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                                  UNITED STATES
                        SECURITIES & EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

    [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

          For the transition period from ___________ to ______________

                         COMMISSION FILE NUMBER: 0-28234


                            MEXICAN RESTAURANTS, INC.
             (Exact name of registrant as specified in its charter)


                        TEXAS                                76-0493269
           (State or other jurisdiction of                 (IRS Employer
            incorporation or organization)              Identification Number)

            1135 EDGEBROOK, HOUSTON, TEXAS                   77034-1899
       (Address of Principal Executive Offices)              (Zip Code)

        Registrant's telephone number, including area code: 713/943-7574

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

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of class)


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.   Yes  X       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. [ ]

The aggregate market value of Common Stock held by non-affiliates of the
registrant, based on the sale trade price of the Common Stock as reported by the
Nasdaq National Market on April 11, 2001 was $3,656,873. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant. Number of shares outstanding of each of the
issuer's classes of common stock, as of April 11, 2001: 3,522,905 shares of
common stock, par value $.01.


                       DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive proxy statement in connection with the Annual Meeting
of Shareholders to be held May 22, 2001, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
report.

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                                     PART 1

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements in this Form 10-K under "Item 1. Business", "Item 3.
Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other facts which may cause the actual results,
performance or achievements of Mexican Restaurants, Inc. (the "Company"), its
area developers, franchisees and restaurants to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; competition; success of operating
initiatives; development and operating costs; area developers' adherence to
development schedules; advertising and promotional efforts; brand awareness;
adverse publicity; acceptance of new product offerings; availability, locations
and terms of sites for store development; changes in business strategy or
development plans; quality of management; availability, terms and development of
capital; business abilities and judgment of personnel; availability of qualified
personnel; food, labor and employee benefit costs; changes in, or the failure to
comply with government regulations; regional weather conditions; construction
schedules; and other factors referenced in the Form 10-K. The use in this Form
10-K of such words as "believes", "anticipates", "expects", "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. The success of the
Company is dependent on the efforts of the Company, its employees, its area
developers, and franchisees and the manner in which they operate and develop
stores.

ITEM 1. BUSINESS

GENERAL

         Mexican Restaurants, Inc. (formerly Casa Ole Restaurants, Inc., the
"Company") was incorporated under the laws of the State of Texas in February
1996, and had its initial public offering in April 1996. The Company operates as
a holding company and conducts substantially all of its operations through its
subsidiaries. All references to the Company include the Company and its
subsidiaries, unless otherwise stated.

         The Company operates and franchises Mexican-theme restaurants featuring
various elements associated with the casual dining experience, under the names
Casa Ole, Monterey's Tex-Mex Cafe, Monterey's Little Mexico, Tortuga Coastal
Cantina and La Senorita. The Casa Ole, Monterey, Tortuga and La Senorita
concepts have been in business for 29, 46, 7 and 22 years, respectively. Today
the Company operates 53 restaurants and franchises 35 restaurants in various
communities across Texas, Louisiana, Oklahoma, Idaho and Michigan. The Casa
Ole', Monterey and La Senorita restaurants are designed to appeal to a broad
range of customers, and are located primarily in small and medium-sized
communities and middle-income areas of larger markets. The Tortuga Coastal
Cantina restaurants also appeal to a broad range of customers and are primarily
located in Houston suburban markets. The restaurants offer fresh, quality food,
affordable prices, friendly service and comfortable surroundings. Menus feature
a variety of traditional Mexican and Tex-Mex selections; complemented by the
Company's own original Mexican-based recipes designed to have broad appeal. The
Company believes that the established success of the Company in existing
markets, its focus on middle-income customers, and the skills of its management
team provide significant opportunities to realize the value inherent in the
Mexican restaurant market, increase revenues in existing markets, and through
opportunistic acquisitions, penetrate new markets.

STRATEGY AND CONCEPT

         The Company's objective is to be perceived as a value leader in the
Mexican segment of the full-service casual dining marketplace. To accomplish
this objective, the Company has developed strategies designed to achieve and
maintain high levels of customer loyalty, frequent patronage and profitability.
The key strategic elements are:

         o        Offering consistent, high-quality, original recipe Mexican
                  menu items that reflect both national and local taste
                  preferences;

         o        Pricing menu offerings at levels below many family and
                  casual-dining restaurant concepts;

         o        Selecting, training and motivating its employees to enhance
                  customer dining experiences and the friendly casual atmosphere
                  of its restaurants;

         o        Providing customers with the friendly, attentive service
                  typically associated with more expensive casual-dining
                  experiences; and

         o        Reinforcing the perceived value of the dining experience with
                  a comfortable and inviting Mexican decor.


         MENU. The Company's restaurants offer high-quality products with a
distinctive, yet mild taste profile with mainstream appeal. Fresh ingredients
are a critical recipe component, and the majority of menu items are prepared
daily in the kitchen of each restaurant from original recipes.

         The menus feature a wide variety of entrees including enchiladas,
combination platters, burritos, fajitas, coastal seafood and other house
specialties. The menu also includes soup, salads, appetizers and desserts. From
time to time the



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Company also introduces new dishes designed to keep the menus fresh. Alcoholic
beverages are served as a complement to meals and represent a range of less than
5% of sales at its more family oriented locations, and up to 20% in its more
casual dining locations. At Company-owned restaurants the dinner menu entrees
presently range in price from $4.49 to $14.95, with most items priced between
$5.95 and $8.95. Lunch prices at most Company-owned restaurants presently range
from $4.45 to $8.95.

         ATMOSPHERE AND LAYOUT. The Company emphasizes an attractive interior
and exterior design for each of its restaurants. The typical restaurant has an
inviting and interesting Mexican exterior. The interior decor is comfortable
Mexican in appearance to reinforce the perceived value of the dining experience.
Stucco, tile floors, carpets, plants and a variety of paint colors are integral
features of each restaurant's decor. These decor features are incorporated in a
floor plan designed to provide a comfortable atmosphere. The Company's
restaurant designs are sufficiently flexible to accommodate a variety of
available sites and development opportunities, such as malls, end-caps of strip
shopping centers and free standing buildings, including conversions. The
physical facility is also designed to serve a high volume of customers in a
relatively limited period of time. The Company's restaurants typically range in
size from approximately 4,000 to 5,600 square feet, with an average of
approximately 4,500 square feet and a seating capacity of approximately 180.

GROWTH STRATEGY

         The Company believes that the unit economics of the various restaurant
concepts of the Company, as well as their value orientation and focus on middle
income customers, provide significant opportunities for expansion. The Company's
strategy to capitalize on these expansion opportunities is comprised of three
key elements:

         IMPROVE SAME RESTAURANT SALES AND PROFITS. The Company's first growth
objective is to improve the sales and controllable income of existing
restaurants. This is accomplished through an emphasis on restaurant operations,
coupled with marketing, purchasing and other organizational efficiencies (see
"Restaurant Operations" below).

         INCREASED PENETRATION OF EXISTING MARKETS. The Company's second growth
objective is to increase the number of restaurants in existing Designated Market
Areas ("DMAs") and expansion into contiguous new markets. The DMA concept is a
mapping tool developed by the A.C. Nielsen Co. that measures the size of a
particular market by reference to communities included within a common
television market. The Company's objective in increasing the density of
Company-owned restaurants within existing markets is to improve operating
efficiencies in such markets and to realize improved overhead absorption. In
addition, the Company believes that increasing the density of restaurants in
both Company-owned and franchised markets will assist it in achieving effective
media penetration while maintaining or reducing advertising costs as a
percentage of revenues in the relevant markets. The Company believes that
careful and prudent site selection within existing markets will avoid
cannibalization of the sales base of existing restaurants.

         In implementing its new unit expansion strategy, the Company may use a
combination of franchised and Company-owned restaurants. The number of such
restaurants developed in any period will vary. The Company believes that a mix
of franchised and Company-owned restaurants would enable it to realize
accelerated expansion opportunities, while maintaining majority or sole
ownership of a significant number of restaurants. Generally the Company does not
anticipate opening franchised and Company-owned restaurants within the same
market. In seeking franchisees, the Company will continue to primarily target
experienced multi-unit restaurant operators with knowledge of a particular
geographic market and financial resources sufficient to execute the Company's
development strategy.

         In adding to its Company-owned restaurants, the Company anticipates it
will continue to selectively acquire existing franchised restaurants. During
fiscal 1999, the Company acquired a franchised restaurant in San Marcos, Texas
and converted that restaurant into a Tortuga Coastal Cantina.

         SELECTIVE ACQUISITIONS. The Company's third growth objective is to seek
selective acquisitions that meet its growth goals of increasing penetration in
existing markets and/or entering new markets. Following this strategic approach
to growth the Company purchased 100% of the outstanding stock of Monterey's
Acquisition Corp. ("MAC") on July 2, 1997. The Company purchased the shares of
common stock of MAC for $4.0 million, paid off outstanding debt and accrued
interest totaling $7.1 million and funded various other agreed-upon items
approximating $500,000. At the time of the acquisition, MAC owned and operated
26 restaurants in Texas and Oklahoma.

         On April 30, 1999, the Company purchased 100% of the outstanding stock
of La Senorita Restaurants, a Mexican restaurant chain operated in the State of
Michigan. The Company purchased the shares of common stock of La Senorita for
$4.0 million. The transaction was funded with the Company's revolving line of
credit with Bank of America. La Senorita operates five company-owned
restaurants, and has four franchise restaurants. One of the franchise
restaurants is owned by a general partnership in which the parent company has a
17.5% limited interest.

         The Company does not currently anticipate building any new restaurants
or making any acquisitions during fiscal year 2001.

SITE SELECTION

         Execution of the expansion strategy requires locating, evaluating and
securing adequate sites. Senior management devotes significant time and
resources to analyzing each prospective site. Senior management has also created
and utilizes a site selection committee, which reviews and approves each site to
be developed. In addition, the Company conducts



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customer surveys to precisely define the demographic profile of the customer
base of each of the Company's restaurant concepts. The Company's site selection
criteria focus on:

         1)   matching the customer profile of the respective restaurant
              concept to the profile of the population of the target local
              market;

         2)   easy site accessibility, adequate parking, and prominent
              visibility of each site under consideration;

         3)   the site's strategic location within the marketplace;

         4)   the site's proximity to the major concentration of shopping
              centers within the market;

         5)   the site's proximity to a large employment base to support the
              lunch segment; and

         6)   the impact of competition from other restaurants in the
              market.


         The Company believes that a sufficient number of suitable sites are
available for Company and franchise development in existing markets. Based on
its current planning and market information, the Company does not plan to open
additional restaurants in fiscal year 2001, but believes that its franchisees
will open one additional restaurant. The anticipated total investment for a
4,200 to 5,600 square foot restaurant, including land, building, equipment,
signage, site work, furniture, fixtures and decor ranges between $1.4 and $2.1
million (including capitalized lease value). Additionally, training and other
pre-opening costs are anticipated to approximate $50,000 per location. The cost
of developing and operating a Company restaurant can vary based upon
fluctuations in land acquisition and site improvement costs, construction costs
in various markets, the size of the particular restaurant and other factors.
Although the Company anticipates that development costs associated with
near-term restaurants will range between $1.4 and $2.1 million, there can be no
assurance of this. Where possible, the Company uses build to suit, lease
conversion or sale and leaseback transactions to limit its cash investment to
approximately $500,000 per location.

         The Company's ability to open the number of restaurants contemplated by
its expansion plans is subject to certain risks. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors."

RESTAURANT OPERATIONS

         MANAGEMENT AND EMPLOYEES. The management staff of each restaurant is
responsible for managing the restaurant's operations. Each Company-owned
restaurant operates with a general manager, one or more assistant managers and a
kitchen manager or a chef. Including managers, restaurants have an average of 50
full-time and part-time employees. The Company historically has spent
considerable effort developing its employees, allowing it to promote from
within. As an additional incentive to its restaurant management personnel, the
Company has a bonus plan in which restaurant managers can receive monthly
bonuses based on a percentage of their restaurants' controllable profits.

         The Company's regional supervisors, who report directly to the
Company's Directors of Operation, offer support to the store managers. Each
supervisor is eligible for a monthly bonus based on a percentage of controllable
profits of the stores under their control.

         As of December 31, 2000, the Company employed approximately 2,350
people, of whom 2,317 were restaurant personnel at the Company-owned restaurants
and 33 were corporate personnel. The Company considers its employee relations to
be good. Most employees, other than restaurant management and corporate
personnel, are paid on an hourly basis. The Company's employees are not covered
by a collective bargaining agreement.

         TRAINING AND QUALITY CONTROL. The Company requires its hourly employees
to participate in a formal training program carried out at the individual
restaurants, with the on-the-job training program varying from three days to two
weeks based upon the applicable position. Managers of both Company-owned and
franchised restaurants are trained at one of the Company's specified training
stores by that store's general manager and then certified upon completion of a
four to six week program that encompasses all aspects of restaurant operations
as well as personnel management and policy and procedures, with special emphasis
on quality control and customer relations. To evaluate ongoing employee service
and provide rewards to employees, the Company employs a "mystery shopper"
program which consists of two anonymous visits per month per restaurant. The
Company's franchise agreement requires each franchised restaurant to employ a
general manager who has completed the Company's training program at one of the
Company's specified training stores. Compliance with the Company's operational
standards is monitored for both Company-owned and franchised restaurants by
random, on-site visits by corporate management, regular inspections by regional
supervisors, the ongoing direction of a corporate quality control manager and
the mystery shopper program.

         MARKETING AND ADVERTISING. The Company believes that when media
penetration is achieved in a particular market, investments in radio and
television advertising can generate significant increases in revenues in a
cost-effective manner. During fiscal 2000, the Company spent approximately 3.7%
of restaurant revenues on various forms of advertising. Besides radio and
television, the Company makes use of in-store promotions, involvement in
community activities, and customer word-of-mouth to maintain their performance.
Achieving effective media penetration in each market which it enters is a key
component of the Company's expansion strategy.



