spending; increase in food and supply costs;
failure to execute our expansion plans; our dependence on key food product distributors; commodity and availability risk;



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increases in federal and state statutory minimum wages; failure to enforce and maintain our trademarks and trade names; negative performance of a single
restaurant; our operating results may fluctuate due to seasonality; labor shortages and increased labor costs; adverse litigation and publicity concerning food quality and health issues; our compliance with environmental laws; our compliance with
changing regulation of corporate governance and public disclosure; and failure to maintain an effective system of internal controls.

Company
Overview

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. Therefore, as of that date, 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 PBF, 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.

Effective
December 31, 2003, we confirmed a Plan of Reorganization (the Plan), which 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.

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.

As of December 31, 2007, we operated 23 full-service restaurants located in seven states. We operate under the brand names of Carvers, Hungry Hunter Steakhouse,
Hunter Steakhouse and Mountain Jacks. We believe that our restaurants are 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 or through management arrangements with restaurants owned by third parties, such as our arrangement with



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Dakota Steakhouse and Sirloin Saloons. 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.

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.

Results of Operations

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

The following table sets forth, as a percentage of revenue, certain items in our condensed consolidated
statements of operations for the indicated periods. For comparative purposes, the percentage of revenue for the fifty-two weeks of fiscal 2006 reflects the effect of the long-lived asset held for sale or disposal. (Note: See Financial Footnote F-4):



|                                    |  |                                       |    |  |                                       |   
|----------------------------------- |  | ------------------------------------- | -- |  | ------------------------------------- | --
|                                    |  | FIFTY-TWOWEEKS ENDEDDecember 31, 2007 |    |  | FIFTY-TWOWEEKS ENDEDDecember 31, 2006 |   
|Net revenues                        |  | 100.0                                 | %  |  | 100.0                                 | % 
|Cost of Sales                       |  |                                       |    |  |                                       |   
|Food and Liquor costs               |  | 34.6                                  | %  |  | 33.2                                  | % 
|Payroll and Related Costs           |  | 36.5                                  | %  |  | 34.4                                  | % 
|Direct Operating Cost               |  | 23.9                                  | %  |  | 21.8                                  | % 
|Depreciation                        |  | 3.1                                   | %  |  | 2.7                                   | % 
|Gross Profit                        |  | 2.0                                   | %  |  | 7.9                                   | % 
|Costs and Expenses                  |  |                                       |    |  |                                       |   
|General and administrative Expense  |  | 11.1                                  | %  |  | 10.1                                  | % 
|Capital Lease Interest              |  | 2.0                                   | %  |  | 1.9                                   | % 
|Other expense                       |  | 17.3                                  | %  |  | 0.5                                   | % 
|Net Loss from continuing operations |  | (28.5                                 | %) |  | (4.6                                  | %)

Factors that have affected the results of operations for fifty-two weeks of fiscal 2007 for us as compared to the
fifty-two weeks of fiscal 2006 for us are discussed below.

52 Weeks Ended December 31, 2007 Compared to the 52 Weeks Ended December 31, 2006
(Pro Forma)

Net revenues for the fifty-two week period ended December 31, 2007 decreased
approximately $3.6 million or 8.4% from $42.7 million for the fifty-two week period ended December 31, 2006 to $39.1 for the same period in 2007. The decrease was the result of total entree counts decreasing 6.8% and the price per entree
remaining relatively flat. Also contributing to the decline in net revenue was the increase in discounts, primarily attributable to the Companys 40thAnniversary gift card $40 gets you $60 promotion ($0.7 million).

Food and beverage costs for the fifty-two week period ended
December 31, 2007 decreased approximately $0.7 million or 4.7% from $14.2 million for the fifty-two week period ended December 31, 2006 to $13.5 million for the same period in 2007. The major reason for this decrease in absolute
dollars was the proportional decline in net revenue and relatively stable food cost as compared with 2006.



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Food and beverage costs as a percentage of net revenues for the twenty-three restaurants were 33.2% for the fifty-two week period ended December 31,
2006 compared to 34.6% for the same period in 2007. One of the primary causes of this increase in percentage relation to revenue was the Companys 40thAnniversary gift card $40 gets you $60 promotion ($0.7 million) because of the resulting decrease in net sales.

Payroll and payroll related costs for the fifty-two week period ended December 31, 2007 decreased approximately $0.4 million or 2.7% from $14.7 million for the fifty-two week period ended December 31, 2006
to $14.3 million for the same period in 2007. The total payroll and payroll related costs as a percentage of net revenues were 34.4% for the fifty-two week period ended December 31, 2006 compared to 36.5% for the same period in 2007. With Net
Revenue decreasing 8.4% and the mandated (five states) minimum wage increases adding $400,000 in cost, we were not able to effectively reduce labor dollars proportionately to revenue dollars per unit and also maintain guest services and a positive
dining experience. At these volume levels for many units, the payroll and related costs have become fixed costs. Also contributing to this increase in percentage relation to revenue was the Companys 40thAnniversary gift card $40 gets you $60 promotion ($0.7 million) because of the resulting decrease in net sales.

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 are fixed or indirectly variable. Direct operating costs for the fifty-two week period ended
December 31, 2007 increased by almost $0.04 million from $9.31 million for the fifty-two week period ended December 31, 2006 to $9.35 million for the same period in 2007. The costs as a percentage of net revenues were 21.8% for the
fifty-two week period ended December 31, 2006 compared to 23.9% for the same period in 2007. This increase was mainly a function of the decrease in our net revenue being greater than the proportionate reduction in controllable spending. Also
contributing to this increase in percentage relation to revenue was the Companys 40thAnniversary gift card $40 gets you $60 promotion
($0.7 million) because of the resulting decrease in net sales.

Depreciation and amortization for the fifty-two week period ended December 31, 2007
increased slightly from $1.15 million for the fifty-two week period ended December 31, 2006 to $1.2 million for the same period in 2007. The major reason for this change is a result of the capital spending on property, equipment and the POS
system of approximately $0.34 million in 2007.

General and administrative expenses for the fifty-two week period ended December 31, 2007 increased
$0.029 million or 0.7% from $4.30 million for the fifty-two week period ended December 31, 2006 to $4.33 million for the same period in 2007. General and administrative expenses as a percentage of net revenues was 10.1% for the fifty-two
week period ended December 31, 2006 compared to 11.1% for the same period in 2007. The primary reasons for the increase as a percentage relationship to revenue is the effect of a number of non-recurring items, including the penalties associated
with the Forbearance Agreement (Exhibit 10.2) executed on June 12, 2007 increased the Class 4 Note Payable ($0.265 million) and other penalties ($0.16 million). Partially offsetting these increases was the reduction in the non-cash compensation
expense as all of the higher valued options are now fully amortized ($0.21 million).

Total impairment write-down of the Companys Identifiable
Intangible Assets as a result of the annual test (in accordance with FAS 142) for the fifty-two week period ended December 31, 2007, was $7.083 million. Tradenames was written-down ($7.083 million) leaving approximately $4.2 million on the
Balance Sheet. Total Goodwill remains on the Balance Sheet at approximately $2.4 million.

Total other and interest expense, net, for the fifty-two week
period ended December 31, 2007 decreased approximately $0.423 million or 49.8% from $0.85 million for the fifty-two week period ended December 31, 2006 to $0.43 million for the same period in 2007. The principal reason for this decrease
was the July 11, 2007 settlement agreement and full release with Rewards Network/I-dine that the Company executed on the remaining balance of our Note Payable and related matters. As a result of this Agreement, the approximately $0.951 million
balance due on the Note and related matters was considered void and was then taken into income as a forgiveness of debt. Also contributing to the change was the reduction in capital lease interest and interest associated with our reorganization debt
payments, as we continue to pay down the principal on such debt. Partially offsetting this decrease was the interest expense associated with the June 12, 2007 Forbearance Agreement with the Creditors Trust ($0.64 million).



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Total reorganization items, net, for the fifty-two week period ended December 31, 2007 decreased $0.14 million as
compared to the same period in 2006. The primary reason for the decrease reflects the resolution of all of the Companys bankruptcy issues. On December 28, 2007 the United States Bankruptcy Court for the Central District of California
entered an order terminating the Chapter 11 Reorganization Proceedings of Steakhouse Partners and subsidiaries, reserving jurisdiction over the implementation of the Forbearance Agreement. With this order Steakhouse Partners and subsidiaries, no
longer have to provide periodic reports (either in writing or in person) or pay trustee fees to the United States Bankruptcy Court for the Central District of California. The only exception is that the Creditors Trust may ask the Court for
assistance ,if they believe the implementation of the Forbearance Agreement isnt proceeding as plan.

Net loss for the fifty-two week period ended December 31, 2007 increased $11.9 million from $1.8 million for the fifty-two week period ended December 31, 2006 to approximately $13.7 million for the same period in 2007. The
increase in net loss for the fifty-two week period ended December 31, 2007 was principally the result of soft revenue for the period compounded with higher discounts, additional expenses associated with the Forbearance Agreement, and the
impairment write-down of Tradenames. Partially offsetting the reduced gross profits was the settlement of an old Plan of Reorganization claim and a gain on the sale of a long-lived asset. The continuing operations net loss for the fifty-two week
period ended December 31, 2007 increased approximately $9.15 million from net loss of $1.98 million for the fifty-two week period ended December 31, 2006 to a net loss of $11.13 million for the fifty-two week period in 2007. The increase
in net loss for the fifty-two week period ended December 31, 2007 was principally the result of soft revenue for the period, compounded with the Companys 40thAnniversary gift card $40 gets you $60 discount promotion ($0.7 million), minimum wage increases ($0.4 million), as well as, the additional interest and penalties associated with the Forbearance Agreement
($0.9 million) and the impairment write-down of Tradenames ($7.1 million). Partially offsetting these increases was the Rewards Network/I-dine settlement ($0.951 million).

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 2007 and 2006 follow (in millions):



|                                                               |  |      |     |   |      |    |      |        |  |    |     |  
|-------------------------------------------------------------- |  | ---- | --- | - | ---- | -- | ---- | ------ |  | -- | --- | -
|                                                               |  | 2007 |     |   | 2006 |    |      | Change | 
|Net cash provided by (used in) continuing operating activities |  | $    | 1.4 |   |      | $  | 1.6  |        |  | ($ | 0.2 | )
|Net cash provided by (used in) continuing investing activities |  | $    | 0.6 |   |      | ($ | 0.5  | )      |  | $  | 1.1 |  
|Net cash provided by (used in) continuing financing activities |  | ($   | 2.0 | ) |      | ($ | 1.5  | )      |  | ($ | 0.5 | )
|                                                               |  |      |     |   |      |    |      |        |  |    |     |  
|Net increase (decrease) in cash and cash equivalents           |  | $    | 0.0 |   |      | $  | (0.4 | )      |  | $  | 0.4 |  
|                                                               |  |      |     |   |      |    |      |        |  |    |     |  

We had a cash and cash equivalents balance of $0.02 million at December 31, 2007. Note: Our actual fiscal
year end was December 25, 2007; as a result approximately $0.7 million credit card receipts were still being processed through the bank. The $0.7 million is classified as Accounts Receivable versus cash and cash equivalents. During fiscal 2007,
we maintained a current ratio of 0.12-to-1, which arose from a working capital deficit of $14.6 million, which includes short-term debt ($4.8 million) resulting from the Plan of Reorganization and Forbearance Agreement.