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         PURCHASING. The Company strives to obtain consistent quality products
at competitive prices from reliable sources. The Company works with its
distributors and other purveyors to ensure the integrity, quality, price and
availability of the various raw ingredients. The Company researches and tests
various products in an effort to maintain quality and to be responsive to
changing customer tastes. The Company operates a centralized purchasing system
that is utilized by all of the Company-owned restaurants and is available to the
Company's franchisees. Under the Company's franchise agreement, if a franchisee
wishes to purchase from a supplier other than a currently approved supplier, it
must first submit the products and supplier to the Company for approval.
Regardless of the purchase source, all purchases must comply with the Company's
product specifications. The Company's ability to maintain consistent product
quality throughout its operations depends upon acquiring specified food products
and supplies from reliable sources. Management believes that all essential food
and beverage products are available from other qualified sources at competitive
prices.

FRANCHISING

         The Company currently has 17 franchisees operating a total of 35
restaurants. No new franchise restaurants were opened and none were closed
during fiscal year 2000. As of April 11, 2001, two franchise restaurant
locations are under consideration (one Tortuga Coastal Cantina and one Casa
Ole). Franchising allows the Company to expand the number of stores and
penetrate markets more quickly and with less capital than developing
Company-owned stores. Franchisees are selected on the basis of various factors,
including business background, experience and financial resources. In seeking
new franchisees, the Company targets experienced multi-unit restaurant operators
with knowledge of a particular geographic market and financial resources
sufficient to execute the Company's development schedule. Under the current
franchise agreement, franchisees are required to operate their stores in
compliance with the Company's policies, standards and specifications, including
matters such as menu items, ingredients, materials, supplies, services,
fixtures, furnishings, decor and signs. In addition, franchisees are required to
purchase, directly from the Company or its authorized agent, spice packages for
use in the preparation of certain menu items, and must purchase certain other
items from approved suppliers unless written consent is received from the
Company.

         FRANCHISE AGREEMENTS. The Company enters into a franchise agreement
with each franchisee which grants the franchisee the right to develop a single
store within a specific territory at a site approved by the Company. The
franchisee then has limited exclusive rights within the territory. Under the
Company's current standard franchise agreement, the franchisee is required to
pay a franchise fee of $25,000 per restaurant. The current standard franchise
agreement provides for an initial term of 15 years (with a limited renewal
option) and payment of a royalty of 3% to 5% of gross sales. The termination
dates of the Company's franchise agreements with its existing franchisees
currently range from 2001 to 2015. During fiscal year 2000, the Company modified
its franchise agreement to accommodate the Tortuga Coastal Cantina concept.

         Franchise agreements are not assignable without the prior written
consent of the Company. Also, the Company retains rights of first refusal with
respect to any proposed sales by the franchisee. Franchisees are not permitted
to compete with the Company during the term of the franchise agreement and for a
limited time, and in a limited area, after the term of the franchise agreement.
The enforceability and permitted scope of such noncompetition provisions varies
from state to state. The Company has the right to terminate any franchise
agreement for certain specific reasons, including a franchisee's failure to make
payments when due or failure to adhere to the Company's policies and standards.
Many state franchise laws, however, limit the ability of a franchisor to
terminate or refuse to renew a franchise. See "Item 1. Business--Government
Regulation."

         Prior forms of the Company's franchise agreements may contain terms
that vary from those described above, including with respect to the payment or
nonpayment of advertising fees and royalties, the term of the agreement, and
assignability, noncompetition and termination provisions.

         FRANCHISEE TRAINING AND SUPPORT. Under the current franchise agreement,
each franchisee (or if the franchisee is a corporation, a manager designated by
the franchisee) is required to personally participate in the operation of the
franchise. Before opening the franchisee's business to the public, the Company
provides training at its approved training facility for each franchisee's
general manager, assistant manager and chef. The Company recommends that the
franchisee, if the franchisee is other than the general manager, or if a
corporation, its chief operating officer, attend such training. The Company also
provides a training team to assist the franchisee in opening its restaurant. The
team, supervised by the Director of Training, will assist and advise the
franchisee and/or its manager in all phases of the opening operation for a seven
to fourteen day period. The formal training program required of hourly employees
and management, along with continued oversight by the Company's quality control
manager, promotes consistency of operations.

         AREA DEVELOPERS. The area development agreement is an extension of the
standard franchise agreement. The area development agreement provides area
developers with the right to execute more than one franchise agreement in
accordance with a fixed development schedule. Restaurants established under
these agreements must be located in a specific territory in which the area
developer will have limited exclusive rights. Area developers pay an initial
development fee generally equal to the total initial franchise fee for the first
franchise agreement to be executed pursuant to the development schedule plus 10%
of the initial franchise fee for each additional franchise agreement to be
executed pursuant to the development schedule. Generally the initial development
fee is not refundable, but will be applied in the proportions described above to
the initial franchise fee payable for each franchise agreement executed pursuant
to the development schedule. New area developers will pay monthly royalties for
all restaurants established under such franchise agreements on a declining scale
generally ranging from 5% of gross sales for the initial restaurant to 3% of
gross sales for the fourth restaurant and thereafter as additional restaurants
are developed. Area development agreements are not assignable without the prior
written consent of



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the Company. The Company will retain rights of first refusal with respect to
proposed sales of restaurants by the area developers. Area developers are not
permitted to compete with the Company. If an area developer fails to meet its
development schedule obligations, the Company can, among other things, terminate
the area development agreement or modify the territory in the agreement. The
Company is not currently seeking new area developers. The Company currently has
one area developer operating a total of eleven restaurants.

COMPETITION

         The restaurant industry is intensely competitive. Competition is based
upon a number of factors, including concept, price, location, quality and
service. The Company competes against a broad range of other family dining
concepts, including those focusing on various other types of ethnic food, as
well as local restaurants in its various markets. The Company also competes
against other quick service and casual dining concepts within the Mexican and
Tex-Mex food segment. Many of the Company's competitors are well established and
have substantially greater financial and other resources than the Company. Some
of the Company's competitors may be better established in markets where the
Company's restaurants are or may be located. The Company believes that it
competes with franchisors of other restaurants and various other concepts for
franchisees.

         The restaurant business is affected by many factors, including changes
in consumer tastes and eating habits, national, regional or local economic and
real estate conditions, demographic trends, weather, traffic patterns, and the
type, number and location of competing restaurants. In addition, factors such as
inflation, increased food, labor and benefit costs, and the availability of
experienced management and hourly employees may adversely affect the restaurant
industry in general and the Company's restaurants in particular.

GOVERNMENT REGULATION

         Each Company restaurant is subject to regulation by federal agencies
and to licensing and regulation by state and local health, sanitation, safety,
fire and other departments relating to the development and operation of
restaurants. These include regulations pertaining to the environmental, building
and zoning requirements in the preparation and sale of food. The Company is also
subject to laws governing the service of alcohol and its relationship with
employees, including minimum wage requirements, overtime, working conditions and
immigration requirements. Difficulties or failures in obtaining the required
construction and operating licenses, permits or approvals could delay or prevent
the opening of a specific new restaurant. The Company believes that it is
operating in substantial compliance with applicable laws and regulations that
govern its operations.

         Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county or
municipal authorities, for a license or permit to sell alcoholic beverages on
the premises and to provide service for extended hours. Typically licenses must
be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the
Company's restaurants, including minimum age of patrons drinking alcoholic
beverages and employees serving alcoholic beverages, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The Company is also subject to "dramshop"
statutes which generally provide a person injured by an intoxicated person the
right to recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance.
Additionally, within thirty days of employment by the Company, each Texas
employee of the Company who serves alcoholic beverages is required to attend an
alcoholic seller training program that has been approved by the Texas Alcoholic
Beverage Commission and endorsed by the Texas Restaurant Association and which
endeavors to educate the server to detect and prevent overservice of the
Company's customers.

         In connection with the sale of franchises, the Company is subject to
the United States Federal Trade Commission rules and regulations and state laws
that regulate the offer and sale of franchises and business opportunities. The
Company is also subject to laws that regulate certain aspects of such
relationships. Although certain potential compliance issues were historically
identified, the Company has had no claims with respect to its programs and,
based on the nature of the potential compliance issues identified, does not
believe that compliance issues associated with its historical franchising
programs will have a material adverse effect on its results of operations or
financial condition. The Company believes that it is operating in substantial
compliance with applicable laws and regulations that govern franchising
programs.

         The Company is subject to various local, state and federal laws
regulating the discharge of pollutants into the environment. The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations. The Company conducts
environmental audits of each proposed restaurant site in order to determine
whether there is any evidence of contamination prior to purchasing or entering
into a lease with respect to such site. To date the Company's operations have
not been materially adversely affected by the cost of compliance with applicable
environmental laws.

TRADEMARKS, SERVICE MARKS AND TRADE DRESS

         The Company believes its trademark, service marks and trade dress have
significant value and are important to its marketing efforts. It has registered
the trademarks for "Casa Ole", "Casa Ole Mexican Restaurant", "Monterey's
Tex-Mex Cafe", "Monterey's Little Mexico", "Tortuga Cantina" and "La Senorita"
with the U.S. Patent Office.



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ITEM 2. PROPERTIES

         The Company's executive offices are located in approximately 7,200
square feet of office space in Houston, Texas. The offices are currently leased
by the Company from CO Properties No. 3, a Texas partnership owned by Larry N.
Forehand and Michael D. Domec, under a gross lease (where the landlord pays
utilities and property taxes) expiring in December 2004, with rental payments of
$7,868 per month. See "Notes to Consolidated Financial Statements--Related Party
Transactions." The Company believes that its properties are suitable and
adequate for its operations.

         The Company owns the land and buildings on three restaurant locations
and the building and improvements on two restaurant locations situated on ground
leases with the balance of locations on leased sites. One of the owned
restaurants is closed and has a sale contract pending. Three of the owned
restaurants were closed in previous years and have been leased to either
franchisees or to third parties. The Company also owns a pad site in Phoenix,
Arizona that is for sale. Real estate leased for Company-owned restaurants is
typically leased under triple net leases that require the Company to pay real
estate taxes and utilities, to maintain insurance with respect to the premises
and in certain cases to pay contingent rent based on sales in excess of
specified amounts. Generally the non-mall locations for the Company-owned
restaurants have initial terms of 10 to 20 years with renewal options.

RESTAURANT LOCATIONS

         At December 31, 2000, the Company's system of Company-operated and
franchised restaurants included 88 restaurants. As of such date, the Company
operated and franchised Casa Ole restaurants in the States of Texas and
Louisiana. As of such date, the Company operated Monterey's Tex-Mex Cafe and
Monterey's Little Mexico restaurants in the States of Texas, Oklahoma and Idaho,
and Tortuga Coastal Cantina restaurants in the State of Texas. The Company also
operated and franchised La Senorita restaurants in the State of Michigan. The
Company's portfolio of restaurants is summarized below:

<TABLE>
<S>                        <C>                                   <C>
                  CASA OLE
                           Company-operated                       16 Leased

                           Franchised                             31
                                                                 ---

                                    TOTAL                         47
                                                                 ===

                  MONTEREY'S TEX-MEX CAFE
                           Company-operated                        5 Leased

                                    TOTAL                          5
                                                                 ===

                  MONTEREY'S LITTLE MEXICO
                           Company-operated                        1 Owned
                                                                  16 Leased

                                    TOTAL                         17
                                                                 ===

                  TORTUGA COASTAL CANTINA
                           Company-operated                       10 Leased

                                    TOTAL                         10
                                                                 ===

                  LA SENORITA
                           Company-operated                        5 Leased
                           Franchised                              4
                                                                 ---

                                    TOTAL                          9
                                                                 ===


                                    GRAND TOTAL                   88
                                                                 ===
</TABLE>


                                       7
<PAGE>   8


ITEM 3. LEGAL PROCEEDINGS

         Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.

         From time to time the Company is party to certain legal proceedings
arising in the ordinary course of business. Although the amount of any liability
that could arise with respect to these proceedings cannot be predicted
accurately, in the opinion of the Company, any liability that might result from
existing claims will not have a material adverse effect on the Company or its
business. Nevertheless, a future lawsuit or claim could result in a material
adverse effect on the Company or its business.


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

         No matter was submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 31, 2000.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

         The Company's Common Stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol "CASA." The following table sets forth
the range of quarterly high and low closing sale prices of the Company's Common
Stock on the Nasdaq National Market during each of the Company's fiscal quarters
since December 29, 1997.


<TABLE>
<CAPTION>

                                                              HIGH            LOW
                                                              ----            ---
<S>                                                        <C>             <C>
FISCAL YEAR 1998:
     First Quarter (ended March 29, 1998) ........           4 7/8           3 3/4
     Second Quarter (ended June 28, 1998) ........           5 7/8           4 3/4
     Third Quarter (ended September 27, 1998) ....           5 3/8               4
     Fourth Quarter (ended January 3, 1998) ......          5 1/16               4

FISCAL YEAR 1999:
     First Quarter (through April 4, 1999) .......           4 1/2          3 7/16
     Second Quarter (ended July 4, 1999) .........          4 9/16           3 1/4
     Third Quarter (ended October 3, 1999) .......         4 15/16           3 3/4
     Fourth Quarter (ended January 2, 2000) ......          4 7/16           3 1/4

FISCAL YEAR 2000:
     First Quarter (ended April 2, 2000) .........         3 13/16          3 3/16
     Second Quarter (ended July 2, 2000) .........               4         2 13/16
     Third Quarter (ended October 1, 2000) .......           3 7/8           2 3/8
     Fourth Quarter (ended December 31, 2000) ....           2 7/8           1 3/4

FISCAL YEAR 2001:
     First Quarter (ended April 1, 2001) .........          3 3/16           2 1/4
</TABLE>


         As of April 11, 2001, the Company estimates that there were
approximately 800 beneficial owners of the Company's Common Stock, represented
by approximately 66 holders of record.

         Since its 1996 initial public offering, the Company has not paid cash
dividends on its Common Stock. The Company intends to retain earnings of the
Company to support operations and to finance expansion and does not intend to
pay cash dividends on the Common Stock for the foreseeable future. The payment
of cash dividends in the future will be at the discretion of the Board of
Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's current credit
agreement prohibits the payment of any cash dividends.



                                       8
<PAGE>   9


ITEM 6.  SELECTED FINANCIAL DATA

         Balance sheet data as of December 27, 1996, December 28, 1997, January
3, 1999, January 2, 2000 and December 31, 2000, and income statement data for
the fiscal years then ended have been derived from consolidated financial
statements audited by KPMG LLP, independent certified public accountants. The
selected financial data set forth below should be read in conjunction with and
are qualified by reference to the Consolidated Financial Statements and the
Notes thereto included in Item 8. hereof and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7.
hereof.


<TABLE>
<CAPTION>

                                                                                 FISCAL YEARS
                                                                                 ------------
                                                        1996          1997          1998(1)         1999           2000
                                                      --------      --------       --------       --------       --------
                                                              (Dollars in thousands, except per share amounts)
<S>                                                   <C>           <C>            <C>            <C>            <C>
INCOME STATEMENT DATA:
Revenues:
  Restaurant sales .............................      $ 17,574      $ 34,301       $ 47,000       $ 55,997       $ 61,834
  Franchise fees, royalties and other ..........           891         1,029          1,120          1,469          1,362
                                                      --------      --------       --------       --------       --------

         Total revenues ........................        18,465        35,330         48,120         57,466         63,196
                                                      --------      --------       --------       --------       --------
Costs and expenses:
  Cost of sales ................................         4,208         8,954         12,899         15,774         17,402
  Restaurant operating expenses ................         9,609        19,231         25,611         31,448         35,796
  General and administrative ...................         2,081         3,632          4,429          5,191          5,548
  Depreciation and amortization ................           208         1,245          1,654          2,003          2,227
  Restaurant closure costs .....................            --           432             --          1,493             --
                                                      --------      --------       --------       --------       --------

         Total costs and expenses ..............        16,106        33,494         44,593         55,909         60,973
                                                      --------      --------       --------       --------       --------

Infrequently occurring income
  items, net ...................................            --            --             --            437             --
                                                      --------      --------       --------       --------       --------

Operating income ...............................         2,359         1,836          3,527          1,994          2,223
Other income (expense) .........................           367          (171)          (385)          (534)          (885)
                                                      --------      --------       --------       --------       --------

Income before income tax expense ...............      $  2,726      $  1,665       $  3,142       $  1,460       $  1,338
                                                      ========      ========       ========       ========       ========

Extraordinary item..............................      $     --      $     --       $     40       $     --       $     --
                                                      ========      ========       ========       ========       ========

Net income .....................................      $  1,868      $  1,015       $  1,973       $    833       $    867
                                                      ========      ========       ========       ========       ========

Net income per share (diluted) .................      $   0.53      $   0.28       $   0.55       $   0.23       $   0.24
                                                      ========      ========       ========       ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                 FISCAL YEARS
                                                                                 ------------
                                                        1996          1997          1998(1)         1999           2000
                                                     --------      --------       --------       --------       --------
                                                                           (Dollars in thousands)
<S>                                                  <C>           <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Working capital (deficit) ......................      $  6,857      $ (2,023)      $ (1,047)      $ (1,484)      $ (1,920)
Total assets ...................................      $ 12,146      $ 26,508       $ 23,421       $ 31,043       $ 31,509
Long-term debt, less
  current portion...............................      $     --      $ 10,107       $  2,870       $  8,963       $  8,300
Total stockholders' equity .....................      $ 10,720      $ 11,735       $ 13,559       $ 14,392       $ 14,889
</TABLE>


---------------

(1)  The fiscal year 1998 consisted of 53 weeks.  All other fiscal years
     presented consisted of 52 weeks.



                                       9
<PAGE>   10


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" above for additional
factors relating to such statements.

         The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report.

GENERAL

         The Company was organized under the laws of the State of Texas on
February 16, 1996. Pursuant to the reorganization of the Company in preparation
for the initial public offering, the shareholders of the prior corporations
contributed to the Company all outstanding shares of capital stock of each
corporation, and the Company issued to such shareholders in exchange therefor an
aggregate of 2,732,705 shares of its Common Stock. The exchange transaction was
completed April 24, 1996, and, as a result, the corporations became wholly-owned
subsidiaries of the Company, and each shareholder of the Company received a
number of shares of Common Stock in the Company.

         The Company's primary source of revenues is the sale of food and
beverages at Company-owned restaurants. The Company also derives revenues from
franchise fees, royalties and other franchise-related activities. Franchise fee
revenue from an individual franchise sale is recognized when all services
relating to the sale have been performed and the restaurant has commenced
operation. Initial franchise fees relating to area franchise sales are
recognized ratably in proportion to services that are required to be performed
pursuant to the area franchise or development agreements and proportionately as
the restaurants within the area are opened.

FISCAL YEAR

         The Company has a 52/53 week fiscal year ending on a Sunday nearest
December 31. References in this Report to fiscal 1998, 1999 and 2000 relate to
the periods ended January 3, 1999, January 2, 2000 and December 31, 2000,
respectively. Fiscal years 1999 and 2000 presented herein consisted of 52 weeks.
Fiscal year 1998 consisted of 53 weeks.

RESULTS OF OPERATIONS

FISCAL 2000 COMPARED TO FISCAL 1999

         REVENUES. Fiscal 2000 revenues increased 10.0% to $63.2 million.
Restaurant sales increased 10.4% to $61.8 million. La Senorita, which was
acquired on April 30, 1999, contributed $2.2 million of the $5.7 million
increase in restaurant sales. One new restaurant was opened, one restaurant was
reopened, and three restaurants were closed during the year. Total system
same-store sales (including La Senorita) were up 2.7%. Company-owned same store
sales were up 3.2% and franchise-owned same-store sales were up 2.1%. Due to new
store development of higher volume Tortuga Coastal Cantina and La Senorita
restaurants, company-owned average weekly sales increased 6.1%.

         Franchise fees, royalties and other decreased 7.3% or $107,000 to $1.4
million. The decrease was due to other miscellaneous revenues decreasing as the
Company quit selling certain merchandise items in the restaurants.

         COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, decreased slightly as a percent of sales to
28.1% compared with 28.2% in fiscal 1999. The decrease was due to efforts with
suppliers to generate costs savings coupled with a decrease in cheese prices.
These were offset by significant increases in the cost of beef, guacamole and
tequila. Moderate price increases during the year also helped to keep costs down
as a percent of sales.

          Labor and other related expenses increased 10 basis points to 33.6%
compared with 33.5% in fiscal 1999. The increase was primarily due to higher
labor costs associated with new store development, as well as the tight labor
markets. Also, workers' compensation and health insurance expenses increased on
a comparable basis. Offsetting these increases were labor efficiencies within
the restaurants that were opened during fiscal 1999.

         Restaurant operating expenses increased to 24.3% of restaurant sales
compared with 22.6% in fiscal 1999. The increase was due to a combination of
higher utility costs, increased repairs and maintenance, increased property
taxes and rent. Utility costs increased due to the higher energy costs. Older
facilities contributed to the increased repairs. The addition of the Tortuga
Coastal Cantina and La Senorita restaurants and their related capital additions
resulted in an increase in rental expense and property taxes.

         General and administrative expenses (G&A) decreased from 9.0% of total
sales in fiscal year 1999 to 8.8% in fiscal year 2000. The decrease was
primarily due to the absorption of general and administrative expenses over a
larger revenue base. Fiscal year 1999 also included $62,000 in write-offs of
site development costs.

         Depreciation and amortization increased by 23.6% to $2.1 million. This
increase is primarily due to the La Senorita acquisition in May 1999 and capital
additions during 1999 as five new restaurants were opened and nine restaurants
were remodeled resulting in a full year's depreciation during fiscal year 2000.
Also during the year, two additional restaurants were opened and four were
remodeled.



                                       10
<PAGE>   11


         Pre-opening costs decreased by 60.8% as the number of stores opened
decreased from 6 to 2.

         During fiscal year 1999, the Company expensed $1.5 million related to
restaurant closure and asset impairment costs. There were no impairments
recorded in fiscal year 2000.

         Infrequently occurring (income) and expense in 1999 consisted of two
items that increased operating income in the aggregate by $437,684. There were
no such items in fiscal year 2000.

         OTHER INCOME (EXPENSE). Interest expense increased by $373,861 due to a
higher average debt balance and higher interest rates. The Company borrowed $4.2
million to finance the La Senorita acquisition in May 1999 and also borrowed to
finance investments in new stores throughout 1999, increasing debt from
$2,870,000 to $8,963,320 during the year. Debt was decreased by $663,320 during
2000, but the average balance remained higher than in 1999. Interest rates have
increased by 2% over the beginning of 1999, further contributing to the
increased expense.

         Other income and expense items decreased from a net expense of $42,426
to a net expense of $19,242.

         INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 2000
was 35.0% compared with 42.9% in fiscal 1999. The lower rate is due to the
effect of higher tax credits on lower income before taxes.

FISCAL 1999 COMPARED TO FISCAL 1998

         REVENUES. Fiscal 1999 revenues increased $9.3 million or 19.4% to $57.5
million. Restaurant sales increased $9.0 million or 19.1% to $56.0 million. La
Senorita, which was acquired on April 30, 1999, contributed $5.3 million in
restaurant sales. Five new restaurants were opened, one restaurant was reopened,
and two restaurant were closed (leases expired) during the year. Total system
same-store sales (including La Senorita) were down 1%. Company-owned same store
sales were down 2.1% and franchise-owned same-store sales were up 0.5%. Due to
new store development of higher volume Tortuga Coastal Cantina and La Senorita
restaurants, company-owned average weekly sales increased 5.5%.

         Franchise fees and royalties increased 19.2% or $205,000 to $1.3
million. Two franchise restaurants were closed (one of which was acquired by the
Company and converted into a Tortuga Coastal Cantina), one franchise restaurant
was opened and four franchise restaurants were acquired through the La Senorita
acquisition.

         COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, increased 80 basis points to 28.2% compared
with 27.4% in fiscal 1998. The increase was primarily due to higher costs of
sales associated with new store development, the acquisition of La Senorita and
the non-core stores located in Idaho and Tennessee. Cheese prices were also
higher during fiscal year 1999.

          Labor and other related expenses increased 50 basis points to 33.5%
compared with 33.0% in fiscal 1998. Again, the increase was primarily due to
higher labor costs associated with new store development, the acquisition of La
Senorita and the non-core stores located in Idaho and Tennessee.

         Restaurant operating expenses increased 110 basis points to 22.6%
compared with 21.5% in fiscal 1998. The increase was primarily due to last
year's $11.5 million sale and leaseback transaction (closed on June 25, 1998)
which increased rent expense.

         General and administrative expenses (G&A) decreased 20 basis points to
9.0% compared with 9.2% in fiscal year 1998. The decrease was primarily due to
the absorption of general and administrative expenses over a larger revenue
base. Fiscal year 1999 included $62,000 in write-offs of site development costs
and fiscal year 1998 included a $60,000 recovery of a previously taken special
charge.

         Depreciation and amortization increased 30 basis points to 3.0%
compared with 2.7% in fiscal 1998. This increase is primarily due to the La
Senorita acquisition. Further, five restaurants were opened and nine restaurants
were remodeled.

         Pre-opening costs decreased 30 basis points to 0.5% compared with 0.8%
in fiscal 1998. The prior year was impacted by the adoption of AICPA Statement
of Position 98-5, "Reporting on the costs of Start-up Activities" ("SOP 98-5"),
which requires that costs of start-up activities be expensed as incurred.

         During fiscal year 1999, the Company evaluated certain properties and
restaurants to determine if continued operation was consistent with the
Company's strategy. As a result of this exercise, it was determined that certain
assets were impaired and the Company expensed $1.5 million related to restaurant
closure and asset impairment costs.

         Infrequently occurring (income) and expense consisted of two items that
increased operating income in the aggregate by $437,684. The Company sold one
restaurant to the State of Texas (by eminent domain) for $1,150,000, resulting
in a gain of $519,685. As part of the Company's decision to consolidate with a
single outsourcing firm its accounting process, the Company settled its old
outsourcing contract for $82,000.

         OTHER INCOME (EXPENSE). Net other expense increased 10 basis points to
0.9% compared with 0.8% in fiscal 1998.



                                       11
<PAGE>   12


         INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 1999
was 42.9% compared with 38.5% in fiscal 1998. The higher rate is due to the
effect of permanent tax differences on lower income before taxes.

LIQUIDITY AND CAPITAL RESOURCES

         The Company met fiscal 2000 capital requirements with cash generated by
operations. In fiscal 2000, the Company's operations generated approximately
$3.5 million in cash, as compared with $3.6 million in fiscal 1999 and $2.1
million in fiscal 1998. As of December 31, 2000, the Company had a working
capital deficit of approximately $1.9 million, compared with a working capital
deficit of approximately $1.5 million at January 2, 2000. A working capital
deficit is common in the restaurant industry, since restaurant companies do not
typically require a significant investment in either accounts receivable or
inventory.