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On June 12, 2007, the Company entered into a Forbearance Agreement with the Class 4 Creditor Trust. Under the
Agreement, the Company was required to sell assets or secure financing to repay the Class 4 Creditors Trust in full by November 15, 2007 (with interest, penalties and additional professional fees the total amount required to satisfy this
obligation is currently approximately $4.8 million). The Company was also required to either make certain minimum payments or enter into contracts for the sale of assets equal to: (1) $2 million by June 30, 2007; (2) another $1
million by August 31, 2007; (3) another $1 million by September 30, 2007 and (4) finally, another $1 million by October 31, 2007 with the balance due by November 15, 2007. In order to facilitate these payments, we have
sold our Williamsburg, Virginia restaurant for $1.2 million, our Cliffhouse and Troy restaurants are under contract to be sold for $0.6 million and $0.18 million, respectively.

At each benchmark date, the Company has provided the Creditors Trust the required payment and/or contractual agreement necessary to satisfy the Forbearance Agreement conditions. The actual units under contract
have changed as some have cancelled, usually due to financial contingencies, SBA requirements and/or issues with liquor license transfers and others have been added and, therefore, the Company has continuing obligations to the Creditors Trust. In
the event that the Companys obligation to the Creditors Trust are not satisfied, the Creditors Trust has remedies which include enforcement of its rights under the Agreement, related Note, and other Documents; these remedies
include initiation of a foreclosure action to recover real and personal property collateral.

On December 28, 2007 the United States Bankruptcy Court
for the Central District of California entered an order terminating the Chapter 11 Reorganization Proceedings of Steakhouse Partners and subsidiaries, reserving jurisdiction over the implementation of the Forbearance Agreement. With this order
Steakhouse Partners and subsidiaries, no longer have to provide periodic reports (either in writing or in person) or pay trustee fees to the United States Bankruptcy Court for the Central District of California. The only exception is that the
Creditors Trust may ask the Court for assistance ,if they believe the implementation of the Forbearance Agreement isnt proceeding as plan.

On
July 11, 2007, the Company executed a settlement agreement and full release with Rewards Network on the remaining balance of their Note Payable and related matters. Under terms of the agreement, the approximate $0.9 million balance due on the
Note was considered void and Rewards Network paid $75,000 in the form of a credit on current Guest Connect program, paid $50,000 legal fees and eliminated any and all Food and Beverage amounts due. In return the Company brought current (to
June 30, 2007) all Guest Connect related fees (minus the credit), remained in the Guest Connect program until the end of January, 2008 and released any claims it may have as a result of the summary judgment in the class action lawsuit entitled
Bistro Executive, Inc. vs. Rewards Network, Inc.

Off-Balance Sheet Arrangements

None.

Contractual Obligations

Our contractual obligations at December 31, 2007 were as follows:



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|                                           |  |                                      |      |                 |   |           |  |            |     |                  |   |     |  |   |     
|------------------------------------------ |  | ------------------------------------ | ---- | --------------- | - | --------- |  | ---------- | --- | ---------------- | - | --- |  | - | ----
|                                           |  | Payments Due by Period (in millions)
|Contractual Obligations                    |  | Total                                |      | Less than1 Year |   | 1-3 Years |  | 3-5 Years  |     | More Than5 Years
|                                           |  | 2008                                 |      | 2009-2010       |   | 2011-2012 |  | After 2012
|Due in Fiscal year                         |  |                                      |      |                 |   |           |  |            |     |                  |   |     |  |   |     
|Long-term debt (including current portion) |  | $                                    | 6.0  |                 | $ | 4.9       |  | $          | 1.1 |                  | $ | 0.0 |  | $ | 0.0 
|Operating leases obligations               |  | $                                    | 19.3 |                 | $ | 2.3       |  | $          | 4.3 |                  | $ | 3.2 |  | $ | 9.5 
|Capital leases obligations                 |  | $                                    | 6.7  |                 | $ | 0.3       |  | $          | 0.8 |                  | $ | 1.1 |  | $ | 4.5 
|                                           |  |                                      |      |                 |   |           |  |            |     |                  |   |     |  |   |     
|Total                                      |  | $                                    | 32.0 |                 | $ | 7.5       |  | $          | 6.2 |                  | $ | 4.4 |  | $ | 14.0
|                                           |  |                                      |      |                 |   |           |  |            |     |                  |   |     |  |   |     

Our long-term debt and operating leases are described in Financial Notes 5 and 6, respectively, of the
accompanying consolidated financial statements.

The Company is uncertain whether its current capital resources will be sufficient to meet our 2008
requirements.

Critical Accounting Principles

Our
critical accounting principles are described in Financial Note 3 of the accompanying consolidated financial statements.

Accounting Change

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective method and
therefore has not restated results for prior periods. Under this transition method, the Company recognizes compensation expense for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provision of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimate in accordance with the
provisions of SFAS 123R.

Prior to the adoption of SFAS 123R on January 1, 2006, the Company recognized stock-based compensation in accordance with
APB 25, and provided pro forma disclosure amounts in accordance with SFAS 148, as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation. Under the fair value recognition provisions of SFAS 123R, the Company
recognizes stock-based compensation expense for those shares expected to vest on a straight-line basis over the requisite service period of the award.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not believe adopting SFAS 157 will have a material impact on our
consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Asset and Financial
Liability: Including an amendment of FASB Statement No. 115 (SFAS 159). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in
earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of adopting SFAS 159 on our Consolidated Financial Statements.



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In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, a replacement of SFAS
No. 141, Business Combinations. The provisions of SFAS 141(R) establish principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest acquired and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of a business combination, and applies to business
combinations for which the acquisition date is on or after December 15, 2008, and may not be adopted early. We are currently evaluating the impact of adopting SFAS 141R on our Consolidated Financial Statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS 160), Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in our Consolidated Financial Statements. Among other requirements,
this statement requires that the consolidated net income attributable the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. SFAS 160 is effective for the first fiscal period
beginning on or after December 15, 2008. We are required to adopt SFAS 160 in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our Consolidated Financial Statements.

Impact of Inflation

Our operating costs that may be affected by
inflation consist principally of food, minimum wage increases in 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. If such increases cannot be offset through changes in menu pricing or menu reengineering, we expect that payroll costs, as a percent of sales, would increase.

We consider our current price structure to be competitive. We consider this factor, among others, when passing cost increases on to our customers. Although we
selectively raised prices nominally on several wine items and dessert items, through consumer choices our average sales price did not increase in 2007. Sales prices were effectively increased 1.0% in fiscal 2006, 4.8% in fiscal 2005 and 4.0 %
in fiscal 2004.



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

Evaluation of Disclosure Controls and
Procedures

The management of the Company, under the supervision and with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of December 31, 2007. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective as of that date.



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Managements Report on Internal Control Over Financial Reporting

Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Companys internal control over financial
reporting as of the end of each fiscal year and report, based on that assessment, whether the Companys internal control over financial reporting is effective.

The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control over financial reporting is a process designed to
provide reasonable assurance of the reliability of its financial reporting and of the preparation of its financial statements for external reporting purposes, in accordance with U.S. generally accepted accounting principles.

The Companys internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and disposition of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on its financial statements.

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

The
Companys management has assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2007. In making this assessment, the Company used the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and
monitoring. The Companys assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal controls over financial reporting.

Based on the Companys processes and assessment, as described above, management has concluded that, as of December 31, 2007, the Companys internal control over financial reporting was effective.

The Companys independent registered public accounting firm, Mayer Hoffman McCann P.C., has not audited and therefore has not issued a report on
effectiveness of the Companys internal control over financial reporting.

Changes in Internal Control

There were no changes in the Companys internal control over financial reporting during the Companys fourth quarter ended December 31, 2007, that have
materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART
III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE.
|-------- | ------------------------------------------------------

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.



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



|                            |  |     |  |                                                                           
|--------------------------- |  | --- |  | --------------------------------------------------------------------------
|Name                        |  | Age |  | Position                                                                  
|A. Stone Douglass(1)        |  | 60  |  | Chairman of the Board, President, Chief Executive Officer and Secretary   
|Joseph L. Wulkowicz         |  | 58  |  | Vice President, Chief Financial Officer and Assistant Secretary           
|Susan Schulze-Claasen       |  | 55  |  | Executive Vice President, Chief Administrative Officer and General Counsel
|Edgar Tod Lindner (1)(2)(3) |  | 62  |  | Director                                                                  
|Thomas A. Edler (2)(3)      |  | 64  |  | 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 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.



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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 established three standing committees: an Audit
Committee; a Compensation Committee; and a Nominating Committee.

The Audit Committee was established in accordance with section 3(a)(58)(A) of the
Exchange Act. The members of our Audit Committee are Edgar Tod Lindner and Thomas A. Edler. Mr. Lindner is an Audit Committee financial expert, as defined in the rules of the Securities and Exchange Commission (SEC). The Audit
Committee oversees, reviews and evaluates our financial statements, accounting and financial reporting processes, internal control functions and the audits of our financial statements. The Audit Committee is responsible for the appointment,
compensation, retention and oversight of our independent auditors. All members of the Audit Committee are independent (as independence is defined in the NASDAQ Stock Market qualitative listing standards and the rules of the U.S. Securities and
Exchange Commission (SEC)). The Audit Committee acts pursuant to a written charter.

The members of our Compensation Committee are Edgar Tod
Lindner and Thomas A. Edler. The Compensation Committee reviews and makes recommendations to our Board of Directors concerning the compensation and benefits of our executive officers, including the Chief Executive Officer, and directors, oversees
the administration of our stock option and employee benefits plans, and reviews general policy relating to compensation and benefits. All members of the Compensation Committee are independent (as independence is defined in the NASDAQ Stock Market
qualitative listing standards and the SEC rules). The Compensation Committee acts pursuant to a written charter.

The members of our Nominating Committee
are A. Stone Douglass, Edgar Tod Lindner and Thomas A. Edler. The Nominating Committee identifies prospective candidates to serve on the Board of Directors, recommends nominees for election to the Board of Directors, develops and recommends Board
member selection criteria, considers committee member qualification, recommends corporate governance principles to the Board of Directors, and provides oversight in the evaluation of the Board of Directors and each committee. All members of the
Nominating Committee are independent (as independence is defined in the NASDAQ Stock Market qualitative listing standards and the SEC rules), except for Mr. Douglass. The Nominating Committee acts pursuant to a written charter.