         The Company's principal capital requirements are the funding of new
restaurant development or acquisitions and remodeling of older units. During
fiscal 2000, capital expenditures on property, plant and equipment were
approximately $2.8 million as compared to approximately $7.3 million for fiscal
1999. The Company opened one new restaurant, reopened an existing restaurant (a
conversion from a Casa Ole to a Tortuga Coastal Cantina) and remodeled four
restaurants. There are no new restaurants planned for fiscal 2001. The Company
does plan to modestly remodel five restaurants in fiscal year 2001. The
estimated capital needed for fiscal 2001 for general corporate purposes,
including remodeling, is approximately $1.6 million. This estimate also includes
five remodels, ranging from $50,000 to $130,000 per restaurant.

         The Company has a $9.5 million credit facility with Bank of America. At
December 31, 2001, the credit facility will be reduced to $8.5 million and will
mature on July 15, 2002. The interest rate is either the prime rate or LIBOR
plus a stipulated percentage. Accordingly, the Company is impacted by changes in
the prime rate and LIBOR. The Company is subject to a non-use fee ranging from
0.25% to 0.5% on the unused portion of the revolver from the date of the credit
agreement. As of December 31, 2000, the Company had $8.3 million outstanding on
the revolving line of credit. The acquisition of La Senorita, which closed on
April 30, 1999, used $4.2 million of the revolving line. The balance was used
for new restaurant construction, remodeling and other working capital needs.

         Bank of America notified the Company in early February 2001 that it was
asking the Company to find a replacement lender. They also indicated that to
facilitate the effort they were moving the Company's account to the bank's
Special Assets Group. As of December 31, 2000, the Company was in compliance
with all of its loan covenants. However, based on tighter covenants that go into
effect in the first quarter of fiscal 2001, the Company anticipates it maybe out
of compliance with certain loan covenants at the end of the first and second
quarters of fiscal 2001. The bank, in return for additional fees and an increase
in interest rates, has agreed to waive the 2001 first and second quarter lack of
compliance and amended certain future covenant ratios under the debt agreement.
The Company has received and is evaluating alternative finance proposals from
several lenders. The goal is to enter into a term loan for at least $5.0
million, and to establish a new revolving line of credit. Without property
sales, the Company anticipates that it will use excess cash flow during fiscal
2001 to pay down approximately $2.0 million of outstanding indebtedness.

         The Company also has a $9.8 million forward commitment agreement with
Franchise Finance Corporation of America ("FFCA"). At December 31, 2000, the
Company had approximately $9.8 million available under the FFCA forward
commitments.

         The Company's management believes that with its forward commitments
with Franchise Finance Corporation of America, along with operating cash flow
and the Company's revolving line of credit with Bank of America (and its
successor), funds will be sufficient to meet operating requirements and to
finance routine capital expenditures and remodels through the end of the 2001
fiscal year.


RISK FACTORS

         The Company cautions readers that its business is subject to a number
of risks, any of which could cause the actual results of the Company to differ
materially from those indicated by forward-looking statements made from time to
time in releases, including this Form 10-K, and oral statements. Certain risk
factors have been presented throughout this document, including, among others,
expansion strategy; site selection; attracting and retaining franchisees,
managers and other employees; availability of food products; competition and
government regulation. Certain other risks to which the Company is subject
include:

         SEASONALITY. The Company's sales and earnings fluctuate seasonally.
Historically the Company's highest sales and earnings have occurred in the third
and fourth calendar quarters, which the Company believes is typical of the
restaurant industry and consumer spending patterns in general with respect to
the third quarter and is due to increased holiday traffic at the Company's mall
restaurants for the fourth quarter. In addition, quarterly results have been
and, in the future are likely to be, substantially affected by the timing of new
restaurant openings. Because of the seasonality of the Company's business and
the impact of new restaurant openings, results for any calendar quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.

         IMPACT OF INFLATION & MARKET RISKS. The Company does not believe that
inflation has materially impacted net income during the past three years.
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses, could have a significant impact on the Company's
operating results to the extent such increases cannot be passed along to
customers. If operating expenses increase, management intends to attempt to
recover increased costs by




                                       12
<PAGE>   13


increasing prices to the extent deemed advisable considering competitive
conditions. The Company does not have or participate in transactions involving
derivative, financial and commodity instruments.

         ACCELERATING GROWTH STRATEGY. The Company's ability to expand by adding
Company-owned and franchised restaurants and acquisitions will depend on a
number of factors, including the availability of suitable locations, the ability
to hire, train and retain an adequate number of experienced management and
hourly employees, the availability of acceptable lease terms and adequate
financing, timely construction of restaurants, the ability to obtain various
government permits and licenses and other factors, some of which are beyond the
control of the Company and its franchisees. The opening of additional franchised
restaurants will depend, in part, upon the ability of existing and future
franchisees to obtain financing or investment capital adequate to meet their
market development obligations. There can be no assurance that the Company will
be able to open the number of restaurants it currently plans to open or that new
restaurants can be operated profitably. Expansion into new geographic markets in
which the Company has no operating experiences and in which Mexican and Tex-Mex
food restaurants are less prevalent than in Texas has an inherent risk. Consumer
tastes vary from region to region in the United States, and there can be no
assurance that customers located in the regions of the United States into which
the Company intends to expand will be as receptive to Mexican and Tex-Mex food
as those customers in its existing markets. There can be no assurance as to the
success of the Company's efforts to expand into other geographic regions or that
the cost of such efforts will not have a material adverse effect on the
Company's results of operations or financial condition.

         SMALL RESTAURANT BASE AND GEOGRAPHIC CONCENTRATION. The results
achieved to date by the Company's relatively small restaurant base may not be
indicative of the results of a larger number of restaurants in a more
geographically dispersed area. Because of the Company's relatively small
restaurant base, an unsuccessful new restaurant could have a more significant
effect on the Company's results of operations than would be the case in a
company owning more restaurants. Additionally, given the Company's present
geographic concentration (all Company-owned units are currently in Texas,
Oklahoma, Michigan and Idaho), results of operations may be adversely affected
by economic or other conditions in the region and adverse publicity relating to
the Company's restaurants could have a more pronounced adverse effect on the
Company's overall sales than might be the case if the Company's restaurants were
more broadly dispersed.

         CONTROL OF THE COMPANY BY MANAGEMENT AND DIRECTORS. Approximately 47%
of the Common Stock and rights to acquire Common Stock of the Company are
beneficially owned or held by Larry N. Forehand, David Nierenberg, Michael D.
Domec and Louis P. Neeb, directors and/or executive officers of the Company.

         SHARES ELIGIBLE FOR FUTURE SALE AND STOCK PRICE. Sales of substantial
amounts of shares in the public market could adversely affect the market price
of the Common Stock. The Company has granted limited registration rights to
holders of warrants granted by the Company and Larry N. Forehand to Louis P.
Neeb, Tex-Mex Partners, L.C. and a former officer of the Company to register the
880,766 underlying shares of Common Stock covered by such warrants in connection
with registrations otherwise undertaken by the Company. In any event, the market
price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors.

         COMPETITION. The restaurant industry is intensely competitive. The
Company competes against other family dining concepts, as well as quick service
and casual dining concepts, for customers, employees, and franchisees. See "Item
1. Business--Competition."


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company does not have or participate in transactions involving
derivative, financial and commodity instruments. The Company's long-term debt
bears interest at floating market rates. Based on amounts outstanding at year-
end, a 1% change in interest rates would change interest expense by
approximately $83,000.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1 of this report.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         Not applicable.



                                       13
<PAGE>   14




                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.


ITEM 11. EXECUTIVE COMPENSATION

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.


ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)      Documents filed as part of Report.

                  1.       Financial Statements:

                           The Financial Statements are listed in the index to
                  Consolidated Financial Statements on page F-1 of this Report.

                  2.       Exhibits:

                 +/-2.1    Stock Purchase Agreement with Purchase of Designated
                           Assets, dated as of January 12, 1999, by and among
                           the Company, La Senorita Restaurants Acquisition
                           Corp., a Delaware corporation and wholly owned
                           subsidiary of the Company, La Senorita Traverse City,
                           Inc., Kleinrichert Bros., Inc., La Senorita Mt.
                           Pleasant, Inc., KMANCO, Inc., La Senorita Lansing,
                           Inc., Kenneth Kleinrichert, Donald Kleinrichert,
                           Joseph Kleinrichert, The Joseph Kleinrichert Trust
                           and Steve Arnot.

                   #3.1    Articles of Incorporation of the Company (as
                           amended).

                  ++3.2    Bylaws of the Company.

                  ++4.1    Specimen of Certificate of Common Stock of the
                           Company.

                  ++4.2    Articles of Incorporation of the Company (see 3.1
                           above).

                  ++4.3    Bylaws of the Company (see 3.2 above).

                 ++10.1    Employment Agreement by and between the Company and
                           Louis P. Neeb dated February 28, 1996.

                 ++10.2    Employment Agreement by and between the Company and
                           Patrick A. Morris dated February 28, 1996.

                 ++10.3    Employment Agreement by and between the Company and
                           Stacy M. Riffe dated February 28, 1996.

                 ++10.4    Indemnity Agreement by and between the Company and
                           Louis P. Neeb dated as of April 10, 1996.

                 ++10.5    Indemnity Agreement by and between the Company and
                           Larry N. Forehand dated as of April 10, 1996.


                                       14

<PAGE>   15


                 ++10.6    Indemnity Agreement by and between the Company and
                           John C. Textor dated as of April 10, 1996.

                 ++10.7    Indemnity Agreement by and between the Company and
                           Patrick A. Morris dated as of April 10, 1996.

                 ++10.8    Indemnity Agreement by and between the Company and
                           Michael D. Domec dated as of April 10, 1996.

                 ++10.9    Indemnity Agreement by and between the Company and
                           Stacy M. Riffe dated as of April 10, 1996.

                ++10.10    Indemnity Agreement by and between the Company and
                           J.J. Fitzsimmons dated as of April 10, 1996.

                ++10.11    Indemnity Agreement by and between the Company and
                           Richard E. Rivera dated as of April 10, 1996.

                ++10.12    Corrected Warrant Agreement by and between the
                           Company and Louis P. Neeb dated as of February 26,
                           1996.

                ++10.13    Corrected Warrant Agreement by and between the
                           Company and Tex-Mex Partners, L.C. dated as of
                           February 26, 1996.

                ++10.14    Form of the Company's Multi-Unit Development
                           Agreement.

                ++10.15    Form of the Company's Franchise Agreement.

               +++10.16    1996 Long Term Incentive Plan.

               +++10.17    Stock Option Plan for Non-Employee Directors.

                ++10.18    Lease Agreement, dated July 15, 1977, between
                           Weingarten Realty, Inc. and Fiesta Restaurants, Inc.,
                           for property located at 1020 Federal Road, Houston,
                           Texas (Casa Ole No. 4).

                ++10.19    Lease Agreement, dated July 12, 1978, between W & W
                           Investments, a Texas partnership, and Fiesta
                           Restaurants, Inc., for property located at 2727 John
                           Ben Shepperd Pkwy, Odessa, Texas (Casa Ole No. 8).

                ++10.20    Lease Agreement, dated August 11, 1986, between
                           Hartford-Lubbock Limited Partnership, a Texas limited
                           partnership, and Casa Ole No. 10, Inc., for property
                           located at 4413 South Loop 289, Lubbock, Texas (Casa
                           Ole No. 10).

                ++10.21    Lease Agreement, dated July 29, 1983, between Phil R.
                           Kensinger, Trustee, and Quality Mexican Restaurants,
                           Inc., for property located at 12203 Murphy Rd.,
                           Stafford, Texas (Casa Ole No. 13).

                ++10.22    Lease Agreement, dated July 17, 1987, between Leroy
                           Melcher and Fiesta Restaurants, Inc., for property
                           located at 3121 Palmer Hwy, Texas City, Texas (Casa
                           Ole No. 14).

                ++10.23    Lease Agreement, dated February 17, 1981, between
                           Eldred Doty, wife Joyce C. Doty and Fiesta
                           Restaurants, Inc., for property located at 3121
                           Palmer Hwy, Texas City, Texas (Casa Ole No. 14).

                ++10.24    Lease Agreement, dated May 16, 1983, between CBL
                           Management, Inc., a Tennessee corporation, and Fiesta
                           Restaurants, Inc., d/b/a Casa Ole, for property
                           located at Post Oak Mall #3026, College Station,
                           Texas (Casa Ole No. 22).

                ++10.25    Lease Agreement, dated June 5, 1985, between David Z.
                           Mafrige Interests and Fiesta Restaurants, Inc., for
                           property located at 12350 Gulf Freeway, Houston,
                           Texas (Casa Ole No. 28).

                ++10.26    Lease Agreement, dated March 13, 1985, between
                           Plantation Village Plaza Joint Venture and Fiesta
                           Restaurants, Inc., for property located at 415 This
                           Way, Lake Jackson, Texas (Casa Ole No. 29).

                ++10.27    Lease Agreement, dated August 6, 1985, between Dalsan
                           Properties--Waco II, Service Life and Casualty
                           Insurance Co. and Casa Ole No 34, Inc., for property
                           located at 414 N. Valley Mills Dr., Waco, Texas (Casa
                           Ole No. 34).

                ++10.28    Lease Agreement, dated May 6, 1976, between Federated
                           Store Realty, Inc., Prudential Insurance Company of
                           America and Fiesta Restaurants, Inc., for property
                           located at 263 Greenspoint Mall, Houston, Texas (Casa
                           Ole No. 35).

                ++10.29    Lease Agreement, dated May 30, 1989, between Temple
                           Mall Company, a Texas General Partnership, and Casa
                           Ole Franchise Services, Inc., for property located at
                           3049 S. 31st Street, Temple, Texas (Casa Ole No. 37).


                                       15
<PAGE>   16


                ++10.30    Lease Agreement, dated May 3, 1995, between CO
                           Properties No. 3, a Texas general partnership, and
                           Casa Ole Franchise Services, Inc., for property
                           located at 1135 Edgebrook, Houston, Texas.

                ++10.31    Corrected Warrant Agreement by and between Larry N.
                           Forehand and Louis P. Neeb dated as of February 26,
                           1996.

                ++10.32    Corrected Warrant Agreement by and between Larry N.
                           Forehand and Tex-Mex Partners, L.C. dated as of
                           February 26, 1996.

                ++10.33    Corrected Warrant Agreement by and between Larry N.
                           Forehand and Patrick A. Morris dated as of February
                           26, 1996.

                ++10.34    Corrected Warrant Agreement by and between Larry N.
                           Forehand and Stacy M. Riffe dated as of February 26,
                           1996.

                ++10.35    Indemnification letter agreement by Larry N. Forehand
                           dated April 10, 1996.

                 +10.36    1996 Manager's Stock Option Plan (incorporated by
                           reference to Exhibit 99.2 of the Company's Form S-8
                           Registration Statement Under the Securities Act of
                           1933, dated February 24, 1997, filed by the Company
                           with the Securities and Exchange Commission).

                **10.37    Lease Agreement, dated June 21, 1996, between Sam
                           Jack McGlasson and Casa Ole Restaurants, Inc., for
                           property located at 725 North Loop 340, Bellmead,
                           Texas (Casa Ole No. 51).

                **10.38    Amended Lease Agreement, dated November 7,1996,
                           between The Prudential Insurance Company of America,
                           by and through its Agent, Terranomics Retail
                           Services, Inc. and Casa Ole Restaurants, Inc., for
                           property located at 263 Greenspoint Mall, Houston,
                           Texas (Casa Ole No. 35).

                **10.39    Assignment of Lease and Consent to Assign, dated
                           October 11, 1996, between Roy M. Smith and W.M. Bevly
                           d/b/a Padre Staples Mall (landlord) and Pepe, Inc.
                           d/b/a Casa Ole Restaurant and Cantina
                           (tenant/assignor) and Jack Goodwin (guarantor) and
                           Casa Ole No. 29, Inc., for property located at 1184
                           Padre Staples Mall, Corpus Christi, Texas (Casa Ole
                           No. 36).

                **10.40    Option Contract and Agreement dated January 11, 1997,
                           between Casa Ole of Beaumont, Inc., a Texas
                           corporation, and Casa Ole Restaurants, Inc.

                **10.41    $750,000 Promissory Note, dated December 30, 1996,
                           between Casa Ole No. 29, Inc. and Rainbolt, Inc. for
                           the purchase of Victoria, Texas restaurant (Casa Ole
                           No. 15).

                  10.42    Credit Agreement Between Casa Ole Restaurants, Inc.,
                           as the Borrower, and NationsBank of Texas, N.A., as
                           the Bank, for $10,000,000, dated July 10, 1996
                           (incorporated by reference to Exhibit 10.1 of the
                           Company's Form 10-Q Quarterly Report Under the
                           Securities Exchange Act of 1934, dated August 22,
                           1996, filed by the Company with the Securities and
                           Exchange Commission).

                **10.43    Amendment No. 1, dated January 13, 1997, to the
                           Credit Agreement Between Casa Ole Restaurants, Inc.,
                           as the Borrower, and NationsBank of Texas, N.A., as
                           the Bank, for $10,000,000, dated July 10, 1996.

                **10.44    Employment Agreement by and between the Company and
                           Curt Glowacki dated May 15, 1997.

                **10.45    Employment Agreement by and between the Company and
                           Andrew J. Dennard dated May 20, 1997.

                 +10.46    Form of Executive Officer Stock Purchase Letters.

                 ++21.1    List of subsidiaries of the Company (incorporated by
                           reference to Exhibit 22.1 of the Company's Form S-1
                           Registration Statement Under the Securities Act of
                           1933, dated April 24,1996, filed by the Company with
                           the Securities and Exchange Commission).

                  *23.1    Consent of KPMG LLP.

                  *24.1    Power of Attorney (included on the signature page to
                           this Form 10-K).

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

         **       Incorporated by reference to corresponding Exhibit number of
                  the Company's (then known as Casa Ole Restaurants, Inc.) Form
                  10-K Annual Report Pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934, dated March 24, 1997, filed
                  by the Company with the Securities and Exchange Commission.



                                       16
<PAGE>   17


         +/-      Incorporated by reference to corresponding Exhibit 2.1 of the
                  Company's (then known as Casa Ole Restaurants, Inc.) Form 8-K
                  filed by the Company on May 14, 1999 with the Securities and
                  Exchange Commission.

         *        Incorporated by reference to corresponding Exhibit number of
                  the Company's Form 8K filed by the Company on May 25, 1999
                  with the Securities and Exchange Commission.

         ++       Incorporated by reference to corresponding Exhibit number of
                  the Company's (then known as Casa Ole Restaurants, Inc.) Form
                  S-1 Registration Statement Under the Securities Act of 1933,
                  dated April 24, 1996, filed by the Company with the Securities
                  and Exchange Commission.

         +        Management contract or compensatory plan or arrangement.

(b)      Reports on Form 8-K

There were no reports on Form 8-K during the last quarter of the period covered
by this report.



                                       17
<PAGE>   18



                            MEXICAN RESTAURANTS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                                   PAGE
                                                                                                                   ----
<S>                                                                                                                <C>
Report of Independent Auditors..................................................................................    F-2

Consolidated Balance Sheets as of January 2, 2000 and December 31, 2000.........................................    F-3

Consolidated Statements of Income for each of the years in the three fiscal-year
  period ended December 31, 2000................................................................................    F-4

Consolidated Statements of Stockholders' Equity for each of the years in
  the three fiscal-year period ended December 31, 2000..........................................................    F-5

Consolidated Statements of Cash Flows for each of the years in the three
  fiscal-year period ended December 31, 2000....................................................................    F-6

Notes to Consolidated Financial Statements......................................................................    F-7
</TABLE>





                                      F-1
<PAGE>   19



                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors
Mexican Restaurants, Inc.:


         We have audited the accompanying consolidated balance sheets of Mexican
Restaurants, Inc. and subsidiaries (the Company) as of January 2, 2000 and
December 31, 2000, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mexican
Restaurants, Inc. and subsidiaries as of January 2, 2000 and December 31, 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.


KPMG LLP


Houston, Texas
March 2, 2001,
except as to Note 3 which
is as of April 17, 2001


                                      F-2
<PAGE>   20



                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                      JANUARY 2, 2000 AND DECEMBER 31, 2000



<TABLE>
<CAPTION>
                                                                                       FISCAL YEARS
                                                                                  1999              2000
                                                                              -------------    -------------
<S>                                                                           <C>              <C>
ASSETS

Current assets:
  Cash and cash equivalents ...............................................   $     743,935    $     636,334
  Royalties receivable ....................................................          42,660           66,798
  Other receivables .......................................................         448,468          611,603
  Inventory ...............................................................         701,195          718,629
  Taxes receivable ........................................................         120,427          257,080
  Prepaid expenses ........................................................         522,379          529,830
                                                                              -------------    -------------
         Total current assets .............................................       2,579,064        2,820,274
                                                                              -------------    -------------


Property, plant and equipment .............................................      23,148,394       25,550,871
  Less accumulated depreciation ...........................................      (5,727,517)      (7,339,223)
                                                                              -------------    -------------
         Net property, plant and equipment ................................      17,420,877       18,211,648
Deferred tax assets .......................................................       1,390,873        1,167,661
Property held for resale ..................................................       1,100,000        1,100,000
Other assets ..............................................................       8,552,487        8,209,243
                                                                              -------------    -------------

                                                                              $  31,043,301    $  31,508,826
                                                                              =============    =============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ..........................................................   $   2,422,503    $   2,953,649
Accrued sales and liquor taxes ............................................         175,932          452,617
Accrued payroll and taxes .................................................         877,085        1,006,457
Accrued expenses ..........................................................         587,116          327,390
                                                                              -------------    -------------

         Total current liabilities ........................................       4,062,636        4,740,113
                                                                              -------------    -------------

Long-term debt ............................................................       8,963,320        8,300,000
Other liabilities .........................................................         372,571          537,219
Deferred gain .............................................................       3,252,440        3,042,832

Stockholders' equity:
  Preferred stock, $.01 par value,
    1,000,000 shares authorized, none issued ..............................              --               --
  Capital stock, $0.01 par value, 20,000,000 shares
    authorized, 4,732,705 shares issued ...................................          47,327           47,327
  Additional paid-in capital ..............................................      20,537,076       20,121,076
  Retained earnings .......................................................       5,157,931        6,025,121
  Deferred Compensation ...................................................              --         (171,519)
  Treasury stock, cost of 1,135,000 common shares in 1999 and 1,200,400
    common shares in 2000 .................................................     (11,350,000)     (11,133,343)
                                                                              -------------    -------------
         Total stockholders' equity .......................................      14,392,334       14,888,662
                                                                              -------------    -------------
                                                                              $  31,043,301    $  31,508,826
                                                                              =============    =============
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   21



                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                   FOR THE FISCAL YEARS ENDED JANUARY 3, 1999
                      JANUARY 2, 2000 AND DECEMBER 31, 2000


<TABLE>
<CAPTION>
                                                                                FISCAL YEARS
                                                                   1998             1999              2000
                                                               -------------    -------------    -------------
<S>                                                            <C>              <C>              <C>
Revenues:
  Restaurant sales .........................................   $  46,999,835    $  55,997,170    $  61,833,623
  Franchise fees, royalties and other ......................       1,120,619        1,468,596        1,361,909
                                                               -------------    -------------    -------------
                                                                  48,120,454       57,465,766       63,195,532

Costs and expenses:
  Cost of sales ............................................      12,898,673       15,773,922       17,401,417
  Labor ....................................................      15,503,584       18,785,669       20,768,127
  Restaurant operating expenses ............................      10,106,957       12,662,395       15,028,247
  General and administrative ...............................       4,429,375        5,191,043        5,547,784
  Depreciation and amortization ............................       1,292,394        1,708,965        2,111,839
  Pre-opening costs ........................................         362,189          293,931          115,331
  Asset impairments and restaurant closure costs ...........              --        1,493,449               --
                                                               -------------    -------------    -------------
                                                                  44,593,172       55,909,374       60,972,745
Infrequently occurring income items, net ...................              --          437,684               --
                                                               -------------    -------------    -------------
         Operating income ..................................       3,527,282        1,994,076        2,222,787
                                                               -------------    -------------    -------------
Other income (expense):
  Interest income ..........................................          41,817           21,304           18,141
  Interest expense .........................................        (524,413)        (491,494)        (865,355)
  Other, net ...............................................          97,718          (63,730)         (37,383)
                                                               -------------    -------------    -------------
                                                                    (384,878)        (533,920)        (884,597)
                                                               -------------    -------------    -------------
Income before income tax expense and extraordinary item ....       3,142,404        1,460,156        1,338,190
Income tax expense .........................................       1,209,825          627,032          471,000
                                                               -------------    -------------    -------------
Income before extraordinary item ...........................       1,932,579          833,124          867,190
Extraordinary item (net of tax of $25,025) .................          39,975               --               --
                                                               -------------    -------------    -------------
         Net income ........................................   $   1,972,554    $     833,124    $     867,190
                                                               =============    =============    =============

Basic income per share (before extraordinary item) .........   $         .54    $         .23    $         .24
                                                               =============    =============    =============

Basic income per share (extraordinary item) ................   $         .01    $          --    $          --
                                                               =============    =============    =============

Basic income per share .....................................   $         .55    $         .23    $         .24
                                                               =============    =============    =============

Diluted income per share (before extraordinary item) .......   $         .54    $         .23    $         .24
                                                               =============    =============    =============

Diluted income per share (extraordinary item) ..............   $         .01    $          --    $          --
                                                               =============    =============    =============

Diluted income per share ...................................   $         .55    $         .23    $         .24
                                                               =============    =============    =============

Weighted average number of shares (basic and diluted) ......       3,600,429        3,603,712        3,580,380
                                                               =============    =============    =============
</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-4

<PAGE>   22



                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                           FOR THE FISCAL YEARS ENDED
                        JANUARY 3, 1999, JANUARY 2, 2000
                              AND DECEMBER 31, 2000


<TABLE>
<CAPTION>
                                                         ADDITIONAL                                                     TOTAL
                                            CAPITAL       PAID-IN        RETAINED       TREASURY        DEFERRED     STOCKHOLDERS'
                                             STOCK        CAPITAL        EARNINGS         STOCK       COMPENSATION     EQUITY
                                          ------------  ------------   ------------    ------------   ------------   -------------
<S>                                       <C>           <C>            <C>             <C>            <C>            <C>
Balances at December 28, 1997             $     47,327  $ 20,685,610   $  2,352,253    $(11,350,000)            --   $ 11,735,190

  Warrants purchased                                --      (148,534)            --              --             --       (148,534)

  Net income                                        --            --      1,972,554              --             --      1,972,554
                                          ------------  ------------   ------------    ------------   ------------   ------------
Balances at January 3, 1999               $     47,327  $ 20,537,076   $  4,324,807    $(11,350,000)            --   $ 13,559,210

  Net income                                        --            --        833,124              --             --        833,124
                                          ------------  ------------   ------------    ------------   ------------   ------------
Balances at January 2, 2000               $     47,327  $ 20,537,076   $  5,157,931    $(11,350,000)            --   $ 14,392,334

  Net income                                        --            --        867,190              --             --        867,190

  Issuance of Restricted Stock                      --      (416,000)            --         622,500       (206,500)            --

  Repurchase of shares
                                                    --            --             --        (405,843)            --       (405,843)