Board Member Independence

The Board of Directors has determined
that, except for Mr. Douglass, all of the members of the Board of Directors are independent as independence is defined in the NASDAQ Stock Market qualification standards and the SEC rules. Mr. Douglass is not considered
independent because he is either currently, or has within the last three years been, employed by the Company.



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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 2007 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 2007 fiscal year have been timely filed.

Code of Ethics

We adopted a Code of Ethics that applies to all employees, including all executive officers and senior financial officers and directors. 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 by contacting the Company Secretary (in writing) at 10200 Willow Creek Road, San Diego, California 92131.

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 by contacting the Company Secretary (in writing) at 10200 Willow Creek Road, San Diego, California 92131.



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

Summary Compensation

The following table shows information concerning the annual compensation for services provided to us by our President and Chief Executive Officer and the two other most
highly compensated executive officers (collectively referred to herein as the Named Executive Officers) during the fiscal years ended December 31, 2007 and 2006.

SUMMARY COMPENSATION TABLE

Annual Compensation $ (Dollars)



|                                                                           |  |      |  |         |  |       |  |               |  |                           |  |                   
|-------------------------------------------------------------------------- |  | ---- |  | ------- |  | ----- |  | ------------- |  | ------------------------- |  | ------------------
|Name and Position                                                          |  | Year |  | Salary  |  | Bonus |  | OptionAwards$ |  | All (1)OtherCompensation$ |  | TotalCompensation$
|A. Stone Douglass (1)                                                      |  | 2007 |  | 200,012 |  | 0     |  | 0             |  | 76,169                    |  | 276,181           
|President, Chief Executive Officer and Secretary                           |  | 2006 |  | 200,012 |  | 0     |  | 32,000        |  | 69,801                    |  | 301,813           
|Joseph L. Wulkowicz (1)                                                    |  | 2007 |  | 174,310 |  | 0     |  | 0             |  | 36,735                    |  | 211,045           
|Vice President and Chief Financial Officer                                 |  | 2006 |  | 156,000 |  | 0     |  | 24,000        |  | 37,236                    |  | 217,236           
|Susan Schulze-Claasen (1)                                                  |  | 2007 |  | 150,014 |  | 0     |  | 0             |  | 20,224                    |  | 170,238           
|Executive Vice President, Chief Administrative Officer and General Counsel |  | 2006 |  | 150,014 |  | 0     |  | 24,000        |  | 20,739                    |  | 194,753           



|1. | Other annual compensation for Mr. Douglass includes (i) an automobile allowance ($7,946), (ii) a housing allowance ($34,000), (iii) insurance premium
reimbursement ($19,035) and (iv) executive medical coverage ($15,188). Other annual compensation for Mr. Wulkowicz and Ms. Schulze-Claasen includes (i) an automobile allowance ($12,000 each), (ii) insurance premium
reimbursement ($19,384 and $5,351, respectively) and (iii) executive medical coverage ($8,224 and $0, respectively).
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Outstanding Equity Awards at December 31, 2007.

The following table provides information with regard to the stock option granted to each Named Executive Officer in April 2004 and October 2006, which were outstanding stock option awards, classified as exercisable
and unexercisable as of December 31, 2007. 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. The options
listed have an exercise price of $1.11 and $0.35 per share, respectively.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END



|                      |  |                                                                   |  |                                                                     |  |                                                                                       |  |                        |  |                         
|--------------------- |  | ----------------------------------------------------------------- |  | ------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---------------------- |  | ------------------------
|Option Awards         |  |                                                                  
|Name                  |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable(1) |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable(1) |  | EquityIncentivePlanAwards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions
(#) |  | OptionExercisePrice($) |  | OptionExpiration Date   
|A. Stone Douglass     |  | 250,000 33,333                                                    |  | 0 66,667                                                            |  | 00                                                                                    |  | 1.11 0.35              |  | April, 2014October, 2016
|Joseph L. Wulkowicz   |  | 100,000 25,000                                                    |  | 0 50,000                                                            |  | 00                                                                                    |  | 1.11 0.35              |  | April, 2014October, 2016
|Susan Schulze-Claasen |  | 100,000 25,000                                                    |  | 0 50,000                                                            |  | 00                                                                                    |  | 1.11 0.35              |  | April, 2014October, 2016



|(1) | Based on the December 31, 2007 closing price of $0.08 per share of our common stock as reported on the OTC Bulletin Board; there were no exercisable, in-the-money options as of
December 31, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Option Exercises and Stock Vested

None of our Named Executive Officers exercised options or had shares of restricted stock vest in 2007.

Director
Compensation

No fees or other compensation was paid during the year ended December 31, 2007 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.

Employment Contracts

Mr. Douglass serves as our President and Chief Executive Officer pursuant to a written employment agreement with a three-year base term, which expired on
March 31, 2007. The base term of three years expired, but 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, annual salary increases tied to the Consumer Price Index (All Urban Consumers) and an annual bonus at the discretion of the Board of Directors. Additionally,
the agreement contains non-compete and non-solicitation provisions, which provide that 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.

In the event that Mr. Douglasss employment period is terminated as a result of his death or Permanent Disability (as defined in the agreement); for a reason
other than for cause; or pursuant to a Change of Control (as defined in the agreement), Mr. Douglass will



- 33 -



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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 these
same circumstances, he is entitled to receive payment of his medical, dental, and other welfare plan payments for a one-year period, currently having a value of $19,035 plus any and all deferred salary increases.

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, which expired on March 31, 2007, 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 $174,000, annual salary increases tied to the Consumer Price Index (All Urban Consumers) and an annual bonus at the discretion of the Board of Directors. Additionally, the agreement contains a
non-solicitation provision.

In the event Mr. Wulkowiczs employment 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
(currently valued at $174,000). In these same circumstances, he would be entitled to receive payment of his medical, dental, and other welfare plan payments for a one-year period, currently having a value of $19,384 plus any and all
deferred salary increases. In the event Mr. Wulkowiczs employment is terminated by us for a reason other than for cause (as defined in the agreement) or as stated above, Mr. Wulkowicz will be entitled to receive the lesser of:
(i) his base salary and medical and welfare plan contributions through the third anniversary date of his employment agreement; (ii) his base salary and medical and welfare plan contributions for a period of 12 months after the date of
termination; and (iii) any and all deferred salary increases.

We entered into a three-year employment agreement dated as of April 1, 2004 with
Ms. Schulze-Claasen to serve as Executive Vice President and General Counsel, the initial term expired on March 31, 2007. 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, annual salary increases tied to the Consumer Price Index (All Urban Consumers)
and an annual bonus at the discretion of the Board of Directors. Additionally, the agreement contains a non-solicitation provision.

In the event
Ms. Schulze-Claasens employment 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 (currently valued at $150,000). In these same circumstances, she is entitled to receive payment of her medical, dental, and
other welfare plan payments for a one-year period, currently having a value of $8,224. 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 those
stated above, Ms. Schulze-Claasen will be entitled to receive the lesser of: (i) her base salary and medical and welfare plan contributions through the third anniversary date of her employment agreement; and (ii) her base salary and
medical and welfare plan contributions for a period of 12 months after the date of termination.

In each case described above, payments would be made
pursuant to the Company then-current payroll practices. Currently, the Company pays employees base pay every two weeks on alternate Tuesdays and makes contributions to Medical and Welfare plans on a monthly basis. Although each executive has stock
option grants, which have in part vested, all have a strike price in excess of current market price, and as such, it is not expected that any payment would be made in this regard.



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Potential Payments Upon Termination or Change in Control.

As more fully described above, in the event that each executive had been terminated on December 31, 2007 for any reason other than for cause, the following payments
would have been due the named executive:



|                      |  |                                        |  |                                 |  |        |         |               |                                             
|--------------------- |  | -------------------------------------- |  | ------------------------------- |  | ------ | ------- | ------------- | --------------------------------------------
|Executive             |  | Trigger Event                          |  | Type of Pay                     |  | Amount |         | Payment Terms
|A. Stone Douglass     |  | Any but cause                          |  | 12 months Base Salary           |  | $      | 200,000 |               | payable every two weeks in 26 equal payments
|                      |  |                                        |  | Insurance Premium Reimbursement |  | $      | 19,035  |               | payable in 12 equal monthly payments        
|Joseph L Wulkowicz    |  | Any but cause or voluntary termination |  | 12 months Base Salary           |  | $      | 174,310 |               | payable every two weeks in 26 equal payments
|                      |  |                                        |  | Insurance Premium Reimbursement |  | $      | 19,384  |               | payable in 12 equal monthly payments        
|Susan Schulze-Claasen |  | Any but cause or voluntary termination |  | 12 months Base Salary           |  | $      | 150,000 |               | payable every two weeks in 26 equal payments
|                      |  |                                        |  | Insurance Premium Reimbursement |  | $      | 8,224   |               | payable in 12 equal monthly payments        



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

The following table sets forth, as of December 31, 2007, 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, 2007, we had 6,635,669 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, 2007 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.



- 35 -



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|                                                                        |  |                        |  |                  |  
|----------------------------------------------------------------------- |  | ---------------------- |  | ---------------- | -
|Name and Address of Beneficial Owner                                    |  | Number of Shares Owned |  | Percent of Class |  
|A. Stone Douglass (1)                                                   |  | 463,369                |  | 6.3              | %
|Joseph L. Wulkowicz (2)                                                 |  | 125,000                |  | 1.7              | %
|Susan Schulze-Claasen (2)                                               |  | 125,000                |  | 1.7              | %
|Edgar Tod Lindner (3)                                                   |  | 75,000                 |  | 1.0              | %
|Thomas A. Edler (3)                                                     |  | 75,000                 |  | 1.0              | %
|T. Scott Avila                                                          |  |                       |  |                 |  
|All executive officers and directors as a group (5 persons)             |  | 863,369                |  | 11.8             | %
|                                                                        |  |                       
|5% Stockholders:                                                        |  |                        |  |                  |  
|Steven B. Sands (4) 90 Park Avenue, 31st Floor New York, NY 10016       |  | 1,035,000              |  | 15.2             | %
|Eye of the Round, LLC (5) 90 Park Avenue, 31st Floor New York, NY 10016 |  | 885,000                |  | 13.0             | %
|George Rich (6) 904 South Broadway Baltimore, MD 21231                  |  | 790,000                |  | 11.5             | %
|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              | %
|David Rich                                                              |  | 359,964                |  | 5.4              | %



|(1) | Includes 180,036 shares of common stock owned directly by Mr. Douglass and options to purchase 283,333 shares of common stock and 33,333 shares of common stock granted pursuant
to our 2004 Stock Incentive Plan, which are currently exercisable within 60 days of March 15, 2008, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes 125,000 shares of common stock and 25,000 shares of common stock granted pursuant to our 2004 Stock Incentive Plan, which are currently exercisable within 60 days of
March 15, 2008, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes 75,000 shares of common stock and 25,000 shares of common stock granted pursuant to our 2004 Stock Incentive Plan, which are currently exercisable within 60 days of
March 15, 2008, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes 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 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) | Includes 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) | Includes 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 250,000 shares of common stock granted to Mr. Rich pursuant to our 2004 Stock Incentive Plan, which are currently exercisable within
60 days of March 15, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 36 -



---

|(7) | Includes 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 options to
purchase 250,000 shares of common stock granted to George Rich pursuant to our 2004 Stock Incentive Plan, which are currently 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE.
|-------- | ----------------------------------------------------------------------

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 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 became exercisable in full on March 1, 2007.