  Amortization of Deferred Compensation             --            --             --              --         34,981         34,981
                                          ------------  ------------   ------------    ------------   ------------   ------------
Balances at December 31, 2000             $     47,327  $ 20,121,076   $  6,025,121    $(11,133,343)  $   (171,519)  $ 14,888,662
                                          ============  ============   ============    ============   ============   ============
</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-5

<PAGE>   23



                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   FOR THE FISCAL YEARS ENDED JANUARY 3, 1999,
                     JANUARY 2, 2000, AND DECEMBER 31, 2000



<TABLE>
<CAPTION>
                                                                                                   FISCAL YEARS
                                                                                      1998             1999            2000
                                                                                   ------------    ------------    ------------
<S>                                                                                <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .....................................................................   $  1,972,554    $    833,124    $    867,190
Adjustments to reconcile net income to net
       cash provided by operating activities:
    Depreciation and amortization ..............................................      1,654,583       1,708,965       2,111,839
    Deferred gain amortization .................................................       (116,634)       (253,234)       (243,518)
    Asset impairments and restaurant closure costs .............................             --       1,493,449              --
    Gain on early extinguishment of debt .......................................        (39,975)             --              --
    Gain on sale of fixed assets ...............................................         (7,188)       (457,243)         19,537
    Deferred compensation expense ..............................................             --              --          34,981
    Deferred income taxes ......................................................       (639,065)       (452,272)        223,212
Changes in assets and liabilities, net of effects of acquisitions:
    Royalties receivable .......................................................         41,253          28,051         (24,138)
    Receivable from affiliates .................................................         13,000              --              --
    Other receivables ..........................................................        (90,270)       (168,133)       (163,135)
    Taxes receivable/payable ...................................................       (469,888)        426,845        (136,653)
    Inventory ..................................................................        (43,819)       (241,935)        (17,434)
    Prepaids and other current assets ..........................................       (134,502)       (152,282)        (30,985)
    Other assets ...............................................................         (6,448)        (93,056)         (5,696)
    Accounts payable ...........................................................        357,556         967,709         531,146
    Accrued expenses and other liabilities .....................................       (501,328)       (156,303)        146,331
    Deferred franchise fees and other long-term liabilities ....................         93,789         137,707         205,404
                                                                                   ------------    ------------    ------------
          Total adjustments ....................................................        111,064       2,788,268       2,650,891
                                                                                   ------------    ------------    ------------
          Net cash provided by operating activities ............................      2,083,618       3,621,392       3,518,081
                                                                                   ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of acquisition, net of cash acquired ......................             --      (4,132,945)             --
Purchase of property, plant and equipment ......................................     (5,665,556)     (7,297,411)     (2,840,040)
Proceeds from sale of property, plant and equipment ............................     11,360,632       1,996,732         283,521
                                                                                   ------------    ------------    ------------
Net cash provided by (used in) investing activities ............................      5,695,076      (9,433,624)     (2,556,519)
                                                                                   ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from minority partners' contributions .................................         20,000              --              --
Net borrowings under line of credit agreement ..................................      2,247,153       6,093,320        (663,320)
Purchase of treasury stock .....................................................             --              --        (405,843)
Payments of notes payable ......................................................    (10,569,024)             --              --
                                                                                   ------------    ------------    ------------
          Net cash provided by (used in)  financing activities .................     (8,301,871)      6,093,320      (1,069,163)
                                                                                   ------------    ------------    ------------
          Increase (decrease) in cash and cash equivalents .....................       (523,177)        281,088        (107,601)

Cash and cash equivalents at beginning of year .................................        986,024         462,847         743,935
                                                                                   ------------    ------------    ------------

Cash and cash equivalents at end of year .......................................   $    462,847    $    743,935    $    636,334
                                                                                   ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year:
     Interest ..................................................................   $    692,763    $    493,845    $    832,528
     Income taxes ..............................................................      2,178,856         807,882         388,608
Non-cash financing activities:
     Exchange of equipment for note balance ....................................        200,004              --              --
     Undeveloped site exchanged for purchase of restaurant .....................        277,771              --              --
     Exchange of note for warrants .............................................        148,534              --              --
     Issuance of restricted stock ..............................................             --              --         206,500
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>   24



                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             JANUARY 3, 1999, JANUARY 2, 2000 AND DECEMBER 31, 2000


(1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)  Description of Business

         On February 16, 1996, Mexican Restaurants, Inc. (formerly Casa Ole
Restaurants, Inc.) was incorporated in the State of Texas, and on April 24,
1996, its initial public offering of 2,000,000 shares of Common Stock became
effective. Mexican Restaurants, Inc. is the holding company for Casa Ole
Franchise Services, Inc. and several subsidiary restaurant operating
corporations (collectively the "Company"). Casa Ole Franchise Services, Inc. was
incorporated in 1977, and derives its revenues from the collection of franchise
fees under a series of protected location franchise agreements and from the sale
of restaurant accessories to the franchisees of those protected location
franchise agreements. The restaurants feature moderately priced Mexican and
Tex-Mex food served in a casual atmosphere. The first Casa Ole restaurant was
opened in 1973.

         On July 2, 1997, the Company purchased 100% of the outstanding stock of
Monterey's Acquisition Corp. ("MAC"). The Company purchased the shares of common
stock for $4.0 million, paid off outstanding debt and accrued interest totaling
$7.1 million and funded various other agreed upon items approximating $500,000.
Approximately $4.8 million of goodwill was recorded as a result of this
purchase. At the time of the acquisition, MAC owned and operated 26 restaurants
in Texas and Oklahoma under the names "Monterey's Tex-Mex Cafe," "Monterey's
Little Mexico" and "Tortuga Coastal Cantina."

         On April 30, 1999, the Company purchased 100% of the outstanding stock
of La Senorita Restaurants, a Mexican restaurant chain operated in the State of
Michigan. The Company purchased the shares of common stock of La Senorita for
$4.0 million. The transaction was funded with the Company's revolving line of
credit with Bank of America. La Senorita operates five company-owned
restaurants, and has four franchise restaurants. One of the franchise
restaurants is owned by a partnership in which the parent company has a 17.5%
limited interest.

         (b) Principles of Consolidation

         The consolidated financial statements include the accounts of Mexican
Restaurants, Inc. and its wholly owned subsidiaries, after elimination of all
significant inter-company transactions. The Company owns and operates various
Mexican restaurant concepts principally in Texas, Oklahoma, Idaho and Michigan.
The Company also franchises the Casa Ole concept principally in Texas and
Louisiana and the La Senorita concept principally in the State of Michigan.

         (c) Fiscal Year

         The Company maintains its accounting records on a 52/53 week fiscal
year ending on the Sunday nearest December 31. Fiscal year 1998 consisted of 53
weeks. Fiscal years 1999 and 2000 consisted of 52 weeks.

         (d)  Cash Equivalents

         For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.

         (e)  Inventory

         Inventory, which is comprised of food and beverages, is stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method. Miscellaneous restaurant supplies are included in inventory and valued
on a specific identification basis.

         (f)  Pre-opening Costs

         Pre-opening costs primarily consists of hiring and training employees
associated with the opening of a new restaurant and are expensed upon the
opening of the restaurant.


                                      F-7



<PAGE>   25
                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         (g) Property, Plant and Equipment

         Property, plant and equipment are stated at cost. Depreciation on
equipment and on buildings and improvements is calculated on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized straight-line over the shorter of the lease term plus options or
estimated useful life of the assets.

<TABLE>
<S>                                                               <C>
           Buildings and improvements..........................   20-40 years
           Vehicles............................................       5 years
           Equipment...........................................    3-15 years
           Leasehold improvements..............................    3-20 years
</TABLE>

         Significant expenditures that add materially to the utility or useful
lives of property, plant and equipment are capitalized. All other maintenance
and repair costs are charged to current operations. The cost and related
accumulated depreciation of assets replaced, retired or otherwise disposed of
are eliminated from the property accounts and any gain or loss is reflected as
other income and expense. Recoverability of assets to be held and used is
measured by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount the carrying
value exceeds the fair value of the asset. The Company recorded an impairment
provision at January 2, 2000 of $1,493,449 relating to the impairment of assets
at restaurants that have or will be closed. There were no such impairment costs
during fiscal 1998 or fiscal 2000. Fiscal 1999 also included a gain on sale of
$519,685 on a restaurant sold to the State of Texas (by eminent domain) for
$1,150,000. Property held for resale is separately aggregated in the
consolidated balance sheet and is recorded at January 2, 2000 and December 31,
2000 at $1,100,000 which approximates fair value.

         (h) Other Assets

         At December 31, 2000, other assets included $7.7 million of goodwill,
net of amortization primarily resulting from the MAC and La Senorita
acquisitions. Goodwill is being amortized over 40 years for MAC and over 15
years for La Senorita. Accumulated amortization as of December 31, 2000 was
$874,000. The Company assesses the recoverability of intangible assets by
determining whether amortization of the asset balance over its remaining life
can be recovered through undiscounted operating cash flows of the acquired
operation. The Company believes that no impairment of goodwill exists.

         (i) Income Taxes

         Income taxes are provided based on the asset and liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes.

         (j) Franchise Fees

         Franchise fee revenue from an individual franchise sale is recognized
when all services relating to the sale have been performed and the restaurant
has commenced operation. Initial franchise fees relating to area franchise sales
are recognized ratably in proportion to services that are required to be
performed pursuant to the area franchise or development agreements and
proportionately as the restaurants within the area are opened.

         (k) Stock Options

         The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and has accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation expense is recorded on the
date of the grant only if the current market price of the underlying stock
exceeds the exercise price at the date of grant.

         (l) Use of Estimates

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

         (m) Reclassification

         Certain reclassifications have been made to the 1998 and 1999 amounts
to conform to the 2000 presentation.


                                      F-8
<PAGE>   26

                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         (n) Recent Accounting Pronouncements

         Statement of Financial Accounting Standards No. 133, Accounting for
         Derivative Instruments and Hedging Activities ("SFAS 133"), was issued
         by the Financial Accounting Standards Board in June 1998. SFAS 133
         standardizes the accounting for derivative instruments, including
         certain derivative instruments embedded in other contracts. Under the
         standard, entities are required to carry all derivative instruments in
         the statement of financial position at fair value. The Company will
         adopt SFAS 133 beginning in fiscal year 2001. The Company does not
         expect the adoption of SFAS 133 to have a material effect on its
         financial condition or results of operation because the Company does
         not enter into derivative or other financial instruments for trading or
         speculative purposes nor does the Company use or intend to use
         derivative financial instruments or derivative commodity instruments.

(2)  PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment at January 2, 2000 and December 31, 2000
were as follows:

<TABLE>
<CAPTION>
                                                       FISCAL YEARS
                                                  1999               2000
                                                  ----               ----
<S>                                             <C>              <C>
Land .........................................  $   804,035      $   637,412
Buildings and improvements ...................    1,194,652        1,250,124
Vehicles .....................................       31,178           36,880
Equipment and smallwares .....................   12,585,832       14,046,786
Leasehold improvements .......................    8,372,093        9,480,865
Construction in progress .....................      160,604           98,804
                                                -----------      -----------
         Total ...............................  $23,148,394      $25,550,871
                                                ===========      ===========
</TABLE>

(3)  LONG-TERM DEBT

         Long-term debt consists of the following at January 2, 2000 and
December 31, 2000:

<TABLE>
<CAPTION>
                                                                             FISCAL YEARS
                                                                       1999             2000
                                                                       ----             ----
<S>                                                                  <C>             <C>
Bank of America, Revolving Line of Credit .......................    8,963,320       8,300,000
                                                                    ----------      ----------

Less current installments .......................................           --              --
                                                                    ----------      ----------
         Long-term debt, excluding current installments..........    8,963,320      $8,300,000
                                                                    ==========      ==========
</TABLE>

         On June 25, 1998, the Company completed an $11.5 million sale-leaseback
transaction with Franchise Finance Corporation of America ("FFCA"). The proceeds
from the sale-leaseback transaction were used to pay down most of the Company's
outstanding debt with Bank of America. In fiscal year 1999, the Company amended
its credit facility with Bank of America, increasing the facility to $10.0
million. The amendment also extended the maturity date of the facility to July
15, 2002 and reduced the facility by $500,000 at December 31, 2000 and $1.0
million at December 31, 2001. The interest rate is either the prime rate (9.5%
as of December 31, 2000) or LIBOR plus a percentage ranging from 2% to 3%. The
Company is subject to a non-use fee ranging from 0.25% to 0.5% on the unused
portion of the revolver from the date of the credit agreement. The debt is
unsecured except for the stock of subsidiaries. The terms of the agreement
require the Company to meet certain financial covenants.

         Bank of America notified the Company in early February 2001 that it was
asking the Company to find a replacement lender. They also indicated that to
facilitate the effort they were moving the Company's account to the bank's
Special Assets Group. As of December 31, 2000, the Company was in compliance
with all of its loan covenants. However, based on tighter covenants that go into
effect in the first quarter of fiscal 2001, the Company anticipates it maybe out
of compliance with certain loan covenants at the end of the first and second
quarters of fiscal 2001. The bank, in return for additional fees and an increase
in interest rates, has agreed to waive the 2001 first and second quarter lack of
compliance and amended certain future covenant ratios under the debt agreement.
The Company has received and is evaluating alternative finance proposals from
several lenders.