The disclosure
required by Item 407(a) of Regulation S-K is included under Item 10 of this Annual Report on Form 10-K.



|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, 2007,
December 31, 2006 and December 31, 2005. Services provided to us by MHM with respect to the fiscal years ended December 31, 2007, December 31, 2006 and December 31, 2005 consisted of the audit of our consolidated
financial statements and limited reviews of our Quarterly Reports on Form 10-Q for the interim periods.

Services provided by Singer Lewak
Greenbaum & Goldstein LLP (SLGG) in 2007 consisted of limited review of our Annual Report on Form 10-K for the year ended December 31, 2005, audit of our consolidated financial statements December 31, 2004 and
the Registration Statement (See Note-6) declared effective on November 3, 2006 therein which they were paid fees totaling $14,000 for 2007, $0 for 2006 and $41,147 for 2005.



- 37 -



---

Tax Fees

SLGG has
provided services to us with respect to the preparation of corporate income tax returns, tax provision and tax planning matters. MHM did not provide any services to us with respect to tax matters.



|                                       |  |                           |        |      |   |        |  |                       |  |      |         |  |   |        
|-------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ |  | --------------------- |  | ---- | ------- |  | - | -------
|Singer Lewak Greenbaum & Goldstein
LLP |  | Mayer Hoffman McCann P.C.
|                                       |  | 2007                      |        | 2006 |   |        |  | 2007                  |  | 2006
|Audit Fees(1)                          |  | $                         | 14,000 |      | $ | 0      |  | Audit Fees(1)         |  | $    | 158,000 |  | $ | 130,874
|Audit-Related Fees(2)                  |  | $                         | 0      |      | $ | 0      |  | Audit-Related Fees(2) |  | $    | 0       |  | $ | 0      
|Tax Fees(3)                            |  | $                         | 32,075 |      | $ | 26,272 |  | Tax Fees(3)           |  | $    | 0       |  | $ | 0      
|All Other Fees                         |  | $                         | 0      |      | $ | 0      |  | All Other Fees        |  | $    | 0       |  | $ | 0      



|(1) | Consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the interim consolidated financial statements
included in quarterly reports and services that are normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial
statements and are not reported under Audit Fees. We did not incur any Audit-Related Fees in 2006 and 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning.
|--- | -------------------------------------------------------------------------------------------------------------------

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 Audit Committee member so long as the approval is presented to the full Audit Committee at a later time.

PART IV



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

The following documents
are filed as part of this report:



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



- 38 -



---

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 (incorporated by reference to Form SB-2 filed on June 12, 1997).                                                                                                                                               
|               |  |  
|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 (incorporated by reference to Form 10-K filed on April 12, 2005).                                                                                            
|               |  |  
|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).                                                                                                                                                                
|               |  |  
|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 Principal 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 Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         



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



- 39 -



---

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 8, 2008



|                                                                                             |  |  |  |                                                               
|-------------------------------------------------------------------------------------------- |  |  |  | --------------------------------------------------------------
|STEAKHOUSE PARTNERS, INC.                                                                    |  |  |  | STEAKHOUSE PARTNERS, INC.                                     
|                                                                                             |  | 
|/ S / A. STONE DOUGLASS                                                                      |  |  |  | / S / JOSEPH L. WULKOWICZ                                     
|A. STONE DOUGLASS President, Chief Executive Officer,
and Chairman of the Board of Directors |  |  |  | JOSEPH L. WULKOWICZ Vice President and Chief Financial
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 8, 2008
|Name: A. Stone Douglass Title: President, Chief
Executive Officer, and Chairman of the Board of Directors |  |              
|                                                                                                          | 
|/s/ TOM EDLER                                                                                             |  | April 8, 2008
|Name: Tom Edler Title: Director                                                                           |  |              
|                                                                                                          | 
|/s/ TOD LINDNER                                                                                           |  | April 8, 2008
|Name: Tod Lindner Title: Director                                                                         |  |              



- 40 -



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31,
2007 AND 2006



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONTENTS

December 31, 2007



|                                                                                          |  |       
|----------------------------------------------------------------------------------------- |  | ------
|                                                                                          |  | Page  
|                                                                                          | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                   |  | F-1   
|                                                                                          | 
|CONSOLIDATED FINANCIAL STATEMENTS                                                         |  |       
|                                                                                          | 
|Consolidated Balance Sheet as of December 31, 2007 and 2006                               |  | F-2-3 
|                                                                                          | 
|Consolidated Statement of Operations as of December 31, 2007 and 2006                     |  | F-4-5 
|                                                                                          | 
|Consolidated Statement of Stockholders Equity (Deficit) as of December 31, 2007 and 2006 |  | F-6   
|                                                                                          | 
|Consolidated Statement of Cash Flows as of December 31, 2007 and 2006                     |  | F-7-8 
|                                                                                          | 
|Notes to Consolidated Financial Statements                                                |  | F-9-30



---

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, 2007 and
2006, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2007. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Steakhouse Partners, Inc. and its subsidiaries as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007, 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 2 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 0.12:1
and 0.15:1 for December 31, 2007 and 2006, respectively. Additionally, the Company had a working capital deficit of approximately $14,600,000 and $11,900,000 in 2007 and 2006, 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 2. 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 April 8,
2008



F-1



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

ASSETS



|                                          |  |                  |        |                  |   |       
|----------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                          |  | December 31,2007 |        | December 31,2006
|Current assets                            |  |                  |        |                  |   |       
|Cash and cash equivalents                 |  | $                | 2      |                  | $ |      
|Accounts receivable                       |  |                  | 889    |                  |   | 841   
|Inventories                               |  |                  | 702    |                  |   | 736   
|Prepaid expenses and other current assets |  |                  | 317    |                  |   | 332   
|                                          |  |                  |        |                  |   |       
|Total current assets                      |  |                  | 1,910  |                  |   | 1,909 
|Property, plant, and equipment, net       |  |                  | 7,227  |                  |   | 8,099 
|Liquor licenses                           |  |                  | 583    |                  |   | 583   
|Deposits and other assets                 |  |                  | 556    |                  |   | 394   
|Tradenames                                |  |                  | 4,201  |                  |   | 11,283
|Goodwill                                  |  |                  | 2,373  |                  |   | 2,373 
|Assets held for sale                      |  |                  | 899    |                  |   | 4,764 
|                                          |  |                  |        |                  |   |       
|Total assets                              |  | $                | 17,749 |                  | $ | 29,405
|                                          |  |                  |        |                  |   |       



F-2



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)



|                                                     |  |                  |         |   |                  |   |        |  
|---------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                                                     |  | December 31,2007 |         |   | December 31,2006 |  
|Liabilities                                          |  |                  |         |   |                  |   |        |  
|Current liabilities                                  |  |                  |         |   |                  |   |        |  
|Current portion of long term debt                    |  | $                | 4,909   |   |                  | $ | 6,696  |  
|Current portion of long term capital leases          |  |                  | 370     |   |                  |   | 347    |  
|Bank overdraft                                       |  |                  |        |   |                  |   | 401    |  
|Accounts payable                                     |  |                  | 6,037   |   |                  |   | 3,470  |  
|Accrued expenses                                     |  |                  | 1,258   |   |                  |   | 323    |  
|Unearned revenue                                     |  |                  | 2,351   |   |                  |   | 1,659  |  
|Reserve for self insurance claims                    |  |                  | 38      |   |                  |   | 58     |  
|Sales and property taxes payable                     |  |                  | 46      |   |                  |   | 24     |  
|Accrued payroll costs                                |  |                  | 1,440   |   |                  |   | 844    |  
|Liabilities held for sale                            |  |                  | 114     |   |                  |   | 99     |  
|                                                     |  |                  |         |   |                  |   |        |  
|Total current liabilities                            |  |                  | 16,563  |   |                  |   | 13,921 |  
|Long term debt, net of current portion               |  |                  | 1,126   |   |                  |   | 1,228  |  
|Long term capital leases, net of current portion     |  |                  | 6,409   |   |                  |   | 6,736  |  
|Deferred rent                                        |  |                  | 334     |   |                  |   | 278    |  
|Liabilities held for sale                            |  |                  | 870     |   |                  |   | 1,385  |  
|                                                     |  |                  |         |   |                  |   |        |  
|Total liabilities                                    |  |                  | 25,302  |   |                  |   | 23,548 |  
|                                                     |  |                  |         |   |                  |   |        |  
|Stockholders equity (deficit)                       |  |                  |         |   |                  |   |        |  
|Common stock, $0.001 par value                       |  |                  |         |   |                  |   |        |  
|15,000,000 shares authorized                         |  |                  |         |   |                  |   |        |  
|6,635,680 issued and outstanding                     |  |                  | 7       |   |                  |   | 7      |  
|Additional paid-in capital                           |  |                  | 8,961   |   |                  |   | 8,710  |  
|Accumulated deficit                                  |  |                  | (16,521 | ) |                  |   | (2,860 | )
|                                                     |  |                  |         |   |                  |   |        |  
|Total stockholders equity (deficit)                 |  |                  | (7,553  | ) |                  |   | 5,857  |  
|                                                     |  |                  |         |   |                  |   |        |  
|Total liabilities and stockholders equity (deficit) |  | $                | 17,749  |   |                  | $ | 29,405 |  
|                                                     |  |                  |         |   |                  |   |        |  



F-3



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share
amounts)



|                                                                                   |  |                  |         |   |                  |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                                                                                   |  | December 31,2007 |         |   | December 31,2006 |  
|Revenues, net                                                                      |  | $                | 39,098  |   |                  | $ | 42,676 |  
|                                                                                   |  |                  |         |   |                  |   |        |  
|Cost of sales                                                                      |  |                  |         |   |                  |   |        |  
|Food and beverage                                                                  |  |                  | 13,510  |   |                  |   | 14,172 |  
|Payroll and payroll related costs (includes non-cash compensation of $42 and $109) |  |                  | 14,265  |   |                  |   | 14,660 |  
|Direct operating costs                                                             |  |                  | 9,348   |   |                  |   | 9,311  |  
|Depreciation and amortization                                                      |  |                  | 1,206   |   |                  |   | 1,149  |  
|                                                                                   |  |                  |         |   |                  |   |        |  
|Total cost of sales                                                                |  |                  | 38,329  |   |                  |   | 39,292 |  
|Gross profit                                                                       |  |                  | 769     |   |                  |   | 3,384  |  
|General and administrative (includes non cash compensation of $209 and $428)       |  |                  | 4,333   |   |                  |   | 4,304  |  
|Impairment of Tradenames                                                           |  |                  | 7,083   |   |                  |   |       |  
|                                                                                   |  |                  |         |   |                  |   |        |  
|Loss before other income (expense)                                                 |  |                  | (10,647 | ) |                  |   | (920   | )
|Other income (expense)                                                             |  |                  |         |   |                  |   |        |  
|Legal Settlement                                                                   |  |                  | 1,001   |   |                  |   |       |  
|Miscellaneous income                                                               |  |                  | 126     |   |                  |   | 200    |  
|Interest expense                                                                   |  |                  | (1,553  | ) |                  |   | (1,049 | )
|                                                                                   |  |                  |         |   |                  |   |        |  
|Total other income (expense)                                                       |  |                  | (426    | ) |                  |   | (849   | )
|Loss before reorganization items, provision for income taxes                       |  |                  | (11,073 | ) |                  |   | (1,769 | )
|                                                                                   |  |                  |         |   |                  |   |        |  
|Reorganization items                                                               |  |                  |         |   |                  |   |        |  
|Professional fees                                                                  |  |                  | (53     | ) |                  |   | (192   | )
|Fresh Start Adjustment                                                             |  |                  |        |   |                  |   |       |  
|                                                                                   |  |                  |         |   |                  |   |        |  
|Total reorganization items                                                         |  |                  | (53     | ) |                  |   | (192   | )



F-4



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                       |  |                  |         |   |                  |   |        |  
|-------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                                       |  | December 31,2007 |         |   | December 31,2006 |  
|Loss before provision for income taxes |  |                  | (11,126 | ) |                  |   | (1,961 | )
|Provision for income taxes             |  |                  |        |   |                  |   | 14     |  
|                                       |  |                  |         |   |                  |   |        |  
|Net Loss from continuing operations    |  | $                | (11,126 | ) |                  | $ | (1,975 | )
|                                       |  |                  |         |   |                  |   |        |  
|Discontinued operations, net of tax    |  | $                | (2,535  | ) |                  | $ | 205    |  
|                                       |  |                  |         |   |                  |   |        |  
|Net Loss                               |  | $                | (13,661 | ) |                  | $ | (1,770 | )
|                                       |  |                  |         |   |                  |   |        |  
|Basic earnings (loss) per share        |  |                  |         |   |                  |   |        |  
|Continuing operations                  |  | $                | (1.68   | ) |                  | $ | (0.30  | )
|Discontinued operations                |  |                  | (0.38   | ) |                  |   | 0.03   |  
|                                       |  |                  |         |   |                  |   |        |  
|Net Loss                               |  | $                | (2.06   | ) |                  | $ | (0.27  | )
|                                       |  |                  |         |   |                  |   |        |  
|Diluted earnings (loss) per share      |  |                  |         |   |                  |   |        |  
|Continuing operations                  |  | $                | (1.68   | ) |                  | $ | (0.30  | )
|Discontinued operations                |  |                  | (0.38   | ) |                  |   | 0.03   |  
|                                       |  |                  |         |   |                  |   |        |  
|Net Loss                               |  | $                | (2.06   | ) |                  | $ | (0.27  | )
|                                       |  |                  |         |   |                  |   |        |  
|Weighted average shares                |  |                  |         |   |                  |   |        |  
|Basic                                  |  |                  | 6,636   |   |                  |   | 6,636  |  
|                                       |  |                  |         |   |                  |   |        |  
|Diluted                                |  |                  | 6,636   |   |                  |   | 6,636  |  
|                                       |  |                  |         |   |                  |   |        |  



F-5



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(in thousands,
except shares)



|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | -------------------- | ----- | - | ------------------ | - | ---- | ----- |  | - | ------- | - |  | - | ------- | -
|                                                               |  | Common Stock |  | AdditionalPaid-InCapital |   |  | DeferredCompensation |       |   | AccumulatedDeficit |   |      | Total | 
|                                                               |  | Shares       |  | Amount                   |   |  |                      |      
|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   | (455    | ) |  |   | (455    | )
|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   |         |   |  |   |         |  
|Balance, December 31, 2005                                     |  | 6,635,680    |  | $                        | 7 |  | $                    | 8,758 |   |                    | $ | (585 | )     |  | $ | (1,090  | ) |  | $ | 7,090   |  
|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   |         |   |  |   |         |  
|Reclassification of Deferred Compensation due to SFAS No. 123R |  |              |  |                          |   |  |                      | (585  | ) |                    |   | 585  |       |  |   |         |   |  |   |         |  
|Stock Based Compensation                                       |  |              |  |                          |   |  |                      | 537   |   |                    |   |      |       |  |   |         |   |  |   | 537     |  
|Net Loss                                                       |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   | (1,770  | ) |  |   | (1,770  | )
|Balance, December 31, 2006                                     |  | 6,635,680    |  | $                        | 7 |  | $                    | 8,710 |   |                    | $ |     |       |  | $ | (2,860  | ) |  | $ | 5,857   |  
|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   |         |   |  |   |         |  
|Stock Based Compensation                                       |  |              |  |                          |   |  |                      | 251   |   |                    |   |      |       |  |   |         |   |  |   | 251     |  
|Net Loss                                                       |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   | (13,661 | ) |  |   | (13,661 | )
|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   |         |   |  |   |         |  
|Balance, December 31, 2007                                     |  | 6,635,680    |  | $                        | 7 |  | $                    | 8,961 |   |                    | $ |     |       |  | $ | (16,521 | ) |  | $ | (7,553  | )
|                                                               |  |              |  |                          |   |  |                      |       |   |                    |   |      |       |  |   |         |   |  |   |         |  



F-6



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW



|                                                                                                         |  |                  |         |   |                  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------ | -
|                                                                                                         |  | December 31,2007 |         |   | December 31,2006 |  
|Cash flows from operating activities                                                                     |  |                  |         |   |                  |   |        |  
|Net loss from operations                                                                                 |  | $                | (13,661 | ) |                  | $ | (1,770 | )
|Adjustment to reconcile net loss from continuing operations to net cash provided by operating activities |  |                  |         |   |                  |   |        |  
|Loss on disposal of restaurant operations                                                                |  |                  | 2,262   |   |                  |   |        |  
|Gain on Settlement of debt                                                                               |  |                  | (951    | ) |                  |   |        |  
|Increase in Note Payable due to penalty incurred                                                         |  |                  | 265     |   |                  |   |        |  
|Depreciation and amortization                                                                            |  |                  | 1,323   |   |                  |   | 1,316  |  
|Impairment of Intangibles                                                                                |  |                  | 7,083   |   |                  |   |       |  
|Stock based compensation                                                                                 |  |                  | 251     |   |                  |   | 537    |  
|(Increase) decrease in operating assets                                                                  |  |                  |         |   |                  |   |        |  
|Accounts receivable                                                                                      |  |                  | (47     | ) |                  |   | (88    | )
|Inventories                                                                                              |  |                  | 84      |   |                  |   | 90     |  
|Prepaid expenses and other current assets                                                                |  |                  | 368     |   |                  |   | 524    |  
|Deposits and other assets                                                                                |  |                  | (31     | ) |                  |   | 84     |  
|Increase (decrease) in operating liabilities                                                             |  |                  |         |   |                  |   |        |  
|Accounts payable                                                                                         |  |                  | 2,100   |   |                  |   | 996    |  
|Accrued expenses                                                                                         |  |                  | 1,006   |   |                  |   | 30     |  
|Unearned revenue                                                                                         |  |                  | 687     |   |                  |   | 45     |  
|Reserve for self insurance claims                                                                        |  |                  | (20     | ) |                  |   | (44    | )
|Sales and property taxes payable                                                                         |  |                  | (1      | ) |                  |   | (22    | )
|Accrued payroll costs                                                                                    |  |                  | 596     |   |                  |   | (187   | )
|Deferred rent                                                                                            |  |                  | 66      |   |                  |   | 93     |  
|                                                                                                         |  |                  |         |   |                  |   |        |  
|Net cash provided by operating activities                                                                |  |                  | 1,380   |   |                  |   | 1,604  |  



F-7



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW



|                                                                                                                                 |  |              |        |   |              |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ------------ | - | ------ | -
|                                                                                                                                 |  | December 31, |        |   | December 31, |  
|                                                                                                                                 |  | 2007         |        |   | 2006         |  
|Cash flows from investing activities                                                                                             |  |              |        |   |              |   |        |  
|Acquisition cost                                                                                                                 |  |              | (146   | ) |              |   | (148   | )
|Purchases of property, plant, and equipment                                                                                      |  |              | (339   | ) |              |   | (424   | )
|Proceeds from disposal of discontinued operations                                                                                |  |              | 1,099  |   |              |   |       |  
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Net cash provided by (used in) continuing investing activities                                                                   |  |              | 614    |   |              |   | (572   | )
|Cash flows from financing activities                                                                                             |  |              |        |   |              |   |        |  
|Principal payments on debt and capital leases                                                                                    |  |              | (1,992 | ) |              |   | (1,481 | )
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Net cash used in continuing financing activities                                                                                 |  |              | (1,992 | ) |              |   | (1,481 | )
|Net decrease in cash and cash equivalents                                                                                        |  |              | 2      |   |              |   | (449   | )
|Cash and cash equivalents, beginning of the year                                                                                 |  |              |       |   |              |   | 449    |  
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Cash and cash equivalents, end of year                                                                                           |  | $            | 2      |   |              | $ |       |  
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Non-cash investing and financing transactions                                                                                    |  |              |        |   |              |   |        |  
|Financing of insurance payment through note payable                                                                              |  | $            | 348    |   |              | $ | 390    |  
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Supplemental disclosures of cash flow information                                                                                |  |              |        |   |              |   |        |  
|Interest paid                                                                                                                    |  | $            | 1,353  |   |              | $ | 1,083  |  
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Income taxes paid                                                                                                                |  | $            | 3      |   |              | $ | 3      |  
|                                                                                                                                 |  |              |        |   |              |   |        |  
|Supplemental disclosures of cash flow information for reorganization expenses paid in connection with the Chapter 11
proceedings |  |              |        |   |              |   |        |  
|Professional fees paid for services                                                                                              |  | $            | 53     |   |              | $ | 70     |  
|                                                                                                                                 |  |              |        |   |              |   |        |  



F-8



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

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 owned and operated 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 Debtors in Possession agreement other than
interest.

NOTE 2 - 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. During the years ended December 31, 2007 and 2006,
the Company maintained a current ratio of 0.12-to1 and 0.14-to-1, respectively. In addition, during the years ended December 31, 2007 and 2006, the Company had a working capital deficit of approximately $14.7 million and $12.0 million,
respectively. 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. These circumstances raised
substantial doubt about the Companys ability to continue as a going concern as of December 31, 2007.