         Maturities on long-term debt are as follows:
<TABLE>
<S>                                                             <C>
                  2001..........................................
                                                                             --
                  2002..........................................      8,300,000
                                                                     ----------
                                                                     $8,300,000
                                                                     ==========
</TABLE>


                                      F-9
<PAGE>   27

                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(4)  INCOME TAXES

         The provision for income tax expense is summarized as follows for
fiscal years 1998, 1999 and 2000:


<TABLE>
<CAPTION>
                                         1998              1999               2000
                                         ----              ----               ----
<S>                                   <C>               <C>               <C>
Current:
       Federal .................      $ 1,361,780       $ 1,004,217       $   220,388
       State and local .........          241,544            75,087            27,400
Deferred .......................         (393,499)         (452,272)          223,212
                                      -----------       -----------       -----------
                                      $ 1,209,825       $   627,032       $   471,000
                                      ===========       ===========       ===========
</TABLE>

         The actual income tax expense differs from expected income tax expense
calculated by applying the U.S. federal corporate tax rate to income before
income tax expense as follows:

<TABLE>
<CAPTION>
                                               1998             1999               2000
                                               ----             ----               ----
<S>                                        <C>               <C>               <C>
Expected tax expense ................      $ 1,068,417       $   496,453       $   454,984
State tax expense, net ..............          159,419            49,557            48,180
Non-deductible amortization .........           46,288            38,181            83,497
Tax credits .........................               --           (28,992)         (129,690)
Other ...............................          (64,299)           71,833            14,029
                                           -----------       -----------       -----------
                                           $ 1,209,825       $   627,032       $   471,000
                                           ===========       ===========       ===========
</TABLE>

         The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at January 2, 2000 and December
31, 2000 are as follows:

<TABLE>
<CAPTION>
                                                    JANUARY 2,       DECEMBER 31,
                                                      2000              2000
                                                   -----------       -----------
<S>                                                <C>               <C>
         Deferred tax assets:
           Sale-leaseback ...................      $ 1,203,403       $ 1,124,935
           Tax credit carryforwards .........               --           152,293
           Asset impairments ................          488,772           646,990
           Accrued expenses .................           32,929            25,884
           Other ............................           20,157            41,754
                                                   -----------       -----------
                                                   $ 1,745,261       $ 1,991,856
                                                   -----------       -----------

         Deferred tax liabilities:
Depreciation differences ....................      $  (354,388)      $  (824,195)
                                                   -----------       -----------

         Net deferred taxes .................      $ 1,390,873       $ 1,167,661
                                                   ===========       ===========
</TABLE>

         At January 2 and December 31, 2000, the Company determined that it was
more likely than not that the deferred tax assets would be realized based on
current projections of taxable income.

(5)  COMMON STOCK, OPTIONS AND WARRANTS

         (a) 1996 Long Term Incentive Plan

         The Board of Directors and shareholders of the Company have approved
the Mexican Restaurants, Inc. 1996 Long Term Incentive Plan (the "Incentive
Plan"). The Incentive Plan, as amended, authorizes the granting of up to 500,000
shares of Common Stock in the form of incentive stock options and non-qualified
stock options to key executives and other key employees of the Company,
including officers of the Company and its subsidiaries. The purpose of the
Incentive Plan is to attract and retain key employees, to motivate key employees
to achieve long-range goals and to further align the interests of key employees
with those of the other shareholders of the Company. Options granted under the
Incentive Plan will vest and become exercisable at the rate of 10% on the first
anniversary of the date of grant, 15% on the second anniversary of the date of
grant, and 25% on each of the third through fifth anniversaries of the date of
grant.


                                      F-10
<PAGE>   28

                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         (b) Stock Option Plan for Non-Employee Directors

         The Company has adopted the Mexican Restaurants, Inc. Stock Option Plan
for Non-Employee Directors (the "Directors Plan") for its outside directors and
has reserved 100,000 shares of Common Stock for issuance thereunder. The
Directors Plan provides that each outside director will automatically be granted
an option to purchase 10,000 shares of Common Stock at the time of becoming a
director. These options will be exercisable in 20% increments and will vest
equally over the five-year period from the date of grant. Such options are
priced at the fair market value at the time an individual is elected as a
director. Each outside director receives options to purchase 1,500 shares of
Common Stock quarterly, plus additional options for attendance at committee
meetings, exercisable at the fair market value of the Common Stock at the close
of business on the date immediately preceding the date of grant. Such annual
options will vest at the conclusion of one year, so long as the individual
remains a director of the Company. All stock options granted pursuant to the
Directors Plan will be nonqualified stock options and will remain exercisable
until the earlier of ten years from the date of grant or six months after the
optionee ceases to be a director of the Company.

         (c) 1996 Manager's Stock Option Plan

         The Company has adopted the 1996 Manager's Stock Option Plan (the
"Manager's Plan") specifically for its store-level managers. The Manager's Plan
authorizes the granting of up to 200,000 shares of Common Stock in the form of
non-qualified stock options to store-level managers of the Company. The purpose
of the Manager's Plan is to attract, retain and motivate restaurant managers to
achieve long-range goals and to further align the interests of those employees
with those of the other shareholders of the Company. Options granted under the
Manager's Plan will generally vest and become exercisable at the rate of 10% on
the first anniversary of the date of grant, 15% on the second anniversary of the
date of grant, and 25% on each of the third through fifth anniversaries of the
date of grant.

         (d) Warrants

         In conjunction with the initial public offering, the Company entered
into warrant agreements with Louis P. Neeb and Tex-Mex, a limited liability
company of which John C. Textor (a member of the Board of Directors prior to
February 14, 2000) is a principal, pursuant to which Mr. Neeb and Tex-Mex
acquired warrants to purchase shares of Common Stock at the initial public
offering ($11.00 per share) price less the amount paid for the warrant ($.10 per
share) for an aggregate amount of Common Stock equal to ten percent (10%) of the
shares of Common Stock of the Company outstanding upon consummation of the
initial public offering, such shares to be allocated 5%, or 179,885 shares, to
Mr. Neeb and 5%, or 179,885 shares, to Tex-Mex. The Company's warrants to Mr.
Neeb became exercisable on the second anniversary of the initial public
offering, and the Company's warrants to Tex-Mex became exercisable on the first
anniversary of the initial public offering.

         In late fiscal 1998 the Company exchanged a note valued in the amount
of $148,534 (principal and accrued interest) for 98,301 warrants to purchase
Common Stock previously held by a former officer of the Company. The warrants,
which were granted by Larry N. Forehand with an exercise price of $10.90 per
share, became exercisable in April 1998. Upon an exercise by Mr. Neeb or Tex-Mex
of the warrants granted to them by the Company, the Company plans to exercise
these newly acquired warrants simultaneously and use the warrant shares acquired
from Mr. Forehand to satisfy its obligations under its warrant agreements with
Mr. Neeb and Tex-Mex.

         (e) Stock Transactions

         During 1999 and 2000 the Company authorized the granting of 64,000
shares of restricted stock to key executives. The awards were valued at an
average of $3.50 per share and will vest in 20% increments over a five year
period from the date of the grant. Compensation expense of $34,981 was
recognized in fiscal year 2000.

         On June 1, 2000, the Company repurchased 120,000 shares of common stock
for $375,000 in a private transaction. On October 23, 2000, the Company
repurchased 9,400 shares from a former executive and current franchise holder
for $30,843.


                                      F-11
<PAGE>   29

                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         (f) Option and Warrant Summary

<TABLE>
<CAPTION>
                                                         Weighted Average
                                                Shares    Exercise Price
                                                ------    --------------
<S>                                            <C>        <C>
Balance at December 28, 1997 ...........       838,270       $ 9.66
    Granted ............................        69,000       $ 4.80
    Exercised ..........................            --           --
    Canceled ...........................       (43,000)      $10.91
                                              --------       ------

Balance at January 3, 1999 .............       864,270       $ 9.28
    Granted ............................       122,500       $ 4.18
    Exercised ..........................            --           --
    Canceled ...........................       (80,675)      $ 7.96
                                              --------       ------

Balance at January 2, 2000 .............       906,095       $ 8.71
    Granted ............................        82,800       $ 3.23
    Exercised ..........................            --           --
    Canceled ...........................       (84,950)      $ 7.96
                                              --------       ------
                                               903,945       $ 8.29
</TABLE>

         The options (544,175) and warrants (359,770) outstanding at December
         31, 2000 had exercise prices ranging between $1.75 to $13.25, of which
         254,875 of the options had exercise prices ranging from $8.63 to
         $11.00, and 359,770 of the warrants had a exercise price of $10.90. As
         of December 31, 2000, 518,828 options and warrants were exercisable at
         an average price of $9.68.

         (g) SFAS No. 123. "Accounting for Stock-Based Compensation"

         The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and has accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, no compensation cost has been recognized
for stock options or warrants. Had compensation cost for the Company's
outstanding stock options and warrants been determined based on the fair value
at the grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below for fiscal years 1998, 1999 and 2000:

<TABLE>
<CAPTION>
                                                                                 1998                1999               2000
                                                                                 ----                ----               ----
<S>                                                                         <C>                  <C>                 <C>
Net income - as reported ............................................        $ 1,972,554           $833,124           $867,190
Pro forma net income - pro forma for SFAS No. 123 ...................          1,693,517            670,960            756,549
Net income per share - as reported ..................................               0.55               0.23               0.24
Pro forma net income per share - pro forma for SFAS No. 123 .........               0.47               0.19               0.21
</TABLE>

         The weighted average fair value of the options and warrants granted
during 1998, 1999 and 2000 is estimated at $1.99, $2.16 and $2.29 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: volatility of 34% for 1998, 52% for 1999, and
85% for 2000, risk-free interest rate of 6.5% for 1998, 5.8% for 1999, and 6.2%
for 2000, an expected life of 5 years for options and 4 years for warrants and
0% dividend yield.

         (h) Income Per Share

         Basic income per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted income per share
reflects dilution from all contingently issuable shares, including options and
warrants. For fiscal years 1998, 1999 and 2000, the effect of dilutive stock
options increase the weighted average shares outstanding by approximately 2,724,
6,007 and 1,054 shares respectively, which does not affect the determination of
diluted income per share. Approximately 835,000, 860,000 and 899,000 options and
warrants were considered antidilutive for 1998, 1999 and 2000, respectively.


                                      F-12
<PAGE>   30

                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(6)  LEASES

         The Company leases restaurant operating space and equipment under
non-cancelable operating leases which expire at various dates through July 2017.

         The restaurant operating space base agreements typically provide for a
minimum lease rent plus common area maintenance, insurance, and real estate
taxes, plus additional percentage rent based upon revenues of the restaurant
(generally 2% to 7%) and may be renewed for periods ranging from five to
twenty-five years.

         On June 25, 1998, the Company completed a sale-leaseback transaction
involving the sale and leaseback of land, building and improvements of 13
company-owned restaurants. The properties were sold for $11.5 million and
resulted in a gain of approximately $3.5 million that was deferred and is
amortized over the terms of the leases, which are 15 years each. The leases are
classified as operating leases in accordance with SFAS No. 13 "Accounting for
Leases". The 13 leases have a total future minimum lease obligation of
approximately $15,781,000. The Company also has a $9.8 million forward
commitment agreement with Franchise Finance Corporation of America ("FFCA"). At
December 31, 2000, the Company had approximately $9.8 million available under
the FFCA forward commitments.

         Future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year as of December 31,
2000 are approximately:

<TABLE>
<S>                                                            <C>
            2001..............................................  $  3,881,000
            2002..............................................     3,774,000
            2003..............................................     3,558,000
            2004..............................................     3,231,000
            2005..............................................     2,923,000
            Thereafter........................................    24,363,000
                                                                ------------
                                                                 $41,730,000
                                                                 ===========
</TABLE>

         Rent expense for restaurant operating space and equipment amounted to
approximately $2,751,000, $3,933,000 and $4,385,000 for the fiscal years 1998,
1999 and 2000, respectively.

(7)      401(k) PLAN

         Beginning in fiscal year 1998, the Company established a defined
contribution 401(k) plan that covers substantially all full-time employees
meeting certain age and service requirements. Participating employees may elect
to defer a percentage of their qualifying compensation as voluntary employee
contributions. The Company may contribute additional amounts at the discretion
of management. The Company did not make any contributions to the plan in 1998 or
1999. The company contributed $21,000 in 2000.

(8)      RELATED PARTY TRANSACTIONS

         Bay Area Management, Inc., owned entirely by the brother of a Company
shareholder and director, provided accounting and administrative services on a
fee basis, to all of the Company-owned Casa Ole restaurants and some franchise
entities. The Company paid a termination fee of $82,000 and cancelled the
contract during 1999. Total amounts paid to Bay Area Management, Inc. in fiscal
1998 and 1999 were $244,304 and $216,369, respectively.

         The Company leases its executive offices from a company owned by two
shareholders of Mexican Restaurants, Inc. Net lease expense related to these
facilities in fiscal 1998, 1999 and 2000 was $60,000, $60,000 and $89,592
respectively.

         In May 1998 the Board of Directors of the Company adopted a program to
assist executives and five key employees of the Company in their purchasing of
shares of the Company. The program provides for the Company to assist the
executives and key employees in obtaining third party loans to finance such
purchases. It also provides for annual cash bonuses to such executives to
provide for payment of interest expense and principal amounts to amortize these
loans in not more than five years. The bonus payments are based on attainment of
earnings per share targets established by the Company's Board of Directors.

(9)      CONTINGENCIES

         The Company has litigation, claims and assessments that arise in the
normal course of business. Management believes that the Company's financial
position or results of operations will not be materially affected by such
matters.