On June 12, 2007, the Company entered
into a Forbearance Agreement with the Class 4 Creditor Trust. Under the Agreement, the Company was required to sell assets or secure financing to repay the Class 4 Creditors Trust in full by November 15, 2007 (with interest, penalties and
additional professional fees the total amount required to satisfy this obligation will be approximately $4.8



F-9



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



million). The Company was also required to either make certain minimum payments or enter into contracts for the sale of assets equal to: (1) $2 million
by June 30, 2007; (2) another $1 million by August 31, 2007; (3) another $1 million by September 30, 2007 and (4) finally, another $1 million by October 31, 2007, with the balance due by November 15, 2007. In
order to facilitate these payments, the Company is prepared to sell virtually any of its units at a fair market value. The Company classifies those units that have satisfied all contractual contingencies as held for sale. To date, the Company has
sold its Williamsburg, Virginia restaurant for $1.2 million; its Cliffhouse and Troy restaurants are under contract to be sold for $0.6 million and $0.18 million, respectively.

At each benchmark date, the Company has provided the Creditors Trust the required payment and/or contractual agreement necessary to satisfy the Forbearance Agreement conditions. The actual units under contract
have changed as some have cancelled, usually due to financial contingencies, SBA requirements and/or issues with liquor license transfers and others have been added, and therefore, the Company has continuing obligations to the Creditors Trust. In
the event that the Companys obligations to the Creditors Trust were not satisfied, the Creditors Trust has remedies which include enforcement of its rights under the Agreement, related Note, and other Documents; these remedies
include initiation of a foreclosure action to recover real and personal property collateral.

On December 28, 2007 the United States Bankruptcy Court
for the Central District of California entered an order terminating the Chapter 11 Reorganization Proceedings of Steakhouse Partners and subsidiaries, reserving jurisdiction over the implementation of the Forbearance Agreement. With this order
Steakhouse Partners and subsidiaries, no longer have to provide periodic reports (either in writing or in person) or pay trustee fees to the United States Bankruptcy Court for the Central District of California. The only exception is that the
Creditors Trust may ask the Court for assistance ,if they believe the implementation of the Forbearance Agreement isnt proceeding as plan.

The
consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and 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 December 31, 2008.

Managements plans include the following:



| |  |  | Restructuring and consolidating its long-term debt position;
| | - |  | ------------------------------------------------------------



| |  |  | Improving the Companys financial performance through local marketing sales generation, cost-reduction, early lease termination for unprofitable units and
restructuring of administrative overhead;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Raising money through sale of long-lived assets and equity financings; and
| | - |  | --------------------------------------------------------------------------



| |  |  | Raising money through sale of other assets as required.
| | - |  | -------------------------------------------------------



F-10



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



NOTE 3 - 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 subsidiary, PSR. 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).

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. 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



F-11



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



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 at least annually or 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. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows, namely individual restaurants. In evaluating long-lived assets for impairment, a number of factors are considered:

a) Restaurants sales trends;

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 a restaurant is determined 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. The fair value was established under fresh-start accounting when the Companys Plan of Reorganization became effective on December 31, 2003. Specifically, the company reached a determination regarding the
valuation for fixed assets as well as valuation for tradenames and intangibles. The excess between these valuations and the fair value derived from fresh-start accounting was booked as goodwill. The goodwill was then allocated to the
Companys reporting units based on the units leasehold valuation to the total at that time. The Company considers each one of our restaurants as an operating unit. Judgments and estimates made by the Company related to the expected useful
lives of long-lived assets are affected by factors such as changes in economic conditions and changes in operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us
to realize a material impairment charge. Management has conducted an impairment analysis of ten underperforming units to determine if the net book value (as of December 31, 2007) of these long-lived assets is realizable. The units selected
were:

Fairfield

Modesto

Raleigh

Sacramento

Taylor

Temecula

Traverse City

Ventura

Cliffhouse

Troy



F-12



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



Because the current carrying values of the selected units is so low (under $100,000 each) and future cash flows from
operations maybe questionable, the Company analyzed the realizable value of each unit at liquidation. Meaning, if we closed the unit and sold outright their respective liquor license and personal property is what the Company would receive. Of course
if the Company sold the business intact (Cliffhouse and Troy), it would receive considerably more than the amount listed. The analysis demonstrated carrying values are realizable and no material impairment occurred.

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 at least 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 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 (See Identifiable Intangible Assets below).

Identifiable Intangible Assets

The identifiable intangible assets consist of the tradenames (Carvers, Hungry Hunters, Hunters Steakhouse, Mountain Jacks, Carvers Creek, Cliffhouse and
Tippecanoe Place) valued at approximately $4.2 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. As part of this review process a write-down of Goodwill and Tradenames was triggered by the sale of
the Williamsburg, VA unit and the closure of the Thousand Oaks, CA unit (see Note 7) $2.079 million and $0.192 million, respectively. The Company also wrote off $0.076 million and $0.068 million of Goodwill and $0.392 million and $0.337 million of
Tradenames allocated to Cliffhouse and Troy, respectively, which are currently classified as discontinued operations.



F-13



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



In accordance with FAS 142, the Company completed its annual test for impairment of the identifiable intangible
assets. As a result of these test the Company determined that these assets were impaired. As a second part of this review, Goodwill was then evaluated and the Company determined it was not impaired. The write-down of Tradenames was
$7.81 million.

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.

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.

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

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective method and therefore has not restated results for prior periods. Under this
transition method, the Company recognizes compensation expense for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123.
Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimate in accordance with the provisions of SFAS 123R.

Prior to the adoption of SFAS 123R on January 1, 2006, the Company recognized stock-based compensation in accordance with APB 25, and provided pro forma disclosure
amounts in accordance with SFAS 148, as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation. Under the fair value recognition provisions of SFAS 123R, the Company recognizes stock-based compensation expense
for those shares expected to vest on a straight-line basis over the requisite service period of the award.

Determining the appropriate fair value model
and calculating the fair value of share-based payment awards requires the input of subjective assumptions. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates, but these
estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, our stock-based compensation expense could be materially different in the future. See
Note 8 to the Consolidated Financial Statements for a further discussion on stock-based compensation.



F-14



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of
the award, which is generally the option vesting term. For the fifty-two weeks ended December 31,

2007 and 2006, total stock-based compensation
expense included in the consolidated statements of operations was approximately $0.25 million $0.57 million, respectively.

The Company has a 100%
valuation allowance recorded against its deferred tax assets; therefore the stock-based compensation has no tax effect on the consolidated statement of operations.

No options were granted during fiscal 2007.

The weighted-average fair value per share of options granted during fiscal 2006 was $0.32, using the
Black-Scholes option-pricing model with the following assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|                        |  | 2006    |  
|Expected volatility     |  | 130.0   | %
|Expected dividend yield |  | 0.0     | %
|Risk-free interest rate |  | 5.0     | %
|Expected life           |  | 6 years |  

Expected Volatility  The volatility factor is based on the Companys historical stock price
fluctuations for a period matching the expected life of the options.



F-15



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



Dividend Yield  The Company has not, and does not, intend to pay dividends.

Risk-free Interest Rate  The Company applies the risk-free interest rate based on the U.S. Treasury yield in effect at the time of the grant.

Expected Term in Years  The expected term is based upon managements consideration of the historical life of options, the vesting period of the option
granted and the contractual period of the option granted.

Forfeitures  Stock-based compensation expense recognized in the consolidated
statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on historical experience. In the Companys pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

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 2007 and 2006 were $0.7 million and $0.7 million, respectively.

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.



F-16



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



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. Options (1,860,000) and Warrants (718,517) 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 September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair
value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of FASB Statement
No. 115 (SFAS 159). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning
of the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of adopting SFAS 159 on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, a replacement of SFAS No. 141, Business Combinations. The provisions of SFAS 141(R) establish principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest acquired and the goodwill acquired. SFAS 141(R) also establishes
disclosure requirements, which will enable users to evaluate the nature and financial effects of a business combination, and applies to business combinations for which the acquisition date is on or after December 15, 2008, and may not be
adopted early. We are currently evaluating the impact of adopting SFAS 141R on our Consolidated Financial Statements.

In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160 (SFAS 160), Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as equity in our Consolidated Financial Statements. Among other requirements, this statement requires that the consolidated net income attributable the parent and the noncontrolling
interest be clearly identified and presented on the face of the consolidated income statement. SFAS 160 is effective for the first fiscal period beginning on or after December 15, 2008. We are required to adopt SFAS 160 in the first
quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our Consolidated Financial Statements.



F-17



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT

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



|                                                   |  |                  |        |                  |   |       
|-------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                                   |  | December 31,2007 |        | December 31,2006
|Leasehold improvements                             |  | $                | 665    |                  | $ | 451   
|Furniture, fixtures, and equipment                 |  |                  | 3,193  |                  |   | 3,129 
|Leased property and buildings under Capital leases |  |                  | 7,777  |                  |   | 7,777 
|                                                   |  |                  |        |                  |   |       
|                                                   |  |                  | 11,635 |                  |   | 11,357
|Less accumulated depreciation and amortization     |  |                  | 4,408  |                  |   | 3,258 
|                                                   |  |                  |        |                  |   |       
|TOTAL                                              |  | $                | 7,227  |                  | $ | 8,099 
|                                                   |  |                  |        |                  |   |       

Depreciation and amortization expense was $1.2 million; $1.1 million for the fiscal years ended December 2007 and
2006, respectively. Depreciation includes amortization of property and buildings under capital leases of approximately $0.4 million and $0.4 million for the fiscal years ended 2007 and 2006, respectively.



F-18



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 5 - NOTES PAYABLE

Notes payable consisted of the following (in thousands):



|                                                                                                                                                                                |  |                  |       |                  |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                                                                                                                                                                                |  | December 31,2007 |       | December 31,2006
|Priority Tax Claim paid over a four-year period from the Effective Date with interest payable at 6% per annum                                                                   |  | $                | 166   |                  | $ | 599  
|Unsecured Claim $1,535 paid over a seven-year period, only interest (6%) to be paid over the first four years and the principal to be
amortized over the remaining three years. |  |                  | 1,504 |                  |   | 1,489
|Unsecured Claims Payments under a $5,030 notes payable, starting in April 2004, will be paid upon satisfaction of obligations                                                   |  |                  | 4,192 |                  |   | 4,855
|Note payable, dated May 17, 2007, bearing interest at 7.25% per annum with an original principal of $273. The note requires nine
monthly payments of $28 through February 2008. |  |                  | 84    |                  |   | 68   
|Note payable to Jack Star, dated May 8, 2007, bearing interest at 8.0% per annum with an original principal of $75, paid over three
years period.                               |  |                  | 62    |                  |   |     
|Note payable to Tippecanoe Place, bearing interest at 9% per annum with an original principal of $71. The note requires monthly payments
of $2 and is due on January 31, 2009   |  |                  | 27    |                  |   | 49   



F-19



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STEAKHOUSE PARTNERS, INC

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 5 - NOTES PAYABLE
(CONTINUED)



|                                                                                                                                                                                                                                                         |  |      |       |      |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                                                                                                                                                                                                                         |  | 2007 |       | 2006
|Secured 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; collateralized by substantially all assets of the company. |  |      |      |      |   | 864  
|                                                                                                                                                                                                                                                         |  |      |       |      |   |      
|                                                                                                                                                                                                                                                         |  |      | 6,035 |      |   | 7,924
|                                                                                                                                                                                                                                                         |  |      |       |      |   |      
|Less current portion                                                                                                                                                                                                                                     |  |      | 4,909 |      |   | 6,696
|                                                                                                                                                                                                                                                         |  |      |       |      |   |      
|LONG-TERM PORTION                                                                                                                                                                                                                                        |  | $    | 1,126 |      | $ | 1,228
|                                                                                                                                                                                                                                                         |  |      |       |      |   |      

Notes payable future payments:



|              |  |      |       |      |   |      |  |      |     |      |   |            |  |       |  |   |  |   |      
|------------- |  | ---- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---------- |  | ----- |  | - |  | - | -----
|              |  | 2008 |       | 2009 |   | 2010 |  | 2011 |     | 2012 |   | Thereafter |  | TOTAL
|Notes Payable |  | $    | 4,909 |      | $ | 537  |  | $    | 554 |      | $ | 35         |  |      |  |  |  | $ | 6,035

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Leases

The Company leases land and building sites for its restaurant operations. These leases have 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 Plan 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 Company.

The
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.

Future minimum lease payments for all leases with initial or remaining terms of one year or more at
December 31, 2007 were as follows (in thousands):



|                                  |  |                 |        |               |   |       
|--------------------------------- |  | --------------- | ------ | ------------- | - | ------
|Year Ending December 31,          |  | OperatingLeases |        | CapitalLeases
|2008                              |  | $               | 2,329  |               | $ | 1,108 
|2009                              |  |                 | 2,186  |               |   | 1,098 
|2010                              |  |                 | 2,078  |               |   | 1,098 
|2011                              |  |                 | 1,654  |               |   | 1,109 
|2012                              |  |                 | 1,589  |               |   | 1,120 
|Thereafter                        |  |                 | 9,496  |               |   | 6,417 
|                                  |  |                 |        |               |   |       
|                                  |  | $               | 19,332 |               | $ | 11,950
|Less amount representing interest |  |                 |        |               |   | 5,171 
|                                  |  |                 |        |               |   |       
|                                  |  |                 |        |               |   | 6,779 
|Less current portion              |  |                 |        |               |   | 370   
|                                  |  |                 |        |               |   |       
|LONG-TERM PORTION                 |  |                 |        |               | $ | 6,409 
|                                  |  |                 |        |               |   |       

For the fiscal years ended 2007, 2006, and 2005, rent expense was $2.6 million, $2.7 million, and $2.6 million
respectively.

Self Insurance

There are two
outstanding general liability claims the Company still has potential liability for, and as of December 31, 2007, the maximum liability could be $0.025 million. The Company believes at this point the claims are fully reserved.

Supplier Concentration

The Company had a major vendor that accounted
for approximately $4.6 million (13%) of the Companys total purchases during 2007, and $5.0 million (11%) of total purchases during 2006. At December 31, 2007, the amount payable to this vendor was approximately $0.14 million.
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.

Sales Tax

The Company owed approximately $2.2 million and $0
million in sales taxes to the California Board of Equalization at December 31, 2007 and 2006, respectively. The Company is working with the Board of Equalization on an acceptable payment plan.



F-20



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

Litigation

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.

On July 11, 2007 the Company executed a settlement agreement and full release with Rewards Network on the remaining balance of their Note Payable and related matters. As
a result of this Agreement, the approximately $0.951 million balance due on the Note was considered void and was then taken into income as a forgiveness of debt.

Employment Agreements

On April 16, 2004, the Companys Board of Directors 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 automatically renewed pursuant to their terms during 2007 and require annual gross salary payments of $200,000, $174,000 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 7  DISCONTINUED OPERATIONS



|                                                                |  |                                      |        |   |                                      |   |      
|--------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | - | -----
|                                                                |  | Fifty-twoweeks EndedDecember 25,2007 |        |   | Fifty-twoweeks EndedDecember 26,2006
|Net Sales                                                       |  | $                                    | 5,251  |   |                                      | $ | 7,492
|Income from Discontinued Operations, net of income tax          |  |                                      | 608    |   |                                      |   | 205  
|Disposal of Goodwill and Tradename For Williamsburg             |  |                                      | (2,079 | ) |                                      |   |     
|Impairment of Goodwill and Tradename for Thousand Oaks          |  |                                      | (192   | ) |                                      |   |     
|Net (loss) income on Discontinued Operations, net of income tax |  | $                                    | (2,535 | ) |                                      | $ | 205  

On July 1, 2007 the Company ceased operations at its Hungry Hunter Thousand Oaks, California location. In
spite of the Companys best efforts, Thousand Oaks continued to be unprofitable. Thousand Oaks had recently experienced very high turnover of key personnel that made it difficult to continue to operate up to the Companys hospitality
standards. With it entering into the slow summer season, the prospects for a turnaround were minimal. However, as a result of the high turnover, no severance was required. The lease for the Thousand Oaks location was due to expire at the beginning
of 2008 and negotiations are in process with the landlord to allow early termination. The total lease liability through termination is approximately $105,000. Goodwill and Tradename were written-down by $0.192 million. Gross Revenues for the 52 week
period ended December 25, 2007 was $0.49 million and the net loss was $0.51 million.



F-21



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

On July 18, 2007 the
Company finalized the sale of its leasehold interest in the Williamsburg, Virginia unit for $1.2 million. Gross revenue for the fifty-two week period ended December 25, 2007 was $1.3 million and net income was $0.08 million. On the Balance
Sheet as of December 25, 2007, excluding Goodwill and Tradename, net assets written-off for Williamsburg was $0.08 million and net capital lease was $0.07 million. Goodwill and Tradename was written-down by $2.08 million. A loss from the sale
of long-term assets for approximately $1.0 million has been recognized. All net proceeds were paid to the Class 4 Creditors Trust pursuant to the terms of the Forbearance Agreement (Exhibit 10-2) executed on June 12, 2007.

In September 2007, the Company received several offers to sell its leasehold interest in the Folsom (Cliffhouse), California unit. All the proposals were in the range of
$0.6 million. The Company is pursuing the purchase agreement, subject to financing contingencies, most probable to close within 12 months. Gross revenue for the fifty-two week period ended December 25, 2007 was $2.6 million and net operating
loss of $6,000. On the Balance Sheet as of December 25, 2007, excluding Goodwill and Tradenames, the net book value for Cliffhouse was $0.03 million. A gain from the sale of long-term assets for approximately $0.05 million will be recognized.
All net proceeds will be paid to the Class 4 Creditors Trust pursuant to the terms of the Forbearance Agreement (Exhibit 10.2) executed on June 12, 2007.

On December 17, 2007, the Company received an offer to sell its leasehold interest in the Troy, Michigan unit. The proposals was for $0.18 million. The Company is pursuing the purchase agreement, subject to financing contingencies,
most probable to close within 12 months. Gross revenue for the fifty-two week period ended December 25, 2007 was $1.0 million and net operating loss of $0.2 million. On the Balance Sheet as of December 25, 2007, excluding Goodwill and
Tradenames, the net book value for Troy was ($0.6) million. A gain from the sale of long-term assets for approximately $0.12 million will be recognized. All net proceeds will be paid to the Class 4 Creditors Trust pursuant to the terms of the
Forbearance Agreement (Exhibit 10.2) executed on June 12, 2007.

Effect of cash flows from discontinued operations are included with cash flows from
continued operations in the condensed consolidated Statements of Cash Flows. Amounts from these discontinued operations included in the Statement of Operations for the year ended December 31, 2006 have been reclassified to conform to the current
year presentation.

NOTE 8 -STOCKHOLDERS EQUITY

Preferred Stock

The 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, preferences, privileges, and restrictions of these shares, including dividend 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, 2007, the Company did not have any preferred shares outstanding.

Common Stock and Warrants

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



F-22



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



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 were reduced to $1.00 per share based on the Companys earnings from recurring operations
before interest payments,

income tax, depreciation and amortization (EBITDA) for Fiscal 2005. The Exercise Price was adjusted as
follows: (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. 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 were reduced to $1.78 per share.

The Company is required to disclose the 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 was decrease to $1.00 per share based on the Companys EBITDA for Fiscal 2005. The April Exercise Price was adjusted as follows: (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 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.



F-23



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



The Company is required to disclose the 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.

On November 3, 2006, the registration statement that the Company was required to file (by September 2005) pursuant to the registration rights agreement we entered
into in January 2005 and April 2005 was declared effective.

NOTE 9  STOCK-BASED COMPENSATION

The 2004 Stock Incentive Plan (the Incentive Plan) was approved by the Companys Board of Directors in April 2004 and by the Companys
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. The number of shares available under the Incentive Plan may automatically increase on January 1 of each year during the term of the Incentive Plan, 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 and expire 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.

At December 31, 2007 there were 140,000 shares available for grant under the 2004 Stock Option Incentive Plan. The Companys Board of
Directors determined not to increase the number of shares authorized for issuance under the Incentive Plan on January 1, 2008. Stock option activity during the periods indicated was as follows:



|                                         |  |                  |   |  |                                         |     
|---------------------------------------- |  | ---------------- | - |  | --------------------------------------- | ----
|                                         |  | Number of shares |   |  | Weighted AverageExercise Price
PerShare
|Options outstanding at December 31, 2005 |  | 1,410,000        |   |  | $                                       | 1.11
|Granted                                  |  | 450,000          |   |  | $                                       | 0.35
|Exercised                                |  |                 |   |  |                                         |    
|Forfeited                                |  |                  |   |  |                                         |     
|Expired                                  |  |                 |   |  |                                         |    
|Options outstanding at December 31, 2006 |  | 1,860,000        |   |  | $                                       | 0.92
|Granted                                  |  |                 |   |  |                                         |    
|Exercised                                |  |                  |   |  |                                         |     
|Forfeited                                |  | (160,000         | ) |  | $                                       | 1.11
|Expired                                  |  |                 |   |  |                                         |    
|                                         |  |                  |   |  |                                         |     
|Options outstanding at December 31, 2007 |  | 1,700,000        |   |  | $                                       | 0.91
|                                         |  |                  |   |  |                                         |     



F-24



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



As of December 31, 2007 and 2006, the number of options exercisable was 1,355,000 and 928,333, respectively, and
the weighted average exercise prices of those options were 1.03 and 1.11, respectively.