                                      F-13
<PAGE>   31
                   MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


(10)     SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

         The unaudited quarterly results for the fiscal year ended December 31,
2000 were as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              FISCAL YEAR 2000 QUARTER ENDED
                                                       DECEMBER 31  OCTOBER 1   JULY 2     APRIL 2
                                                       -----------  ---------   ------     -------
<S>                                                    <C>         <C>        <C>        <C>
Revenues ............................................   $ 15,105    $ 16,128   $ 16,070   $ 15,893
Operating income (loss) .............................   $    (38)   $    699   $    772   $    790
Net income (loss) ...................................   $   (219)   $    313   $    390   $    383
Earnings (loss) per common share ....................   $  (0.07)   $   0.09   $   0.11   $   0.11
Earnings (loss) per common share-diluted ............   $  (0.07)   $   0.09   $   0.11   $   0.11
</TABLE>

<TABLE>
<CAPTION>
                                                              FISCAL YEAR 1999 QUARTER ENDED
                                                       DECEMBER 31  OCTOBER 1   JULY 2     APRIL 2
                                                       -----------  ---------   ------     -------
<S>                                                    <C>          <C>        <C>         <C>
Revenues ............................................   $ 14,882     $15,783   $14,543     $12,258
Operating income (loss) .............................   $   (985)    $   983   $ 1,321     $   675
Net income (loss) ...................................   $   (853)    $   533   $   759     $   394
Earnings (loss) per common share ....................   $  (0.24)    $  0.15   $  0.21     $  0.11
Earnings (loss) per common share-diluted ............   $  (0.24)    $  0.15   $  0.21     $  0.11
</TABLE>


                                      F-14
<PAGE>   32
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        MEXICAN RESTAURANTS, INC.

                                        By: /s/  Louis P. Neeb
                                        -------------------------------------
                                        Louis P. Neeb,
                                        Chairman of the Board of Directors


                                POWER OF ATTORNEY

         KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Louis P. Neeb, Curt Glowacki
and Andrew Dennard, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K under
the Securities Exchange Act of 1934, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
         SIGNATURE                                      TITLE                                            DATE
         ---------                                      -----                                            ----

<S>                                         <C>                                                    <C>
/s/  Louis P. Neeb                          Chairman of the Board of
---------------------------                 Directors                                              April 17, 2001
Louis P. Neeb

/s/  Larry N. Forehand                      Founder and Vice Chairman of the
---------------------------                 Board of Directors                                     April 17, 2001
Larry N. Forehand


/s/  Curt Glowacki                          President and
---------------------------                 Chief Executive Officer                                April 17, 2001
Curt Glowacki                               (Principal Executive Officer)

/s/  Andrew J. Dennard                      Vice President and
---------------------------                 Chief Financial Officer
Andrew J. Dennard                           (Principal Financial and Accounting Officer)           April 17, 2001


/s/  David Nierenberg                       Director                                               April 17, 2001
---------------------------
David Nierenberg


/s/  Michael D. Domec                       Director                                               April 17, 2001
---------------------------
Michael D. Domec


/s/  J. J. Fitzsimmons                      Director                                               April 17, 2001
---------------------------
J. J. Fitzsimmons


/s/  Richard E. Rivera                      Director                                               April 17, 2001
---------------------------
Richard E. Rivera


/s/  J. Stuart Sargent                      Director                                               April 17, 2001
---------------------------
J. Stuart Sargent
</TABLE>


                                      F-15

<PAGE>   33

                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION
-------                       -----------
<S>       <C>
+/-2.1    Stock Purchase Agreement with Purchase of Designated Assets, dated as
          of January 12, 1999, by and among the Company, La Senorita Restaurants
          Acquisition Corp., a Delaware corporation and wholly owned subsidiary
          of the Company, La Senorita Traverse City, Inc., Kleinrichert Bros.,
          Inc., La Senorita Mt. Pleasant, Inc., KMANCO, Inc., La Senorita
          Lansing, Inc., Kenneth Kleinrichert, Donald Kleinrichert, Joseph
          Kleinrichert, The Joseph Kleinrichert Trust and Steve Arnot.

  #3.1    Articles of Incorporation of the Company (as amended).

 ++3.2    Bylaws of the Company.

 ++4.1    Specimen of Certificate of Common Stock of the Company.

 ++4.2    Articles of Incorporation of the Company (see 3.1 above).

 ++4.3    Bylaws of the Company (see 3.2 above).

 ++10.1   Employment Agreement by and between the Company and Louis P. Neeb
          dated February 28, 1996.

 ++10.2   Employment Agreement by and between the Company and Patrick A. Morris
          dated February 28, 1996.

 ++10.3   Employment Agreement by and between the Company and Stacy M. Riffe
          dated February 28, 1996.

 ++10.4   Indemnity Agreement by and between the Company and Louis P. Neeb dated
          as of April 10, 1996.

 ++10.5   Indemnity Agreement by and between the Company and Larry N. Forehand
          dated as of April 10, 1996.
</TABLE>

<PAGE>   34

<TABLE>
<S>       <C>
 ++10.6   Indemnity Agreement by and between the Company and John C. Textor
          dated as of April 10, 1996.

 ++10.7   Indemnity Agreement by and between the Company and Patrick A. Morris
          dated as of April 10, 1996.

 ++10.8   Indemnity Agreement by and between the Company and Michael D. Domec
          dated as of April 10, 1996.

 ++10.9   Indemnity Agreement by and between the Company and Stacy M. Riffe
          dated as of April 10, 1996.

 ++10.10  Indemnity Agreement by and between the Company and J.J. Fitzsimmons
          dated as of April 10, 1996.

 ++10.11  Indemnity Agreement by and between the Company and Richard E. Rivera
          dated as of April 10, 1996.

 ++10.12  Corrected Warrant Agreement by and between the Company and Louis P.
          Neeb dated as of February 26, 1996.

 ++10.13  Corrected Warrant Agreement by and between the Company and Tex-Mex
          Partners, L.C. dated as of February 26, 1996.

 ++10.14  Form of the Company's Multi-Unit Development Agreement.

 ++10.15  Form of the Company's Franchise Agreement.

+++10.16  1996 Long Term Incentive Plan.

+++10.17  Stock Option Plan for Non-Employee Directors.

 ++10.18  Lease Agreement, dated July 15, 1977, between Weingarten Realty, Inc.
          and Fiesta Restaurants, Inc., for property located at 1020 Federal
          Road, Houston, Texas (Casa Ole No. 4).

 ++10.19  Lease Agreement, dated July 12, 1978, between W & W Investments, a
          Texas partnership, and Fiesta Restaurants, Inc., for property located
          at 2727 John Ben Shepperd Pkwy, Odessa, Texas (Casa Ole No. 8).

 ++10.20  Lease Agreement, dated August 11, 1986, between Hartford-Lubbock
          Limited Partnership, a Texas limited partnership, and Casa Ole No. 10,
          Inc., for property located at 4413 South Loop 289, Lubbock, Texas
          (Casa Ole No. 10).

 ++10.21  Lease Agreement, dated July 29, 1983, between Phil R. Kensinger,
          Trustee, and Quality Mexican Restaurants, Inc., for property located
          at 12203 Murphy Rd., Stafford, Texas (Casa Ole No. 13).

 ++10.22  Lease Agreement, dated July 17, 1987, between Leroy Melcher and Fiesta
          Restaurants, Inc., for property located at 3121 Palmer Hwy, Texas
          City, Texas (Casa Ole No. 14).

 ++10.23  Lease Agreement, dated February 17, 1981, between Eldred Doty, wife
          Joyce C. Doty and Fiesta Restaurants, Inc., for property located at
          3121 Palmer Hwy, Texas City, Texas (Casa Ole No. 14).

 ++10.24  Lease Agreement, dated May 16, 1983, between CBL Management, Inc., a
          Tennessee corporation, and Fiesta Restaurants, Inc., d/b/a Casa Ole,
          for property located at Post Oak Mall #3026, College Station, Texas
          (Casa Ole No. 22).

 ++10.25  Lease Agreement, dated June 5, 1985, between David Z. Mafrige
         Interests and Fiesta Restaurants, Inc., for property located at 12350
          Gulf Freeway, Houston, Texas (Casa Ole No. 28).

 ++10.26  Lease Agreement, dated March 13, 1985, between Plantation Village
          Plaza Joint Venture and Fiesta Restaurants, Inc., for property located
          at 415 This Way, Lake Jackson, Texas (Casa Ole No. 29).

 ++10.27  Lease Agreement, dated August 6, 1985, between Dalsan Properties--Waco
          II, Service Life and Casualty Insurance Co. and Casa Ole No 34, Inc.,
          for property located at 414 N. Valley Mills Dr., Waco, Texas (Casa Ole
          No. 34).

 ++10.28  Lease Agreement, dated May 6, 1976, between Federated Store Realty,
          Inc., Prudential Insurance Company of America and Fiesta Restaurants,
          Inc., for property located at 263 Greenspoint Mall, Houston, Texas
          (Casa Ole No. 35).

 ++10.29  Lease Agreement, dated May 30, 1989, between Temple Mall Company, a
          Texas General Partnership, and Casa Ole Franchise Services, Inc., for
          property located at 3049 S. 31st Street, Temple, Texas (Casa Ole No.
          37).
</TABLE>

<PAGE>   35

<TABLE>
<S>       <C>
 ++10.30  Lease Agreement, dated May 3, 1995, between CO Properties No. 3, a
          Texas general partnership, and Casa Ole Franchise Services, Inc., for
          property located at 1135 Edgebrook, Houston, Texas.

 ++10.31  Corrected Warrant Agreement by and between Larry N. Forehand and Louis
          P. Neeb dated as of February 26, 1996.

 ++10.32  Corrected Warrant Agreement by and between Larry N. Forehand and
          Tex-Mex Partners, L.C. dated as of February 26, 1996.

 ++10.33  Corrected Warrant Agreement by and between Larry N. Forehand and
          Patrick A. Morris dated as of February 26, 1996.

 ++10.34  Corrected Warrant Agreement by and between Larry N. Forehand and Stacy
          M. Riffe dated as of February 26, 1996.

 ++10.35  Indemnification letter agreement by Larry N. Forehand dated April 10,
          1996.

  +10.36  1996 Manager's Stock Option Plan (incorporated by reference to Exhibit
          99.2 of the Company's Form S-8 Registration Statement Under the
          Securities Act of 1933, dated February 24, 1997, filed by the Company
          with the Securities and Exchange Commission).

 **10.37  Lease Agreement, dated June 21, 1996, between Sam Jack McGlasson and
          Casa Ole Restaurants, Inc., for property located at 725 North Loop
          340, Bellmead, Texas (Casa Ole No. 51).

 **10.38  Amended Lease Agreement, dated November 7,1996, between The Prudential
          Insurance Company of America, by and through its Agent, Terranomics
          Retail Services, Inc. and Casa Ole Restaurants, Inc., for property
          located at 263 Greenspoint Mall, Houston, Texas (Casa Ole No. 35).

 **10.39  Assignment of Lease and Consent to Assign, dated October 11, 1996,
          between Roy M. Smith and W.M. Bevly d/b/a Padre Staples Mall
          (landlord) and Pepe, Inc. d/b/a Casa Ole Restaurant and Cantina
          (tenant/assignor) and Jack Goodwin (guarantor) and Casa Ole No. 29,
          Inc., for property located at 1184 Padre Staples Mall, Corpus Christi,
          Texas (Casa Ole No. 36).

 **10.40  Option Contract and Agreement dated January 11, 1997, between Casa Ole
          of Beaumont, Inc., a Texas corporation, and Casa Ole Restaurants, Inc.

 **10.41  $750,000 Promissory Note, dated December 30, 1996, between Casa Ole
          No. 29, Inc. and Rainbolt, Inc. for the purchase of Victoria, Texas
          restaurant (Casa Ole No. 15).

   10.42  Credit Agreement Between Casa Ole Restaurants, Inc., as the Borrower,
          and NationsBank of Texas, N.A., as the Bank, for $10,000,000, dated
          July 10, 1996 (incorporated by reference to Exhibit 10.1 of the
          Company's Form 10-Q Quarterly Report Under the Securities Exchange Act
          of 1934, dated August 22, 1996, filed by the Company with the
          Securities and Exchange Commission).

 **10.43  Amendment No. 1, dated January 13, 1997, to the Credit Agreement
          Between Casa Ole Restaurants, Inc., as the Borrower, and NationsBank
          of Texas, N.A., as the Bank, for $10,000,000, dated July 10, 1996.

 **10.44  Employment Agreement by and between the Company and Curt Glowacki
          dated May 15, 1997.

 **10.45  Employment Agreement by and between the Company and Andrew J. Dennard
          dated May 20, 1997.

  +10.46  Form of Executive Officer Stock Purchase Letters.

 ++21.1   List of subsidiaries of the Company (incorporated by reference to
          Exhibit 22.1 of the Company's Form S-1 Registration Statement Under
          the Securities Act of 1933, dated April 24,1996, filed by the Company
          with the Securities and Exchange Commission).

  *23.1   Consent of KPMG LLP.

  *24.1   Power of Attorney (included on the signature page to this Form 10-K).
</TABLE>

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

**   Incorporated by reference to corresponding Exhibit number of the Company's
     (then known as Casa Ole Restaurants, Inc.) Form 10-K Annual Report Pursuant
     to Section 13 or 15(d) of the Securities Exchange Act of 1934, dated March
     24, 1997, filed by the Company with the Securities and Exchange Commission.

<PAGE>   36

+/-  Incorporated by reference to corresponding Exhibit 2.1 of the Company's
     (then known as Casa Ole Restaurants, Inc.) Form 8-K filed by the Company on
     May 14, 1999 with the Securities and Exchange Commission.

#    Incorporated by reference to corresponding Exhibit number of the Company's
     Form 8K filed by the Company on May 25, 1999 with the Securities and
     Exchange Commission.

++   Incorporated by reference to corresponding Exhibit number of the Company's
     (then known as Casa Ole Restaurants, Inc.) Form S-1 Registration Statement
     Under the Securities Act of 1933, dated April 24, 1996, filed by the
     Company with the Securities and Exchange Commission.

+    Management contract or compensatory plan or arrangement.