The following table sets forth information regarding options
outstanding and exercisable under the Incentive Plan at December 31, 2007:



|                        |  |                     |  |                                           |  |                               |      |                   |           |                               |   |     
|----------------------- |  | ------------------- |  | ----------------------------------------- |  | ----------------------------- | ---- | ----------------- | --------- | ----------------------------- | - | ----
|                        |  | Options Outstanding |  | Options Exercisable                      
|Range ofexercise prices |  | Numberoutstanding   |  | Weighted-averageremainingcontractual life |  | Weighted-averageexerciseprice |      | NumberExercisable |           | Weighted-averageexerciseprice
|$    0.35               |  | 450,000             |  | 8.81                                      |  | $                             | 0.35 |                   | 150,000   |                               | $ | 0.35
|1.11                    |  | 1,250,000           |  | 6.98                                      |  |                               | 1.11 |                   | 1,205,000 |                               |   | 1.11
|                        |  |                     |  |                                           |  |                               |      |                   |           |                               |   |     
|                        |  | 1,700,000           |  | 7.47                                      |  | $                             | 0.91 |                   | 1,355,000 |                               | $ | 1.03
|                        |  |                     |  |                                           |  |                               |      |                   |           |                               |   |     

As of April 2004, the Company granted options to purchase in the aggregate 1,075,000 shares of common stock to
employees and two members of its board of directors 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
$1.544 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 amortized the deferred compensation charge over the
vesting period of the options and expensed approximately $0.388 million during 2005. The Company adopted SFAS 123R effective January 1, 2006 and as a result the remaining unearned deferred compensation was reclassified to additional paid in
capital. The unvested portion is now being accounted for under the provisions of SFAS 123R.

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 123R 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 reliably 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 weighted average fair value per share of these options in 2007 and 2006 was $0.26 and $0.28, respectively, using the Black-Scholes options pricing
model with the following valuation assumptions:



|                        |  |         |   |  |         |  
|----------------------- |  | ------- | - |  | ------- | -
|                        |  | 2007    |   |  | 2006    |  
|Expected volatility     |  | 126.0   | % |  | 130.0   | %
|Expected dividend yield |  | 0.0     | % |  | 0.0     | %
|Risk-free interest rate |  | 4.2     | % |  | 4.6     | %
|Expected life           |  | 8 years |   |  | 9 years |  



F-25



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STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

Consistent with the adoption of
the fair value recognition provisions of SFAS 123R and based on the Companys historical experience, the Company estimates that 30,000 options currently outstanding will be forfeited.

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2007 and 2006 were $0.097 million and $0.08 million respectively. The aggregate
intrinsic value represents the total intrinsic value based on the Companys average stock price of $0.27 and $0.53 during the twelve months ended December 31, 2007 and 2006, respectively.

A summary of the Companys unvested stock options as of December 31, 2007 and 2006 and changes during the twelve months ended December 31, 2007 and 2006,
were as follows:



|                                            |  |                  |   |  |                                         |     
|------------------------------------------- |  | ---------------- | - |  | --------------------------------------- | ----
|                                            |  | Number of Shares |   |  | Weighted AverageExercise Price PerShare
|Unvested stock options at December 31, 2005 |  | 826,668          |   |  | $                                       | 1.11
|Granted                                     |  | 450,000          |   |  | $                                       | 0.35
|Forfeited                                   |  |                 |   |  |                                         |    
|Vested                                      |  | (345,001         | ) |  | $                                       | 1.11
|Unvested stock options at December 31, 2006 |  | 931,667          |   |  | $                                       | 0.74
|                                            |  |                  |   |  |                                         |     
|Granted                                     |  |                 |   |  |                                         |    
|Forfeited                                   |  | (160,000         | ) |  |                                         | 1.11
|Vested                                      |  | (426,667         | ) |  | $                                       | 0.84
|                                            |  |                  |   |  |                                         |     
|Unvested stock options at December 31, 2007 |  | 345,000          |   |  | $                                       | 0.39
|                                            |  |                  |   |  |                                         |     

As of December 31, 2007, there was approximately $0.094 million of total unrecognized compensation expense
related to unvested share-based compensation arrangements granted under the Incentive Plan. The cost is expected to be recognized over a weighted-average period of one and a half years.



F-26



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



NOTE 10 - INCOME TAXES

Significant components of the provision for taxes based on income for the fiscal years ended 2007 and 2006 were as follows (in thousands):



|                           |  |                    |   |      |   |   
|-------------------------- |  | ------------------ | - | ---- | - | --
|                           |  | Fiscal Years Ended
|                           |  | 2007               |   | 2006
|Current                    |  |                    |   |      |   |   
|Federal                    |  | $                  |  |      | $ |  
|State                      |  |                    |  |      |   | 14
|                           |  |                    |   |      |   |   
|                           |  |                    |  |      |   | 14
|                           |  |                    |   |      |   |   
|Deferred                   |  |                    |   |      |   |   
|Federal                    |  |                    |  |      |   |  
|State                      |  |                    |  |      |   |  
|                           |  |                    |   |      |   |   
|                           |  |                    |  |      |   |  
|                           |  |                    |   |      |   |   
|PROVISION FOR INCOME TAXES |  | $                  |  |      | $ | 14
|                           |  |                    |   |      |   |   

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 2007 and 2006 was as follows:



|                                                            |  |                    |    |  |       |   
|----------------------------------------------------------- |  | ------------------ | -- |  | ----- | --
|                                                            |  | Fiscal Years Ended |   
|                                                            |  | 2007               |    |  | 2006  |   
|Income tax provision computed at federal statutory tax rate |  | 34.0               | %  |  | 34.0  | % 
|State taxes, net of federal benefit                         |  | 1.4                |    |  | 5.6   |   
|Increase in valuation reserve and other                     |  | (10.5              | )  |  | (39.7 | ) 
|Impairment of Intangibles                                   |  | (25.0              | )  |  |      |   
|                                                            |  |                    |    |  |       |   
|TOTAL                                                       |  | (0.1               | )% |  | (0.1  | )%
|                                                            |  |                    |    |  |       |   



F-27



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



Significant components of the Companys deferred tax assets and liabilities for federal income taxes consisted
of the following at the fiscal years ended 2007 and 2006 (in thousands):



|                               |  |                    |        |   |      |   |        |  
|------------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | -
|                               |  | Fiscal Years Ended |       
|                               |  | 2007               |        |   | 2006 |  
|Deferred tax assets            |  |                    |        |   |      |   |        |  
|Net operating losses           |  | $                  | 3,232  |   |      | $ | 2,554  |  
|Tax credit carry-forwards      |  |                    | 2,090  |   |      |   | 1,507  |  
|Other                          |  |                    | 2,019  |   |      |   | 1,972  |  
|                               |  |                    |        |   |      |   |        |  
|Total deferred tax assets      |  |                    | 7,341  |   |      |   | 6,033  |  
|                               |  |                    |        |   |      |   |        |  
|Deferred tax liabilities       |  |                    |        |   |      |   |        |  
|Property, plant, and equipment |  |                    | (1,917 | ) |      |   | (1,975 | )
|Other                          |  |                    | (270   | ) |      |   | (216   | )
|                               |  |                    |        |   |      |   |        |  
|Total deferred tax liabilities |  |                    | (2,187 | ) |      |   | (2,191 | )
|                               |  |                    |        |   |      |   |        |  
|                               |  |                    | 5,154  |   |      |   | 3,842  |  
|Valuation allowance            |  |                    | (5,154 | ) |      |   | (3,842 | )
|                               |  |                    |        |   |      |   |        |  
|NET DEFERRED TAX LIABILITY     |  | $                  |       |   |      | $ |       |  
|                               |  |                    |        |   |      |   |        |  

The Company has net operating loss carry-forwards of approximately $7.2 million for federal and $8.7 million for
state, which will expire through 2026.

In addition, the Company has Federal credit carry-forwards of about $2.1 million, which will expire through 2026.

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48), for January 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement 109, Accounting for
Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on our evaluation, we have concluded that there
are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 2002, 2003, 2004, 2005 and 2006, the tax years which remain subject to examination by major
tax jurisdictions as of December 25, 2007.



F-28



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments
historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as general and administrative expense.

The Company does not expect changes in the amount of unrecognized tax benefits in the next 12 months.

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction and various states. The Company is no longer subject to income tax examinations by tax authorities in its major
jurisdictions as follows:



|                 |  |                                  |  |  |  | 
|---------------- |  | -------------------------------- |  |  |  | 
|Tax Jurisdiction |  | Years No Longer Subject to Audit |  |  |  | 
|                 |  |                                  | 
|US Federal       |  | 2002 and Before                  |  |  |  | 
|                 |  |                                  | 
|California       |  | 2001 and Before                  |  |  |  | 
|                 |  |                                  | 
|Arizona          |  | 2001 and Before                  |  |  |  | 
|                 |  |                                  | 
|Illinois         |  | 2002 and Before                  |  |  |  | 
|                 |  |                                  | 
|Indiana          |  | 2002 and Before                  |  |  |  | 
|                 |  |                                  | 
|Michigan         |  | 2001 and Before                  |  |  |  | 
|                 |  |                                  | 
|North Carolina   |  | 2002 and Before                  |  |  |  | 
|                 |  |                                  | 
|Ohio             |  | 2002 and Before                  |  |  |  | 
|                 |  |                                  | 
|Utah             |  | 2002 and Before                  |  |  |  | 
|                 |  |                                  | 
|Virginia         |  | 2002 and Before                  |  |  |  | 



F-29



---

STEAKHOUSE PARTNERS, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007



NOTE 11- SUBSEQUENT EVENTS (Unaudited)

On December 28, 2007 the United States Bankruptcy Court for the Central District of California entered an order terminating the Chapter 11 Reorganization Proceedings of Steakhouse Partners and subsidiaries,
reserving jurisdiction over the implementation of the Forbearance Agreement.

On January 31, 2008 the Company and Rewards Network jointly terminated
the Guest Connect program per the terms of the settlement agreement. On July 11, 2007 the Company executed a settlement agreement and full release with Rewards Network on the remaining balance of their Note Payable and related matters. Under
terms of the agreement, the approximate $0.9 million balance due on the Note was considered void and Rewards Network paid $75,000 in the form of a credit on current Guest Connect program, paid $50,000 legal fees and eliminated any and all Food and
Beverage amounts due. In return the Company brought current (to June 30, 2007) all Guest Connect related fees (minus the credit), remained in the Guest Connect program until the end of January, 2008 and released any claims it may have as a
result of the summary judgment in the class action lawsuit entitled Bistro Executive, Inc. vs. Rewards Network, Inc.

On February 28, 2008 the
lease on the Companys Taylor, Michigan location expired and the landlord was duly notified that the Company would not renew. For the fifty-two weeks ended December 25, 2007 the Taylor location had gross revenue of $1.03 million and a net
loss of $0.14 million.



F-30